Your Rent to Rent Questions Answered with Rent 2 Rent Rockstar Pete Baker

Today we have a Rent 2 Rent Q&A you’ll love with Rent 2 Rent Rockstar Pete Baker of Baker Walia.

You’ll see in the video above that I’m away from home at a gorgeous health retreat drinking green juices!

In 2 years Pete and his business partner grew their guaranteed rent HMO management business to a turnover of over £420k a year managing 55 rooms.

So he's gone from working in the corporate world to a successful HMO business in just 2 years. And he’s about to sack his boss and go full-time in property.

So on to the rent to rent questions

The first question is from Kevin…

“What's the process that you go through to vet potential tenants and is there a pro-forma available, please?”

Pete and I have very different approaches on this.

Pete: I think to the core of what we do, we do put a lot of trust into our tenants. We meet with them at a couple of different times.

When we first start off we do a typical interview to get to know the tenant.

And then I arrange to meet them again at a separate time.
We'll also add them to the house WhatsApp group with the rest of the tenants in the house they're potentially going to be living with.

And the existing housemates get to know them that way as well.

For example, we set up a dinner hosted by the existing tenants and they would show the new tenant around the house, they'd have a few drinks, they'd have a dinner, get to know them. The tenants who lived there got to pick the most suited three tenants. That worked really successfully for us.

And of course you have your standard stuff: your referencing, bank statements, Right to Rent checks etc.

Stephanie: That got my palpitations up. I think I had a panic attack!

What about the two people who don't want get a room after coming to dinner? It is great for the existing tenants to meet the new potential tenant though. I think that for the long-term that’s brilliant.

So is there anything else that you do?

Pete: I think think that's it, really.

At the end of the day, it is a people business and people who are going to be moving into a shared house, you've got to connect those people who they're going to be living with.

And you've also got to believe in them yourself. You can only do that by meeting them.

You can check as many documents as you'd like, you can test them, you can do paperwork, but at the end of the day it's going to be the trust that you have with that person. So you need to spend as much time as possible with them.

Stephanie: Our system is quite a lot different.

So obviously we do the Right to Rent checks. We're legally obliged to make sure that the people who move in have the right to live in the UK.

Then we ask tenants to complete an online Tenant Information Form. It also asks for the references from their previous employer and their previous landlord.

Do you do tenant referencing as well?

Pete: Yeah, earlier I talked about things other than the application process. Our standard application form asks for references, bank statements etc

Stephanie: And we ask for 3 months' bank statements and we do the referencing ourselves.

But if you want to outsource that, it's about £15 I believe for each one. We've used Advance Rent. And I've also heard the Residential Landlord's Association have a good referencing process.

The next question is from Mike…

“Let's assume that I've met my first distressed HMO landlord and they've agreed I can provide the refurb.

They're guaranteed monthly rent for a 60 month term.

How best do I reduce or eliminate the risk of voids [empty rooms]?

My concern is that after taking on the property, suddenly I find that I can't rent the rooms to ensure the venture is profitable.”

Pete: That's kind of a two part question.

So the first thing is really, how do you ensure you take on a good property. Unfortunately, this is one of the risks that you're going to have to take in business. It should be a calculated risk.

You should have done your research. You should know the rooms. You should know how much furniture you're going to put in there.
What demand is.

What the fundamentals are: is there a train station locally, are there shops nearby?

When you do all that research before you get to this stage, so once you’ve got the property you know you can let it.

The second part is how to eliminate voids.
It's not possible. Anybody that tells you out there that they have no voids or always often running at 100% occupancy is quite tough to do. There's always gaps, there's always overlaps.You can't possibly eliminate voids, but as you go on with more and more experience, you'll get better. You'll see them upfront.

You need to stay in contact with the tenants regularly. Find out as early as possible when they're looking to move. Then immediately market the room.

A practical tip is to have all your houses set up on Spareroom. That way as soon asa tenant gives notice, you get the room marketed straight away.

Make sure you book at least three people in at the same time to view. Put multiple viewings at the same time. And make sure that you are proactive. And the quicker and more experienced you are at doing that, the better it will be.

Stephanie: I agree with what Pete's saying.

I think the best way to eliminate as much of the risk as possible, is due diligence. Use the Rent 2 Rent Deal Analyser to make sure you get it right.

The Deal Analyser will prompt you for all the costs so you don’t miss anything.

The Deal Analyser will show you how much profit you will make after all costs so you know with certainty how much guaranteed rent you can offer.

The mistake some people make is to try and guestimate instead of writing it down. The number don’t lie!

We understand this is a big worry for people so if you’re in our Rent 2 Rent Kickstarter Coaching Programme we’ll look at all your deals so you get it right.

The next question is from Ineta…

“I have a question regarding refurbishment.

I viewed a house on Sunday and the house is in quite a bad state.

I was calculating, including furniture I'll need to put in around £15,000.

And afterwards, my profit would be around £709 a month.”

Stephanie: Ineta has asked a fantastic question. And I love how exact that is with £709 profit! Maybe it was supposed to be £700, as the nine's next to the zero.

So you need to know how to set up the deal, as you don't want to put in that much money yourself.

Well, Ineta we have got this almost exact scenario so I can give you some brilliant advice for this one.

Basically when there's a huge investment needed like this for someone else property, £15,000 in your case and £20,000 in our case, the way to do it is obviously for the owner to pay.

How to do this is first to calculate how much guaranteed rent you would be able to pay them.

In our case it was £1,200 per month
In total over the whole 5 year term the owner’s will receive £72,000 in rent.

Because of the state of the property they’re currently losing money.
So even if they spent £20,000 on refurbishing their property, they will still make £52,000 over the term in additional to longer-term capital appreciation.
And all this without any effort on their part.

When you're able to show property owners this, they see that it’s actually a sensible investment for them to make because their rent is guaranteed for the next 5 years.
They think OK, I put in £20,000 and I receive £72,000 over the next 5 years.

However, some people simply can’t afford to pay it upfront.

Another way you can work it, if you are in a position to pay 20k upfront, is to offer no rent or low rent until you’ve been repaid. That is not for everyone but it is something we have done before.

For example on a £6,000 refurbishment we offered
£1,200 rent if the owner pays for the refurbishment
£1,000 rent if we pay for the refurb

This was a saving for us of £12,000 over the term of the contract so we weren’t expecting the owner to go for this option rather than paying the £6,000 upfront himself but he did.

Or you can offer to pay for some of the refurb with a lower guaranteed rent and then the owner would pay for the bulk of the refurbishment.

The great thing about this, is you can negotiate whatever makes it a win-win for you and the landlord.

So have you got anything to add on that one Pete?

Pete: I will play devil's advocate here.

I would say the best way to do it is to get all the details of that deal and calculate how much it's going to cost, do some of the calculations and stuff.

And when you've got that spreadsheet finished, delete it and then not do that deal.

That's my personal preference.

Because we don't invest that much in rent to rent.

Stephanie: Well if the owner's paying that's fine, isn't it?

Pete: If the owner's going to pay, yeah. Sure.

That is a great example that I'm actually learning about because we don't typically get into those sorts of discussions when it needs so much investment.

So it was really good for me to hear, actually.

I'm aware, because other people have asked this recently as well, what about if it's £10,000 or £12,000 and I'm going to make £800 a month.

It's very very tight and very very risky. So particularly if it's one of your first couple, just know your strategy.

Know how much you've got, cash in the bank.

And please, just think about that a bit more before you get into that sort of deal.

Stephanie: Exactly. It is a risk. And personally we wouldn't put as much as £20,000 into a rent to rent deal, but obviously we do put money into deals and it all depends what your appetite for risk is.

But I think what we overlook a lot of the time is asking the owner to pay. And if you show them the upside, many owners are willing to invest.

Especially if they've got multiple properties and if they want to hold on to those properties.

It's got two upsides for owners paying for the refurb, they get higher guaranteed rent over the period and they get increased equity over the longer period that they're going to hold their property. And most of them do acknowledge at some point they are going to have to put some cash down if they want to hold onto the property and have it cashflowing consistently.

Many times when landlords have contacted us, and maybe it's the same with this landlord Ineta is speaking to, they're actually having problems letting the property. The landlord that I'm thinking of has actually has had three lots of really bad tenants of non-payment, problem behaviour, evictions. So at the end of all that, he starts to realise, "Actually I'm going to have to do something." And his solution there was to call us. But he actually surprised me when he said that yeah, he would like to invest in it. So often asking owners to pay will work.

Pete: Just to add to that as well, what rent to rent refurb costs £15,000?

And if the answer for Ineta's case is that it's going to cost £9,000 to make the property lettable, maybe an idea could be to split between you and the owner.

Because no matter what, that landlord has got to give you the property in a lettable condition. If some of that work is just to bring it back to a reasonable state to let, that has to be done regardless.

So then you're talking about perhaps a £4,000 or £5,000 investment

Stephanie: Great point.

And finally another way to think about it, is a lease option when you're buying the property off them over a time period. So that's another way to go, where you can invest as the Rent to Renter because you’ll eventually own the property.

So to summarise Ineta, a few options for you.

Ask the landlord to pay and show him the upside of what guaranteed rent you're delivering over the five year period.

You could split the amount so that the landlord pays for getting the property back to lettable standard and then you pay for the bits that you might normally pay for in your deals which is furniture, dressing, etc.

If the landlord is open to selling longer-term, you could suggest renting to buy (also known as a lease option).

Anyway, let us know how you get on.

The next question is from John…

“I'm struggling to put offers to the landlords that I've spoken with so far without insulting them.

The ones that I've spoken with all seem to want way too much for the houses and it just doesn't stack for me.

Profit close to zero sometimes.

Is it just a numbers game?”

Stephanie: Do you want to go first on this one?

Pete: It's a finding the right property game.

You could find that one straightaway. You could find it after 15 or 20, you might have to be patient.

It sounds like you're not struggling to get offers out there, you're struggling to find houses that work. So the question is really, is your area working? Do you need to look at another area?

Stephanie: Okay, John I think yes making offers can be tricky for beginners.

What we need to explain to landlords is that actually what we're offering is different to what the letting agents are offering.

We're offering the net rent.
We're offering the net rent after all costs.

So what your offer email has to really set all this out:

’Although this might look like less than what you're getting currently from your letting agent or what you're getting managing it yourself, actually when you take into account all these management costs and bills, it’s more’

For example, we put in our offer email message that management costs are typically 10% + VAT. And management costs are actually between 15-20% of gross rent because agent have other fees such as tenant find fees, maintenance surcharge fees, sometimes inventory fees, all different kind of fees.

So HMO landlords are paying 15 and 20% of the gross even though the landlord would think they're just paying 10% + VAT.

So I it's just a case of educating the landlords.
Many landlords don't have a good handle on costs because they go out in dribs and drabs. So they have no idea what their net rent is until we walk through the process with them.

Our Rent 2 Rent Stars in our Rent 2 Rent Kickstarter Coaching Programme often say that our offer email templates alone are worth the Programme fee. They’re that good!

To really understand a landlord’s net rent it’s important to listen a lot and ask the right questions.

At the viewing, and even when the landlord first calls me on the phone, we go into costs. The phone call is a great time, because when somebody calls you, they're really motivated. They picked up the phone to you that particular day for a reason.

And so in that call, after they talk to me all about the house I ask if it's okay to ask them a few questions about the house. And at that time, I go into it, what rents they're currently getting, if there are any problems, is it all tenanted, what their utilities cost are and so on. I go through it all.

So because of all that listening I'm able to put it in the email where I'm making the offer and I'm able to explain to them why our offer is actually better than what they're getting/would get from a letting agent.

So John I hope that is helpful.
Let us know if you have more questions.

The next question is from Mike…

“What attracts tenants to take a room at a viewing?
What needs to be in or out to make a room attractive?
And do you dress a room and leave everything they see in there or remove certain things?”

Stephanie: This is such a good question, I love this! So Pete, what do you think?

Pete: What makes a room attractive varies from person to person. People have different preferences overall in what they want to see in a room.

You've got to have some fundamentals.
They want furniture that’s in great condition is number one.

You need to have all the basics: your bed, your drawers, your wardrobe. Ideally not a sink in the room. Which puts a lot of girls off in my experience.

Stephanie: Oh, does it?

Pete: Yeah. I thought they would like a sink.

People kind of bringing up the fact that there's a sink in there, that the house used to be a care home. And each one had a sink in it. And all the girls said that, I mean, luckily the boys took those rooms otherwise they would never have taken them. Which was interesting.

Stephanie: It is interesting. I thought they would have taken because they had a sink.

Pete: Yeah, but it just put them off completely. There's little things like that.

But yeah, your basics have got to be in there.

Paint it if you can. If it's magnolia I just get rid of it. Nobody like magnolia anymore.

Little touches. Perhaps mirrors or pictures above the bed. If there's big, tall walls you might want to break it up with pictures or mirrors and things to make it look nice.

Put some love into the room to make it look more like a home and not just a room, really. So that's the first part.

What was the second part again?

Stephanie: Do you dress the room and leave everything they see or do you remove some things?

Pete: Yes. We dress the rooms a lot. And yes, we leave things in there. So again, we dress the whole room up and when the tenants see the rooms we think it's a bit tight to remove everything out of the room and then give them just the bed and the mattress and sheets.

So to be honest, these days we kind of allow people to keep what they want from what we've left over.

We take the quilt and the covers out and they can keep any of the ornaments or the mirrors or the lamps we put in there and that. If it costs us a bit of extra money, then we've typically taken the view that it might cost us a little bit more but it's not all about doing the cheapest thing all the time.

So put some love into the room by leaving these things for people that might make it a bit better. Just don't be so tight. Yeah. Leave some stuff in there.

Stephanie: Yes, it's imperative to dress the room, we find. Because we're in an area where there's quite a lot of competition.

The beds look so much more amazing when they're dressed than when they're not.

So we put in our rooms: obviously there's the furniture, and then we have the beds dressed with duvet, pillows, pillowcases, cushions and throw.

We add a couple of ornaments in the room and hang pictures as well.
Plus a lamp on the bedside table.

We leave the pictures on the wall and the lamp. We take the bedding and the ornaments because typically people don't want the ornaments, to be fair.

And the bedding's so inexpensive for them to buy at the supermarket. And actually for them to buy off us, it's expensive. If we just do a normal rate with all these cushions on it and with the throw and all the rest of it, even if we did it at cost, it's more expensive than most of our tenants would like to pay.

We explain all that at the viewing. So I think dressing definitely yes. And we leave everything that's on the walls, that makes the room nice.

OK the next question’s from Mike again…

“If you take over management of an HMO, what considerations need to be made for tenants with an existing agreement with the landlord?”

Pete: You need to serve a notice that says that management is changing.

And then you need to talk to the tenants and make new agreements with them direct. So that's the simple part of it, really.

The due diligence that you need to do is to ensure that they have got ASTs, that their deposits have been protected, and that everything is legal about the tenancy.

But that tenancy anyway will be ending and they'll be starting a new tenancy with you. So deposits will need to be transferred and so on, to you. So that even if things happened wrongly in the past that the new tenancy with you will all be on the right footing according to the rules. So you're not taking a chance on whether things have been done correctly.

Stephanie: Now I’m going to answer some questions I get asked a lot.

How do I reduce voids [empty rooms]?

Stephanie: And I have got an amazing tip for you guys about how to reduce your voids.

You are going to love this one.

So what possibly many of you are doing is giving a month's notice to your tenants so they can move out at any time during the month, depending on when they give their notice.

So if they give their notice on the 6th, they can move out on the 5th of the following month. And so on.

What we did is we changed the notice for all of our tenants to be aligned with the rental period.

Because the rental period for all of our tenants starts on the first of each month, the last day of the rental period is the last day of each month.

What that means that we do is that if they want to move out at the end of September, they would have to let us know by the last day of August. If they wanted to move out the end of October, they would need to let us know by the last day of September.

So it's great because what it means is now we have 12 changeover days per year rather than potentially 365.

So if somebody tells us in the middle of September that they'd like to move out, they're moving out at the end of October.

This give's us certainty about dates so we can streamline our operations.
It means we can organise our cleaners in advance for the year. We do a room clean whenever there's a changeover. Even if the room looks spotless.

Because we just want to make sure the skirting boards behind the wardrobe and all the bits that no tenant is going to be cleaning have been cleaned.

Luke our Property Assistant notifies the cleaners as soon as any of our tenants give notice.

So yeah. That one thing has helped with reducing the voids.

Steve: I need to jot that down.

Stephanie: I think you should definitely look into that. We sent out an email message. Because this was a change from how we used to do things. We'd have people moving in and out all through the month.

Now it's the last day. And what we do if people need to be more flexible than that, what we say is you're still responsible for the rent but if we can find somebody to replace you we can release you early.

And we do charge a small fee for the early release. Because otherwise it was costing so much money to help people move on before the end of their six months.

You got anything else on voids Pete?

Pete: Just to be proactive. Just to stay in contact. Find out as early as you possibly can if they're going to leave. Or think about leaving. Or more generally if they're happy in the house. I was at a house the other day and one of the guys sort of said he's starting to think about living in a smaller place.

Your tenants are your customers and we always think about what would be easiest and best for them. And that's just a general point on that, really. That helps a lot with avoiding those awkward voids where you just get it sprung on you.

Stephanie: Yeah, I think excellent service as you said, Pete. Fixing things quickly, having good communication with your tenants, and just caring that the house is in good condition and that the tenants are happy. I think that goes a long way. Because like you said as well, we've had many people who have, say for example moved to Cardiff for a job and they moved out. And then when they come back to Newport then they want to move in with us.

Or they're in a room in a shared house and they want to move into a flat. And they say, "Have you got any flats?" Because they'd like to stay with us because they know that we're responsive. It's thanks to Luke, our Property Assistant, who's just great with corresponding with the tenants and keeping them informed and happy, really. So I think that is the secret.

Pete: Yeah, it's one of those things where it's purely just down to fluffy unmeasurable answer and it really is just caring. Putting the love in, looking after the tenants, looking after the houses, looking after what you do, and putting the tenant first in everything you do. And that's how you avoid it.

And that is the best thing you can do: is to do what you say you're going to do, fix everything on time, make sure you make it as easy as possible for them, try and go the extra mile, try and do anything extra that you can to help them enjoy their stay with you for as long as it's going to be.

Unfortunately sometimes things happen where they need to get out of a contract early and we tend to try and help people do that.If it means it's going to make their lives easier, even if it costs us money.

Stephanie: Yeah. And people's circumstances can genuinely change. We've had people who need to go abroad quickly. We've had people who they were only given a week's notice that their job has ended. So there's lots of reasons why people want to move. And we help them out with that.

How to get rent to rent properties from letting agents and landlords?

Pete: Again, we can probably split on that because we do agents. I think you've got much better experience and skills at going direct to landlords which we don't at all.

It's good to decide at the beginning what you're going to do up front, particularly if you're going to think about working with agents and you're in a competitive area. You need to know that upfront and you need to be honest with what you're doing.

So what we've done from the beginning is we only work through agents. Which means that they're not worried about us taking the landlords direct from them and they can carry on that relationship. So we've always done that.

If we get an offer for a landlord direct, then we speak to the agent for it and like I said, we only maintain ours through agent relationship.

With the agents we do what we say we're going to do, we always pay and we make sure we turn up. We take most of the houses that we go and see.

That's because we've done the due diligence beforehand. If the house looks like the pictures, the floor plans, structure, then we take that house.

What we're trying to do is save the agent's time. So we are again, thinking from the agent's point of view, is that they don't want their time wasted, they want to get those agent fees, they want an easier life.

They don't want people pulling out or not doing the houses. Our agents call us now, one is calling right now as well, and they're calling us with houses because they know that if we say yes or if they see me or Ash turn up, then we're taking that house and we'll come back with an offer within an hour.

We won't pull out.
We'll pay the deposit, we always pay full ask because we only go and see houses that we know those are going to work.
And then we're quicker and faster.

Stephanie: So does that mean the properties that you're taking in general are not already HMOs, they're single lets?

Generally they were single let rents to then be converted.

The trouble with ones that are already HMOs is the rents the landlords want are too high.

Best thing is to present your offer, explain why, give the numbers, then if you can. Then wait and see. But don't expect them to just immediately run and agree to the offer with half the rent.

Stephanie: Well what I wanted to ask you, because many people ask what they should say to agents.

Can you remember what you used to say when you first started going in to see letting agents?

Pete: We kind of cheated a bit because both Ash and I have approximately 10 years sales experience. So I think we just had that experience straightaway.

So we don't write scripts.

We don't know very much what we're going to say apart from our core values. And it's our business values.

Which are: do what we say we're going to do; turn up, pay the money, and not waste people's time; and we're going to deliver on it and we're super honest and super genuine with what we do.

So in the beginning that's quite tough. Because you haven’t done anything, you haven't got any respect. It takes a while for relationships to grow.

Having a clear message helped.
So we'd make a call or we'd send an email, super short, one paragraph or one paragraph's worth of talking.

Which was, we're a company, we've started fairly recently. We love property. We'd explain what me and Ash had done before. Bought a house, sold it and made lots of money. Or why we love houses and what we love about them. Just let that passion come through. But super short.

Don't try and oversell to agents, because the first person you often speak to is a mid level guy who just wants to get the viewing booked. Sometimes you spend too long up front, put the view in, turn out and then he wants you to explain what you do. So just keep it short, get the viewing booked and then explain to him and or her boss when you get to that stage.

So I would just say to keep it succinct. Don't write a script because they sound terrible. But just know what your core values are.

And let them know what you’re looking for. If it's that you only work with students and you look for houses by the uni, 5 bedroom houses, around from £1500 to £1700 and we're looking for those two or three houses in the next four months. That's enough of an introduction. Tell them what you're looking for, tell them what you're going to do, but just make sure it's succinct.

Stephanie: I think one of the things that Pete said that’s so important, which is that they want to know that you're honest. They want to know that you're going to do what you say you're going to do. If they give the property to you, because that's what agents are concerned about: the risk.

That they give the property to you, they can't get you out of there, you don't pay the rent. So they want somebody who's going to do those things. So your key message through what you do, not necessarily what you say, has to be that you're honest, you're trustworthy, and that you're going to deliver on your promises. So I think that's great advice. Thank you.

And from the landlord's point of view.

You know I love direct to landlords. It's so simple, really.

Imagine you are an HMO landlord. Most HMO landlords are not full-time in property. For most people it's a side business. So they've got a busy job, maybe a business, a family, maybe they don't live near their HMO.

There are so many areas in all of that that generate hassle, heartache and stress. So when you're talking to HMO landlords either by letter or on the telephone it's just communicating how you're going to solve those problems and take those problems away.

The other part people worry about is what to say when the landlords start calling you. My top tip for this side of the conversation is listen.

So you just ask the landlords about the property, what's made them call today. Go into is it rented at the moment, is it with a letting agent, are you managing it yourself.

I've got a whole list of questions that I go through. You need to understand what is causing them a problem right now, why have they called you today. And once you understand that, you know exactly how to explain what you do in a way that's going to resolve those issues.

And it’s what makes you magnetic. Landlords want to work with you when they see that with you their issues will be gone. It’s as simple as that.

Just make sure you're being really genuine. The first moment that you speak to a landlord or an agent is the beginning of the relationship.

But you should just be emphasising your value at the same time as being genuine. You want to be listening most of the time. Because you want to understand about the property, you want to understand about what the pain is. Because you're genuinely interested.

Landlords will often open with a question. For example, "I've got your letter, what do you do?"

So then you can answer that in a sentence. "We will rent your property from you long term. And pay your guaranteed rent." And then say, "Is it okay if I ask you a few questions about your property?"

So you want to answer the question briefly and then take control of the conversation by asking whether you can ask about the property.

Stephanie: Pete thank you so much for joining us today, is there anything you’d like to add?

Pete: Just a massive thank you for what you've done and the community you're building. We love everything that's coming through your messaging and all of your activity so far. So just super appreciate that you invited me.

Stephanie: Ohhh. Thanks, Pete. That's so lovely. It's been really fun having you here in Kingston-on-Thames. In a very lovely place, drinking juice as I say. And it just so happened that Pete Baker lives like 10 minutes away.

And it's a lovely area, I have to tell you, where Pete Baker lives.

So yeah, thank you so joining us.

See you again soon!

Stephanie & Nicky
xx

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