Top 5 mistakes that rookie R2SA investors make (and how to avoid them)
Top 5 mistakes that rookie R2SA investors make (and how to avoid them)
We have been operating Serviced Accommodation since 2016 and the market has changed a lot since we started.
There has been an influx of new operators jumping in, chasing the lucrative returns that the ‘Furus’ pump out.
There has also been a side industry of so called ‘sourcers’ who are peddling deals to potential investors with themselves having no clue about how the industry works or even doing the basic due diligence on the property.
It is true, Serviced Accommodation (or SA as its more commonly known) can produce some fantastic returns but it can also be risky if you don’t know what you are doing and can end up costing you thousands of pounds and result in you getting locked in to contracts that are difficult to get out of.
We have seen some of the tight situations that would be SA investors have managed to get themselves into by not doing enough due diligence on either the property, the market or the sourcer that is ‘selling’ them the opportunity.
We have even helped an investor navigate their way out of a tight spot by taking over the management of a property and turning it around.
The way it plays out is the investor pays the sourcer a fee (normally in the region of £2-£5k), signs a lease with the landlord or letting agent and is then put in touch with another managing agent to manage the property and bookings going forwards.
At this point, the sourcer walks away with their fat fee.
The investor then has to pay out another few grand in decor and furnishings in order to get the property up and running.
So, what are the top 5 mistakes that we see R2SA investors make and how can you mitigate the risks?
1. Not doing their own due diligence on the sourcer that is ‘selling’ the deal to them
Most of the issues we have seen with this has been as a result of a ‘sourcer’ selling an opportunity to an investor.
Quite often these ‘deals’ are miles away from where the investor is based and sold with a managing agent in place so it is a so called ‘hands-off’ investment.
Once the deal has been ‘sold’ and the investor has parted with thousands of pounds of their hard earned cash, the sourcer then disappears into the sunset and absolves themselves of any responsibilities going forward, leaving the investor to get on with it with little recourse if things go south.
TIP: Check out the credibility of the sourcer – ask to see their accreditations and for a copy of their professional indemnity insurance.
Ask for a list of the last 5 investors who they have sold deals to and get in touch with them. Also ask for the links to the properties on the OTA’s so you can see how they are performing.
2. The managing agent runs the property for a few months and cannot achieve either the occupancy, price per night or both that the investor was expecting.
The investor will have based their calculations on numbers provided by the sourcer, but at this point the sourcer is long gone. The figures could have been over exaggerated or simply made up in order to make the deal stack.
Our experience is that sourcers are not SA operators so do not have the knowledge or experience to do the required due diligence and to know how to stack a deal properly.
TIP: You need to check the expected occupancy and nightly rates yourself and make sure they seem achievable. If you are not sure how to do this, drop me a message.
3. The investors gets a call from the freeholder or managing agent of the block to say that the lease does not allow the use as ‘Airbnb’.
This relates to ‘leasehold’ property where the lease does not allow the use as short term accommodation. Essentially, by running it as SA you are breaching the lease conditions that could have serious consequences for the landlord.
The first an investor will know about it, is when they receive a ‘cease & desist’ letter and will be forced to stop operating the SA or face legal action.
TIP: Check the lease conditions allow for the use of SA and do not have any clauses that may prevent it prior to signing any agreements. Alternatively just rent ‘freehold’ property where there are no leases.
4. Paying too much rent for the property
The rent to the landlord is going to be an SA investors biggest cost and we see so many R2SA deals banded around where the asking or ‘negotiated’ rent is way higher than the market rent.
This is quite often from old HMO’s where the landlord is used to getting a higher rent due to multiple occupants, however, if it is just a 3 bedroom house that’s been converted to a HMO by putting a bed in the lounge then the ‘market’ rent is that of a 3 bed house (not a 4 bedroom HMO).
TIP: Go on to Rightmove and check what similar properties are being rented for in the same area. Then run your own figures to make sure that the deal stacks using market rent.
Remember that you are going to want to rent the property for a number of years, so the landlord will get no voids for the period, so if you pay market rate rent then they will be much better off overall – there is an argument to say you should be paying less than market rent as the NET figure the landlord gets over the period is still going to be higher, although this is a difficult negotiation under current market conditions.
5. Not viewing the property prior to signing.
I know it’s difficult to believe, but I have seen a lot of cases where an investor has rented a property ‘blind’ and have trusted the sourcer and the photos that have been provided. The problem with photos is they can be very misleading as not only can they hide things, you have no idea when they were taken so they may not be a true representation of the condition of the property, so the investor could end up spending thousands of pounds they didn’t account for getting the property up to scratch.
The other issue with not viewing the property is you cannot get a feel for the location. There is no substitute for local knowledge so when you have a sourcer and an investor that are both located out of area, the chances of getting the location wrong is high.
SA can be so location critical that having a property on the wrong street or in a bad neighbourhood can be a disaster for its viability.
TIP: Make sure you view the property within a week or so of to signing the lease so you can ascertain the condition and negotiate and additional works that may need doing.
Have a walk or a drive round the local area and get a feel for it, what is close by that will be of interest to your target market? – do your own DD on the location by asking the locals and looking up things like crime rates online.