R2R exit strategies?

by Readers Question

14:27 PM, 8th January 2020
About 11 months ago

R2R exit strategies?

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R2R exit strategies?

Hi everyone, I was wondering whether anyone could provide insight on a question I’ve been asking myself for a while now. What exit strategies are used for the end of a Guaranteed rent contract?

More specifically, as you near the end of your 3/5 year lease with the landlord, what do you do with the tenants? I assume you would try to make sure that the tenant ASTs would terminate just before the lease agreement to allow for cleaning etc…

However, this may not be the case and let’s say a tenant leaves with 5 months to go, what could be done about that?

From my understanding an AST could not be use for under 6 months, and I think you would struggle to find someone for 5 months? So what would you do? Would you have to leave it empty (heavily impacting profitability) or is there a way to implement this into the agreement with the landlord to allow flexibility around termination dates?

This was just a grey area in the R2R strategy discussed by the ‘gurus’, so I was wondering if anyone who successfully does the guaranteed rent system could help.

Thanks you in advance,
Regards
Elliot


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Comments

Robert Mellors

12:17 PM, 9th January 2020
About 11 months ago

Hi Elliot

There are loads of grey areas which the "get rich quick with R2R" type "gurus" fail to address, which can leave the R2R operator severely out of pocket, or having to breach their agreements with the property owners. The issue about AST end dates is just one of the pitfalls.

I operate R2R, however, I do this on a not-for-profit basis and provide lots of support services into the properties and to the residents (homeless people), so not only do we use daily licence agreements rather than ASTs, but we can also include the void costs within our operating costs (and our true operating costs are what determines the amount of rent charged). This allows us to account for void periods (and other costs) leading up to the handing back of properties upon lease expiry, within our rent setting process (though most landlords ask to renew the leases for a further 6 year lease period).

Without the method we've developed, I struggle to see how private (for profit) R2R operators can adequately cover their risks. All great for the R2R operator and property owner while everything goes smoothly, but what happens when they get a bad tenant that fails to pay the rent, trashes the property, or drives other tenants out?

In answer to the specific question about ending the lease period, somewhere in the R2R operator's figures they will have to account for the cost of void periods leading up to the handing back of the property with vacant possession (plus costs of evictions and repairs etc).

Richard Peeters

13:00 PM, 9th January 2020
About 11 months ago

Hi Elliott, yours is a great question, normally overlooked in training courses!

From the owner’s point of view, there could be several potential exits:

1. Renew with another R2Rer, in which case he/she could simply make it a condition that the new R2Rer takes on the existing occupants (by assigning the tenancy agreements from the date that the original R2R agreement ceases, and the new R2Rer subsequently terminating or renewing them at the end of their fixed terms);

2. Owner takes on management themselves (e.g. after a long absence that had caused them to go to the R2R solution), in which case the owner might be happy to continue with the same occupants (assignment/terminate/renew);

3. Owner gives it to an agent to manage (similar to first option); or

4. Owner sells up: it would depend on the target buyers (developer, landlord, owner-occupier) whether they preferred sitting tenants or vacant possession.

In the case of trying to synchronise the various sub-tenancies to achieve eventual vacant possession, you as R2Rer could try two approaches:

1. Using a shorter term License Agreement instead of an AST (risks that if it looks and smells like an AST, then the “License” might actually *be an AST); or

2. Use it for short-term stays like AirBNB / Booking.com etc.
For what it’s worth, my own preference both as owner and R2Rer would be this last approach, because it minimises the void periods, doesn’t create new tenancies, and provides the option of vacant possession (or to renew on the date that the R2R agreement ceases).

Regards, Richard

Elliot Poublan

17:15 PM, 10th January 2020
About 11 months ago

Reply to the comment left by Robert Mellors at 09/01/2020 - 12:17
Hi Robert - Thank you for taking time out of your day to address my query, much appreciated. It seems that you have found a very beneficial and generous use for the rent to rent strategy, refreshing to hear! I am in agreement that there is no possible way to suppress all risks in this strategy, but then again, that's part of it I guess. In my eyes, it's all about educating yourself to a degree where you can successfully mitigate risk to a comfortable level (which is what I'm attempting to do here). You make a good point about simply having to account for this potential vacancy in the void period predication, and it is something ill take forward in any calculations from now on 🙂
Once again, I appreciate the comment and hopefully hear from you soon should i ever have another R2R question. Cheers

Elliot Poublan

17:27 PM, 10th January 2020
About 11 months ago

Reply to the comment left by Richard Peeters at 09/01/2020 - 13:00
Hi Richard - Thanks for leaving your comment, it has proved to be very helpful in allowing me to find a suitable solution to my problem. The idea of Airbnb to cover the last few months is a great one. I would therefore assume that this agreement to allow short term licenses such as those in Airbnb etc, would have to be implemented in the original contract between the landlord and R2Rer ( I also like you have purchased the R2R contracts offered here) ? Once again thanks for getting back to me and if ever I have any further R2R questions ill be hoping to hear from you if you're around : ) (Im also following your questions on another thread and them find scarily aligned with questions I had too, so you have a follower!)
Cheers,
Elliot


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