R2R Contracts and How They Affect HMO Values

 

Signing a R2R contract on an HMO that you own might solve a short-term cashflow or stress issue but it will devalue your HMO if you might need the option to sell it.

A R2R HMO shows that the property was underperforming before the R2R contract was active - or at least that’s the perception.

“Tired of managing your HMO?”

“Bad tenants causing you stress?”

“We give you a guaranteed rent and no headaches”

The terminology on a R2R marketing letter will trigger responses from landlords with struggling HMOs - those who see R2R as an end to a drama or the stress.

Up and running HMO buyers know this.

“Why did the current landlord sign a lease for less money?”

“What happens if I want to end the lease?”

“What happens to the tenants once the R2R lease expires?”

Most often, new HMO buyers have the energy and drive to run an HMO themselves (with a managing agent too) as they are excited about building up their portfolio. They are not ‘you’ yet, the tired landlord who responds to the R2R letter.

A 5 year lease is a loooooong time and landlord’s circumstances change during this time - you may want/need to sell...

We get asked to sell HMOs with R2R contracts in place weekly - in all cases I either advise the landlord to come back to me when the lease is expired or, if they can’t and want to sell now, I give them a sales valuation that is considerably lower than it would be for the normal ‘landlord run AST’ equivalent. Often just ‘bricks and mortar’.

R2R contracts devalue HMOs when we get asked to sell them - in all cases.

I can sell an average, well-run HMO generating £30,000 gross @ 12% yield or £250,000, for example.

I would value the same HMO with a ‘guaranteed net income’ of £1,200 PCM from a R2R operator at at least £50,000 less. But, to be honest, I’d rather they waited until the landlord had ‘control’ back. There’d be so few buyers for it.

If you’re ‘definitely not’ going to sell your property for the duration of the R2R lease and you’ve researched the R2R operator, they’re bone fide, experienced and liquid, then crack on a sign a lease - they’re not all bad.

There’s lots of discussions about the pitfalls of R2R from a landlords point of view around the ‘guaranteed rent’ and inexperience of most operators - the devaluation of the asset hardly gets mentioned.

So there, I mentioned it.