Rent to serviced accommodation -- AKA rent to SA -- is considered by many to be the "Holy Grail" of property investing...
The reason being, is that what you're doing is renting a property (and thus not having to get a mortgage or put down a deposit) and then letting it out as serviced accommodation (possibly the most lucrative type of letting there is).
The elephant in the room, however, is that Rent to SA is normally limited by mortgage lenders' restrictions and can't (legally) be done unless your property is unencumbered.
But rent to serviced accommodation expert David Fernley has a way round this and in this eye-opening interview, he lays out how he does it (and how you can too).
In the interview below, we cover:
John Wilson: Hi, everyone its John Wilson here from property-investment-blueprint.com. Today, I’m excited to be speaking with serviced accommodation expert David Fernley of Clarus Property Group. David has a very unique spin on the serviced accommodation and the rent to rent model that I think you are going to want to hear about. I’m really looking forward to digging into it. So, David welcome to the broadcast today.
David Fernley: Yeah, hi John.
John Wilson: Yeah, you’re welcome. Let’s crack right into it, David, tell us a bit how long you’ve been in the serviced accommodation business and how you got into it.
David Fernley: Ok, we’re in year four now at Clarus Accommodation Business and we got into through…we got the business of giving the job stuff the financial freedom replace your income thing five years ago but we did that we didn’t get to do it through Clarus Accommodation. We did it through property sourcing and we learned how to do creative property investing and flipping and that kind of thing through a purchase lease option.
So, we were doing that and we were bringing properties in and we were putting them into a general AST portfolio while profiting and flipping them but then we heard about serviced accommodation and that there was potential for more cash flow to be generated. So, we thought we’d have a look at it. So we initially put three of our properties into that model (two lease options one of them were our own) and we gave it a go. That was about four years ago and we did it. We didn’t go down the rent to rent route or anything like that. We refurbished them but we didn’t have a clue what we were doing and yeah, we gave it a go shifted them on the O.T.A’s and then we went from there.
We had all the nightmares of working with people at Booking.com and being targeted by the scammers and people who were into parties. It was a very steep learning curve from there but we had to get our systems right and do it properly. That’s basically how we got into it. It was kind of accidental. We were doing property sourcing and we thought we’d give it a go even though we didn’t have a clue what we were doing. I think a lot of those who do it are coming from a property background, really not understanding that it has more to do with hotel and hospitality then property strategy. So, it was a quick learning curve for us.
John Wilson: Yeah, I think. That’s a good point you made that. There is an element of property involved there but in order to make it really work and get happy customers then you have to be good at the hospitality side I guess and with the internet being the way it is and the way these platforms are certainly Airbnb, I don’t know if Booking.com allows reviews but certainly if you mess up on Airbnb and you get a bad review then you’re going to be less likely to get bookings in the future. So that’s definitely important.
David Fernley: Well, you’re Definitely right and with Booking.com very much so in fact Airbnb is easier to work with regards to reviews because you can review the guest as well. So, a lot of times they are a little bit more careful about slamming you than perhaps Booking.com guest would be. Because you can answer the review from Booking.com but you can’t go out and review the guest because it doesn’t stick on their profile.
John Wilson: Right, that’s interesting. So, I’m sure that you’ve made a lot of progress from those four years that you’ve been at it. What does your business look like today?
David: Well, it's completely different from what it was. We got to a point around three years ago and it was a point where we had been let down again by housekeeping. We had six units at that time. We were sourcing and we were also doing mentoring and coaching at the same time but it was taking too much time. We were struggling to be honest. It got to the point where we either had to give up or we had to do something else and it was like well what do we do? We got to scale this business because what we wanted to do, John. We were so tied into the business. We were tied into with being let down by housekeeping and we had no one to do the administration work and working with the L.T.A the contracts, taking the payments was really chewing us out. So, we decided to scale it.
So, to answer your question we've built a business that was scalable. We went to developers we realised that it was going to be difficult to scale the business with landlords because of free [Inaudible] commissions and that kind of thing. So, we went to developers and we’ve got a very good relationship. We’ve currently had thirty-five units but we’ve also had six businesses that run around that we call it our ecosystem if you like.
We've got the core serviced accommodation business but off that we've built a housekeeping business that services our own business but we also service other people. So that gives us external revenue. It also gives us work for our cleaners and our housekeepers so that it keeps them interested in us and keeps us at the top their priority list. We source but we don’t source anymore externally. We source for Investor Partners as we call them and then we bring them into our programme we manage their properties.
We have SA Angels that's an administration business based in India. We've got five full-time people over there. We currently administer over a hundred properties for different people in the U.K. But the great thing for us is that we’ve got that external revenue coming in. So we can afford to keep these people going to do our business.
We do some management for other people so we’ve got the kind of business that kind of looks after itself now (hopefully). So, it’s totally different from what it was and we work in Leeds, Bradford (not Bradford too much that's a tough market) and Manchester. We are hopefully going to move to Liverpool in Q2, 2019. We’ve got a good development going on there. So, we can’t do that M60 corridor at the moment. So that’s what we’re doing.
John Wilson: That’s fantastic. That’s really getting to be a quite mature business then because it feeds off of itself and the different businesses that are involved. That’s sounds great. You mentioned something O.T.A. So, for anybody who is not sure what an O.T.A. What’s an O.T.A?
David Fernley: Online Travel Agency like Booking.com or Expedia.com. Those kinds of people.
John Wilson: Hmm hmm.
David Fernley: What we realised is that we didn't just want our business to rely on heads on beds. If you look at hotels and we are up against hotels. They have the F and B (food & beverage) they make money on that. They have the event rooms that kind of thing. So, they're being revenue through that events like weddings. So, they got all of these different incomes that we are really up against in my opinion. That's why we said what are we going to do? Because all we were relying on was heads on beds and at this time of year certainly things get quieter and it can be quite a stressful time. Because people aren’t really in the swing of things yet and That’s why we did what we did. We thought what can we do to bring external revenue in. Just to go back on that for the people who are listening.
John Wilson: Yeah, it definitely is a seasonal business sometimes and it seems as if you’ve found a good or at least a partial solution to that which is great. Now, one thing I wanted to ask you about is, I believe, one interesting aspect of what you is that you do kind of rent to rent but rent to serviced accommodation is this of these amazing thing that investors have got their sight set on. It sounds amazing and everything. There is also very high-income potential and you don’t have to get a mortgage and all of that. So, there are fantastic benefits there but the problem is with the mortgage lender criteria and there is new mortgage coming out gradually that will take serviced accommodation but most of the old mortgages don't allow that on their terms. So that's a problem, do you just want to tell people the unique way you’ve managed to get around that.
David Fernley: Yeah, we kind of stumbled on this accidentally, John. When we first up the job, I got an opportunity I bought some property overseas from a property investment agent. So, we kept in touch over the years. A friend of mine who still worked there so he said to us, “Do you want to come on as a sub-agent for us?”
I said, "yeah, what does that involve?”
He said “well, we sell off-plan units in the U.K and overseas. If you come on with us, we will open our inventory up to you. It your own marketing, your own business, your own identity you just get our inventory. So, if you want to have to access to that. If you want to sell those units. you’ll get a decent commission off of it and also we’ll make money off of it as well.”
I said, "yeah, I'd love to give it a go." So, we did and to be honest with you we really struggled. It was a tough market because we were a brand-new company. We had no track record. We had very few contacts in the industry (here in the UK and internationally) so selling those units online was very, very difficult for us. So, what we say is John (we’ve never met before) you send us a hundred thousand pounds and we’ve got a two-bedroom apartment in Liverpool for you and it was like a real leap of faith for the investors to say “like let’s do it.”
John Wilson: Yeah, that’s tough.
David Fernley: We did sell a few deals but the marketing was extremely expensive and it was tough. We weren’t enjoying it. We said “you know what we’re going to have to do something different” And that’s the point where we started doing property sourcing.
So a couple years later we had started doing the serviced accommodation and we kicked off with three units and then we got to six but we soon realised that to scale, we needed to have more units. We then recognised exactly what you were saying which was that we got freeholder commissions and lender commission which are big barriers. So what were we going to do? So we thought “you know what? what if we go back to the developer that we were originally working for. Whereby being at the front end, selling off plans to the investors, what if we were at the back end and we saying to the developer “what if we guarantee you revenue?” because their model was that they’d sell off plants for a fixed yield. We call it a short yield. We can’t use the word guarantee, we call it assured yield.
So typically, they’ll sell to an investor and let’s say it’s a residential block. They’ll say “give us these instalment payments throughout the construction of the building. Yes, we'll sell you at a cheaper rate because you're buying of plan and you are showing your money upfront but as a thank you our deal is that we'll pay you, let us say, six and a half percent for the first year. So when practical completion is achieved for the developer the pressure is on they have to fill those units. We thought to ourselves: what if we go back to those developers whom we had that relationship with. What if we said to them “you know what guys, let us say we take ten units from you or four units from you. We guarantee that rent. Would you be prepared to work with us?” because the really cool thing about this is that number one they own the freeholds, they own the management company. So if they say its okay its okay. Number two these are cash investors so there were no lenders.
John Wilson: Yeah, Yeah that’s awesome.
David Fernley: So, it was like a mega light bulb moment. We went to meet one of the developers and we pitched it to them and I’d say this to everyone listening you don’t have to be a big operator to work with a developer. I believe, John, that there is a misconception in the business that you need to be a real big operator to work directly with developer but you don't have to be. We had 30 units at the time but we knew what would tick their boxes. It was a little bit easier for us because we knew them and we knew people whom they knew. So, we could resonate when we met face to face and that’s what we did. That’s how we now have been able to scale. So, our cost of sourcing is nil and our time spent sourcing is practically going out to look at exciting developments. It’s not work, it’s fun. We don’t do the agent thing. We are not trying to talk agents into Letting or we don’t have to get into arguments about the physics of letting or not. We are not dealing with planning queries that people get so mixed up on. We’re not dealing with any of that. I’d say to anyone who is listening, it's really simple you got to know what where to look. You’ve got to know what to say to them but you can do it.
We at L.M.N.T whom we taught this model to and he went and a couple years ago now he set up an agreement with a developer and he had no units. So, you can do it, you can kick off and you can develop that relationship but you just have to know what ticks their boxes.
John Wilson: if someone out there wanted to go and do that who is it in the development company that they would try to speak to? How would they go about that?
David Fernley: A lot of these developers have their own letting agency companies.
John Wilson: Right.
David Fernley: The way I’d do it to start with, John, I’d start having a look at property investment agencies people selling properties off plant. Then go and have a look at their website. See who those developers are. Once you know who those developers are go and research them. Go and have a look at what they're doing. Go and have a look at what they are selling. Go and have a look if they have a letting agency. If they have that model that our developer works on then when that ribbon gets caught. The pressures on, they are going to want people to start pumping money into their businesses.
So my first suggestion would be to go and have a look at the agents who are selling these proprieties. When you go on to their websites and you start speaking to those guys you start finding out whom they work within the area that you’re interested in. Then just start approaching them. Just talk to them and explain what you do. I don’t say tell them lies don’t try and fool them but say that this is what we do. They'll be worried about things like parties they'll be worried about the damage that kind of thing. The way I talk to them is by saying we are a hotel business really. So, you know when you have a tenant and they move out and it’s a complete dump? That’s not like us. We’ve got to keep our units absolutely pristine because if we don’t, we’ve got no business. They can walk into any of our units now and they’ll be sparkling because we have to keep them right. You know, we’re up against people pitch our units around four stars. So we’re up against the Marriotts of this world and the Hiltons. We got to keep them right. So you’ve got to say the right things to them to get them on your side and to understand what the benefits are for them.
John Wilson: Yeah, sounds good and to be honest I’m sure there's the odd nightmare but I’m a small serviced accommodation provider. I have two in my portfolio that I run as serviced accommodation and my experience is that they treat the place as I would. Whenever I go back to my own flat that I lived in Glasgow when I was there. I remember when I went back there it was almost like I had never left. They treat it well in general.
Yeah, so those are the benefits for the developer. What about the benefits for you? You know, can you talk us through an example of a deal? Just so people can see what the financial benefits of running one of these are.
David Fernley: Yeah sure, I don’t have a calculator with me but obviously there are lots and lots of different types of guests, aren’t there? There are travel guests, there are corporate guests. A sector that we deal with a lot with professional actors and they’re not T.V actors. They are actors that travel around the U.K doing shows like Miss Saigon. Now there on the circuit, they'll come to us and we market to those guys. Now, they don’t pay the biggest money in the world but what they’ll do is they might stay for two or three months. So, to give you an example: we have a lot of three double bedroom departments. We like three double bedroom departments because we can fit lots of people into them. We could get probably about ten people into them but we don’t tend to do that because you’ve only have so many bathrooms. You’ve only got so many dining rooms, you’ve got one kitchen. We usually to restrict it to about eight people but with an actor typically what they’d want is one bedroom each.
So, if they paid let’s say a hundred pounds a night. It's a little bit less than a hundred pounds a night Amanda does the numbers so I think its about eighty pounds a night for a month times thirty point five on average. It's two thousand four hundred and forty quid. We’re paying approximately twelve hundred pounds on a management contract on a rent to rent. That takes us down to twelve forty. These are round figures is that okay?
John Wilson: hmm hmm.
David Fernley: Let polish of a hundred and fifty quid for council tax and then let's polish of a hundred and fifty quid for utilities, okay? That takes us down to nine hundred and forty quid. We quote every fortnight. We can do every week if they want more but we’ll charge them. So let’s say we've got over a hundred pounds in housekeeping cost. That takes us down to eight hundred and forty quid. Consumables.. it's not a lot lets take out forty quid for consumables, that's taking us down to eight-hundred-pound net cash flash for that month. In my opinion that's pretty good, we don't get much hassle out of them. We don’t get the parties. We don’t get the fuss. They can be there for a week but we’ve had them for three or four months on occasion. So, if I'm bringing eight hundred pounds a month, John, net profit. I’m happy.
John Wilson: Yeah, absolutely. Yeah, you mention that you pay twelve hundred rent to rent. So, you’re paying the developer twelve hundred? So, what would the market rate for that property be on an AST?
David Fernley: Right, in Manchester we pretty much pay market rent. I have checked down but the thing with Manchester it's a buoyant market. So, there are a lot of people who say that you've got to knock it down. If you're offering them let’s say three years, five years you can bring the price down. The truth be known, Its really tough because they will go and rent that property out all day long. Yeah, it such a buoyant market especially in Manchester. It is in Leads as well if one of the properties come on the market, we always get the first option. If we say no for whatever reason they'll let it out. So, it’s difficult to get it down.
John Wilson: Sure, okay, yeah but at the same time you’ve got the benefit of not having to source them and of you not having any cost in sourcing them. So, there’s something in it for you and there is something in it for them and that an ingredient for a good deal.
David Fernley: Yeah, what I’ve like to share with you John is that we don’t pay referencing fees or anything like that and we don’t pay deposits. The reason we don’t is when I went to I said look we’re not working under an AST here. We’re not a standard tenant we do not have the housing act behind us, okay. We are going to work on a management contract which is pretty much business to business. So, if we’re going to walk away from all those rights, we expect something in return. So, we don’t expect to be paying deposits and we don’t expect to be paying fees. And we shook hands on the deal. It works for them and it works for us.
John Wilson: Got it. Got it. So yeah, tell me about managing prices David that's something I've had a few issues with in the past. Airbnb has something called smart pricing or at least I think its called smart pricing or something like that. I hear that there were some problem with it in the past but its kind of a bit better now. But is that something that can be managed by a channel manager? Or is that something that you do manually? What are your thoughts on price?
David Fernley: We’ve had a big, big learning experience here, John. If it’s okay, I’ll answer in this way. when we started, we initially thought we’d just have a look at your competitors. Just like you would with your standard AST and you put it on. Let's say comparable it's a hundred pound a night and you just put it on and sorry just to go back on that we do work with Airbnb but its probably about five percent of our income. We don't do much with them. It's predominately Booking.com which in our opinion is a much more sophisticated OTA and also a much more powerful OTA and bigger and Direct.
So, what we thought when we first learned. We had a look at what was in the area and let’s say we see two-bed apartments in the area are £100. We put it on at £95 and then we’d leave it but that was totally wrong. You can’t leave your rates you’ve got to keep adjusting them. We kind of learned that then we started to look at comparables and then you really got to do it every two or three days really. Because the hotels are constantly changing their prices. They have departments full of people who are constantly monitoring the markets. We then came across a revenue manager who is a specialist at manipulating rates and manipulating the markets and seeing what’s going on. Who can go into the likes of booking.com and maximum and optimise your revenue.
At this point, the thing I want to share with you is that when we took Morel on, it really opened our eyes to how little we knew. I believe that typical pretty much of a lot the Facebook and social media circuit is that you kind of don’t know what you don’t know.
John Wilson: Hmm.
David Fernley: And that lady she had been a revenue director for Marriott, Best Western and other people like that. That’s what she did. she was an expert at what she did. It’s what she does and we realised that we actually didn't know much, John. Am I qualified to sit here and talk about revenue optimisation, John? I'll be honest no I'm not. No, I’m not but what I will tell you is that it was a big game changer for us to bring in an expert who did.
So, for everybody who is listening, I would strongly suggest that you looking externally for one of these experts who can come into your business on a self-employed basis. They don't have to work full-time. Of course, they don't but they'll come and they can start looking at your units and try to deal with your bookings and optimise your revenue because that's what its all about isn't it? If you don't get the money in you've lost.
John Wilson: Hmm hmm.
David Fernley: So, if I can join that's the way I'd respond to that question really is that I'm certainly no expert at revenue management and pricing that's why we brought somebody in who is because we didn't know what we were doing.
John Wilson: Interesting so yeah, we are coming to end of our interview here but I’m just wondering if there you obviously (it’s a very eventful kind of business) have you any stories or interesting kinds of events that have gone on. Is there anything that springs to mind?
David Fernley: Yeah, one of the things I’d like to share is that we’ve had so much fun with some terrible guest. We had a really bad period of going through stolen cards.
John Wilson: What?!
David Fernley: um stolen cards.
John Wilson: Right, I thought you said stolen cars.
David Fernley: sorry, sorry, sorry right. So, you know, I'll give you one particular day it was the music awards in leads ah these lads came up from London and they moved in. our housekeeper in leads at the time (it was about midday) she phoned us “’I’m a bit worried there’s a lot of loud music playing its only midday.”
So I told her “go knock on the door.”
And she knocked on the door and the guy was really polite he said
“I’m sorry. It’s just the T.V. I’m just playing a bit of music. I’ll turn it down.” Anyway, I went over there because I was worried. If there were playing loud music at that time…anyway we went in and it really (the unit) smelled of drugs and that sort of thing was going on and we were quite worried. It would be really naïve to think that people don’t smoke drugs in our service department of course they do. But we decided to have a walk by at night and not approach them but just to have a look. It was quiet anyway the next day they were due to move out at 10 o clock. So at 10: 30 she couldn’t get in. The door was locked it was barricaded. So she’s knocking at the door no answered. So she continued knocking at the door but still got no answer.
Eventually one of the guys came to the door but in the meantime, she had managed to push the door a little and opened it. It had been wedged by a washing machine. Now we think they had been on drugs and they were sort of comatose and all the rest of it. So, they came to the door and said "oh yeah, yeah we're sorry. we'll go in ten minutes. We'll come and give you a shout. We're going. So anyway she went down the corridor and fifteen minutes later she came back and what they had done is they had turned on the tap to the washing machine and they were flooding the place.
John Wilson: Noo.
David Fernley: Yeah, it was completely underwater it was starting to come into the hallway. It was going downstairs into the next floor. So, we had panicked. We rushed over there. There was massive panic. We have people moving in at three o' clock. It's a super stressful time. We've got all these problems to deal with. They cut the washing machine and so the manager and told him to (we take a two hundred and fifty-pound deposit) stop the deposit. He said, "I will no problem." So, he stopped the deposit. The next day charge-back. How could that be? It turns out it was a stolen card. It was just a stolen card. It was a four-hundred and fifty-pound booking and we were getting a lot of these, John. We were getting really exposed to it. And this is again just something I want to share with the listeners and readers one of the biggest game changers for us is when we decided to move away from strip as a payment processor (whereby you just go on magic bouton and press the magic bouton and it takes the payment. We then went on to pay 3D verification. I’m not sure if you’re familiar with that. It's like if you go into a shop and it's a chip and pen. Once you put it in there is no going back on it. So, we’ve cut down on so much on the bad element that we were getting targeted with. Because these guys know what they are doing. So as soon as they see the 3D verification. They’ll go on to somebody else and that was a big thing for us because it cut out so much of the damage the parties, the problems, the stolen cards. It was a big thing.
John Wilson: That a good tip. That a really good tip. Well, listen thank you so much for spending time with us, David. I know that the life of somebody that has serviced accommodation company as big as yours has got to be busy. So thanks for taking the time out of your day and just finish up and just let people know how they can find you online or get in touch with you.
David Fernley: yeah, probably the easiest way is to connect with us on Facebook David Fernley and we’ve got a group and its serviced accommodation with AWUF and that’s Amanda’s group. The no bullshit group. No BS or drop us an email firstname.lastname@example.org
John Wilson: fantastic. Thanks very much.
David Fernley: Thanks, John, fantastic. Thanks for inviting us.