Sub-Lease Negotiations - The good, the bad, and the ugly.

Hey team,

Been a while since I've posted.

For those who know, I've been heavily involved in sub-leasing / HMO's for about 3 years now, pivoting from building granny flat after granny flat, and renovations.

I left work 5 October 2019 to focus full-time, and my goal 2 weeks prior to my end date was to increase my business income by an additional $4k/week by 31 Dec 2019.

As of last week, I have signed contracts increasing my income by theoretically $3k+/week, with an additional $2k/week still in the works.

Negotiations were as follows (number are per wk):

Oct 1 - Deal #1
Difficulty: Very Easy
Regret Level: 0
Action: Booked inspection. Turned up. Applied. Approved within 1 hr.

$2,190 re-rent
$1,350 rent
$200 expenses
= $640 profit (achieved)

Notes: Property came with required fire safety, at cost to owner.

Oct 1 - Deal #2
Difficulty: Medium
Regret Level: 8
Action: Booked inspection. Confirming lease with owner. Competitor shows up. Over-offers. Owner wants to give it to me but for the higher price.

$2,450 re-rent.
$1,600 rent.
$200 expenses.
= $650 profit (theoretical)
= -$300 (achieved to date)

Notes: Rushed deal. Property came fully furnished, 50% tenanted. 2 new tenants moved in. However 2 moved out. Furniture was old, and not well presented. I have replaced furniture which has increased interest. Also advertising on alternative platforms. I have had a similar experience in the past. Turned into one of my easiest properties to manage, post re-furnishing, and swapping out tenants. Looking to do the same here.

In addition, revised plan. Keeping additional room for storage. Revised expected profit to $350/wk.

Oct 24 - Deal #3 and 4
Difficulty: Easy
Regret Level: 0
Action: Met with owner of deal #1, took over 2 additional properties they had. Wanted another 2, however they understandably did not want to put all their eggs in 1 basket (working on that). Property comes with all fire-safety installed. Property is fully tenanted, however will turn over tenants who are paying under market value. Deal will be completed by mid-Dec.

Combined numbers
$4,500 (conservative estimate)
$2,850 rent
$300 expenses
= $1,350 profit (conservative theoretical)

Notes: I know this area really well. Am confident I'll break the $1,500/wk profit mark.

Nov 1 - Deal #5 and 6
Difficulty: 4
Regret Level: 5
Action: Applied to property. Owner offered multiple properties in a package deal. Deal was a poison pill with 2 properties being huge loss-makers. Walked away at $1,900/wk on 2 properties I wanted. Came back, however other sub-leasers had thrown much larger numbers at owner and abandoned the deal. Increased owners expectations substantially. I went back to the negotiation table, couldn't get the owner below $2,000/wk. I negotiated 2 weeks rent-free period.

Combined numbers
$3,195 re-rent (conservative estimate)
$2,000 rent
$350 expenses
= $845 (conservative - marketing is showing interest at $1,185 profit)

Notes: Cash-flow was tight and was negotiating on a much better deal ($750+/wk profit). Lost the deal. Went back to this owner whose expectations had risen over the 2 weeks, rather than fallen. I was frustrated at the negotiation, however in fairness, the profits were there even at the higher price-point. We had both gotten greedy. In hind-sight, ego aside I would have taken the deal at $1,900/wk. Took the deal as I could see a gap to pick up an additional 2 properties and actualise cash-flow profits by end of Nov.

Learnings:
1. Follow the numbers - don't let ego get in the way of a solid deal;
2. Don't rush into a negotiation. The opportunity cost of deal #2 meant I couldn't go harder on the deal I missed;
3. Increase adaptability. Owner of missed deal was anti sub-leasing. Then came along another sub-leaser. I had done a lot of the groundwork already, so they received the deal as now the owner was familiar with sub-leasing. Took on feedback on how to improve approach.

Expected weekly profits to be actualised by mid Dec:
Conservative Low: $3,185
Realistic High: $3,675

As stated many many times. This is not a cruisy passive investment.
It is a business where you deal with people. A whole lot of people.
Without a functioning structure, you will likely loose money.
Most properties I take on are existing failing share-houses.

That stated, it is a growing field, with some great education going around, eg. Hi Res by Ian Ugarte. Will keep updating as I go through my journey.

Regards
NHG.

 

Thanks for sharing your experience NHG. Can you please share what sort of lease you negotiate? Is it a regular residence lease or a different type. Also, are they are council (or other) approvals you need for this?

 

1. Leases
Depends on the size of the deal. Residential in most cases, with options to extend.
Larger deals I prefer commercial. A lot of people dislike this, however it gives me peace of mind with long options.

2. Approvals
a. Depends on the size of the deal, the larger properties may be a commercial premises and requires Council approval.
b. You require the fire-safety to be signed off for insurance purposes. This aspect is covered heavily in Hi-Res.

@LarsY I recall you have posted previously about HMO's. Have you already started?

 

Hi NHG,
Thank you for the response. No, I am still in my research phase, trying to understand what are the steps from renting to subleasing. Thank you for sharing your feedback on Hi-Res, really appreciate it. The price point is a consideration for me, should I try to earn some money through subleasing before invest in Hi-Res?
Anyways, I working on learning and understanding the landscape.
Which parts in NSW are your subleased properties in if you dont mind sharing.

 

What comes first is up to you.
The education, or the action.

The profit from a sub-lease will more than comfortably cover the cost of the course.
So the real question is, are you concerned you'll do the course and not take any action?

You'll want at least $20k before kicking off. If you don't have it, then perhaps focus on saving habits. I'm not one to encourage borrowing of friends and family if you haven't got a proven track record (PTR) of success.

I'm all over Sydney. Others are interstate, or purely regional. A handful focus on one or two suburbs. Depends on the strategy you choose.

As you go along the journey, you identify the pain-point, or bottle-neck, and you add the appropriate systems. The trick is to get yourself out of the process as quickly as possible. The more the business is dependant on you, the slower it grows.

I have full-time staff and contractors, they do a lot of the menial work freeing up my time to focus on expansion, and exploring other non-subleasing opportunities.

The opportunities that show up once you've created a PTR is unbelievable. The deals that open up to you, the calibre of mentors that present themselves, crazier than my wildest dreams.

Get stuck into it. Maybe sub-leasing isn't your thing, perhaps it's baking cookies. Just do it!

 

Well done NHG and thanks so much for sharing your story and success!

I love that you traded the 9-5 for something you are clearly skilled at + is income-replacing.

Well done mate, good on you and keep on growing!

 

Nice share @NHG !

 

Hi, thank you for the detailed reply. I am concerned if the course is worth it, I am not concerned about not taking any action. I have sent you a PM. Talk soon

 

Is a well detailed course, in doing a business you haven't done before worth it?

If you use it. 1,000%.
I lost about $60k in my first year figuring stuff out on my own.

 

Nice share @NHG

 

How'd you go with this one?

What financials do you need to prove to owners that you can afford the lease arrangements?

 

Profit downgraded to $900 until I sort out kinks.

Lot of issues I've had to learn to deal with.
Increased set up cost of $5k.

Examples:
- Dealing with number of tenants / personalities (read as noise-complaints);
- Building has cooling issues, gets super hot;
- Creative ways of increasing social, and kitchen space, whilst reducing noise levels;
- Neighbours are militant, need to use all my charms to keep them on my side whilst I resolve the above concerns;
- Many, many, many more.

Overall learning a lot about functionality.
Finding cost effective solutions.
The obvious solutions others seem to use shave $200-300/week profit. This is unacceptable.
In 2 weeks, will be automised and will just be another property.

Up-skilled to take on larger properties moving forward.

The financials I provided, were the ones that proved I could afford the lease arrangements.

ADDITIONAL UPDATE

Major win was, I snuck in deal No.7 a week before Christmas.
I blew out my setup cost as I was taking on too much.
However deal #7 is +$700/week profit.
Will recover soon enough.

The blow-out above meant I had to get creative first week back from holidays.
Has created a handful of no-money-down opportunities.
These may or may not happen.
Around $3k/week profit.

And a whole lot of other things since landing back 12 January. Owned property getting trashed, another aggressive tenant using lawyers to push back eviction, different tenant vanishing from the face of the earth, leaving all furniture behind, renovating 2 properties to get them market ready, fired a staff member, hired 2 additional staff, and an contractor.

Wow, that all happened in a 2 week period.
Doesn't feel like it. I'd actually call this a pretty cruisy week.
Can't believe I use to do this and work 60hrs + / week in a PayG.

LEARNING

Every Pro, is a Con with a poor attitude.
Every Con, is a Pro with a posture of learning.

 

Aren't each of these sub-leases an individual residential tenancy? How do you comply with tenancy legislation in that case? It must be a giant pain in the ass.

 

Yes and no.
We have our own agreements.
However anyone who lawyers up will always find a way to be a pain in the ass.

Generally my owned properties are more painful to deal with, even with an agent, than the HMO's. I evicted 3 people this week, they all left within 24 hrs.

For my own properties I've had to go through tribunal. That process takes months.

 

how do you structure the deal with the property owner?

say the property is currently under let for $500 per week, you think you can get $1500 per week subleasing and managing it. How do you split the additional profit with the owner? Do you charge a management fee?

 

That's the beauty of business.
It's all up for negotiation.

Generally though,

Owner is in the business of renting houses.
I'm in the business of accomodation.

I haven't yet offered my tailor a profit split because I wore their suit to an interview.

 

Hmmm, have you had your own legal advice? I'd say there's a considerable risk that each individual sub-lease is actually a residential tenancy and would therefore come under the usual legislative scheme - standard contracts and no contracting out etc.

And if so, the danger is from the state regulatory body rather than individual sub tenants with lawyers.

Worth checking out I'd say since you seem to be operating on a large-ish scale.

 

NHG, great post thanks for sharing!

I'm moving to Adelaide at the end of March and very keen to do something similar, if there is the demand for it.

One question I do have about the process is: how do you get to the position where you can negotiate direct with owner? - I'm not sure where to start in terms of securing the property and not having to work around a letting agent.

Thanks,

Matt

 

Hi NHG, a bit late and might of missed it, but what is the course?? I'm new to subleasing and I'm keen to learn more.