The changing face of the BtR lease up model
- Home Made launch BtR ‘cost per let’ calculator.
- Investors and operators can interrogate the real and full cost of running an in-house lettings service.
- Access the calculator here.
Controlling the cost to acquire a resident is key to increasing net operating income and maximising the lifetime value of a BTR asset. The primary objective of all BTR operators after a building launch is to reach full occupancy as quickly as possible and at the highest achievable rents. However, if the cost to acquire a resident is too high, NOI margins are narrowed and asset valuations diminished.
Though the importance of keeping resident acquisition costs low is widely understood, there’s often a limited understanding of the full range of costs involved in sourcing residents through the standard in-house lettings model. It isn’t just the cost of the direct marketing activities associated with promoting a specific development - there’s a long list of direct and indirect costs involved in running a lettings team.
With current spiralling inflation likely to persist until at least H1 2023, operating costs are inevitably expected to increase leaving the real possibility of a considerable widening of the gap between expenditure and achieved rents (income).
So what’s the solution? How can operators mitigate rising costs and ensure investment valuations remain stable or, better still, grow despite recession?
BTR lettings specialists Home Made have developed a cost per lease calculator that is enabling investors and operators alike to interrogate the true costs of adopting the favoured on-site leasing model, with some startling results.
Home Made CEO and founder Asaf Navot said:
“In one instance we were able to help our client increase NOI margins by 22% increasing a single asset valuation by £45m.”
In the article below, Home Made explain the basic premise of how it works, how operators should be calculating their true cost per let (CPL), and exploring the full cost of running an in-house lettings team.
Calculate your true CPL
Running an in-house lettings team generates a substantial fixed-cost base. This includes a sizable team of salaried employees, significant costs in lease management software, the equipment and IT infrastructure required for your team to do their jobs, investments in training, employee pension contributions and benefits, and the costs associated with providing and maintaining office space for your back office and onsite teams.
The number of support staff required will obviously vary depending on the size of the organisation, the number of units available to let, the season, and the overall occupancy rate of the assets (i.e. initial lease-up or approaching steady state). However, even a relatively small team that includes a handful of lettings negotiators and tenancy coordinators will drive up the cost of acquisition substantially.
In addition to operational expenses, there are the direct costs involved in marketing a development to attract new renters. This includes the full cost of all your digital advertising, promotional offers, launch events, and more.
Once all of these expenses are tallied, operator resident acquisition costs as a percentage of annual rental income are often much higher than anticipated.
A more significant issue with running your own in-house lettings function is that, regardless of how efficient your team is, it’s very hard to plan the right organisational structure over the long term due to the seasonal nature of the lettings industry. The staffing requirements for a development during lease-up are drastically different than they are in steady state, just as more hands are required on deck during the summer peak season than during the quieter winter months. This often leads to one of two outcomes:
- Operators hire a large and expensive in-house lettings team with enough capacity to manage the lease-up process, and then have a large fixed-cost base for staff that are surplus to business need for much of the year, or when an asset is in steady state.
- Operators hire a leaner lettings team with a modest fixed-cost base that doesn’t have the capacity required to process the volume of viewings, negotiations and tenancy progressions required during peak season or a new lease up.
In addition to the complicating factor of seasonal variation in demand and the different staffing needs of an asset in lease up versus steady state, the actual costs involved in running an in-house lettings function are usually higher than planned. Most organisations expect to have declining costs as they scale, but in reality growing teams need more layers added within the hierarchical structure - e.g. more mid-level managers.
Despite all this, many operators in the UK BTR sector are still adopting this heavily loaded ‘in-house’ model, with a belief that the customer journey requires it, that the brand will suffer without it, and that results will be adversely impacted if any control is relinquished.
In part this is because no traditional agency model has truly been able to provide an alternative that mitigates all these risks and delivers unrivalled results.
But there is another, more effective option and many investors, and forward thinking operators, are reaping the benefits.
The Home Made alternative
Home Made provide the technology, the expertise, the processes and the resources to drastically reduce operator overheads, leading to substantially lower costs per let and increased NOI = higher valuations.
With an average fee of ~2.5 - 3.5% of the annual rent, (some ~65% lower than the industry standard), a leasing velocity at ~2-3 times the rate of any competitor, and a track record of achieving (and often exceeding) ERVs there is an alternative and investment teams are paying attention.
Jo Green, Home Made’s Head of Business Development, said:
“We are now starting to see a real step change in investor mindset, with Home Made being engaged at a much earlier stage to work with the OpCo’s, integrating our model instead of an entirely in-house approach.
The Home Made model is now a wholly credible alternative. We have the largest market share of any BtR lettings provider, some 87% of the market, so our expertise is extensive and our capability proven. It’s very exciting to see this willingness to adapt and the very tangible impact we are making.”
Having partnered on our first BTR development in November 2019, we have grown our presence in the sector to such an extent that we now market more than 90 developments across the UK with a total combined stock of >70,000 rental properties. This is the strongest proof point validating the success of the radical alternative we have created to the sector default.
Case study: WEM Tower
A landmark development in Wembley, we launched WEM Tower in partnership with Israel Canada in January 2022. We planned and executed an exciting and interactive renter journey with our team onsite to support our client by conducting a huge volume of viewings and helping them to organise a range of events and displays to showcase building amenities to prospective residents.
We designed all of the operational processes to manage viewings, complete tenancy administration, and handle ongoing tenancy management, and we also devised and executed the marketing strategy driving renter enquiries on the development. To date, we have helped our client to achieve the following:
- >10,000 enquiries generated.
- 45% of units let within one month.
- Lets agreed on 100% of the building’s units ahead of the target date
- Created a thriving community in a new area with a limited residential rental offering.
By engaging Home Made instead of recruiting an in-house lettings team, our client achieved significant cost savings while still letting 100% of units at or above the asking price. With our support, Israel Canada is able to deliver exceptional value for shareholders and spend more time focusing on creating a fantastic experience for their new residents.
Find out how much value Home Made can create for your scheme
We have created a sophisticated cost per let calculator so that investors and operators can see how much they’re really spending on resident acquisition - you can access it here.
The Build to Rent sector represents the future of UK residential lettings. In Home Made, investors/operators have found a trusted partner able to provide a service that supports the scale of their ambition. For operators wanting to reduce their operating costs while exceeding targets for ERVs and occupancy rates, Home Made’s Build to Rent service proposition has become the go-to option.
We are, as always, here to help and if you want to speak to us about how we can support the lease-up of your scheme get in touch with Jo Green for a bespoke proposal.
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