Don’t you hate those rehearsed pitches you hear, where is sounds like they are reading from a sheet of paper? Good pitches are nothing like this – they are conversations around the benefits of what you do, and how it impacts others. In this episode, we explore the benefits of Serviced Accommodation and how and when to communicate them effectively.
The Serviced Accommodation Podcast is a show brought to you by Chris Poulter and Ritchie Mazivanhanga aimed at new and experienced property investors alike. With each show we help you Start, Systemise and Scale your Serviced Accommodation Business.
If you would like to ask us a question or discuss anything in this episode, please join our Facebook group and ask away. To listen to more episodes or get more information go to www.thesapodcast.com.
Hi I’m Chris. Hi I’m Ritchie. And welcome to the serviced accommodation podcast.
Today we’re going to be talking about pitching serviced accommodation.
The first thing we’re going to say about pitching is don’t pitch!
It sounds a bit of a funny thing to say on an episode on pitching but what we really mean by that is those kind of conventional rehearsed pitches which people use.
The cringeworthy ones!
It’s terrible isn’t it? If you’re kind of at a networking event and you ask someone what they do and then suddenly you kind of feel like they’re reading and it is very uncomfortable isn’t it?
The funny ones are where you bump into the same person for the second time and they’ve forgotten you and they just use the same pitch and you’re like oh my goodness, so rehearsed.
Yeah this is very cringeworthy. You feel like you’re being sold to and no one really likes that. When we say “don’t pitch” that’s kind of what we mean these horrible kind of traditional pitches. Now pitching is obviously important but for us pitching. it’s just a conversation. You know it’s a conversation which is about conveying the benefits of what you do to other people in a kind of way which makes sense to them right.
It’s got to be conversational.
Absolutely, to have effective conversation then with someone or pitching as you might call it. I guess we really need to understand the benefits behind what we’re doing and then kind of position it accordingly with them.
- So if we start to then to think about the benefits of serviced accommodation. What would you say is the biggest benefit of serviced accommodation Ritchie?
More money, more profitable I would say.
If you do it right?!
Yeah it’s got to be done right, the right model within the right area. Yeah you’ve got to carry out a strenuous feasibility study before taking on a property to make sure that stacks up and that it’s going to be profitable now and in due course.
Feasibility, do you know anywhere you might be able to find a bit more information on that?
We’ve got an episode on Feasibility, that’s episode 17 or you can visit our website thesapodcast.com
Yeah absolutely the episodes on there and the article which has it with all the information on there on how to do fantastic feasibility projects and make sure you make lots of money.
There’s a lot of information on that! Yes. Yeah. So profitability as you say and you benefit from positive cash flow. That’s one of the major benefits of serviced accommodation, the cash flow is amazing. If you take payments now for bookings that are in three months’ time, two or three months’ time, that will have a massive impact on the cash flow of your business.
Yes it could. I mean if you think about it, if you’ve got a property which could be turning over say £3000 a month you could have an extra you know £6000 in the bank you know an extra couple of months’ worth of bookings spread over three to six months and that’s obviously a fantastic position to be in. Would you rather have the money sat in your bank account or your customer’s bank account?
My bank account, all day every day!
Oh I’d never thought that with you Ritchie!
We do have a case study on this, don’t we Chris?
Yeah I mean I think for us the impact of it you really see with the first property which we took over which was that the 29 bed property in Southampton and at that point it was our first entry into property really. We didn’t have any kind of capital to play with on it so we were having to structure the deal in a way which worked for us and it was whether to pay the rent in arrears because we didn’t have the £13,000 for the first month rent sitting there so we negotiated those and then of course the next great thing was because it was an operational site it had all these future bookings. When we took over it had about £40,000 worth of future bookings. So of course what’s the first thing we did on day one is that with all the bookings with all credit card details we ran them through the credit card machine, it got quite hot that day! And of course not everything went through you know some got declined, some cancelled, all those kind of things. But a week later we had £25000 sitting in our bank account and of course you know that shows you just the impact, you know okay that wasn’t all profit clearly, it was future revenue.
But you know a lot of business people will talk about the importance of cash flow and if you look at businesses which go out of business usually it’s not so much that they’re not profitable but they’ve run into cash flow issues because they haven’t had enough money in the bank to pay the bills.
So in terms of cash flow positive businesses serviced accommodation is right up there.
We love it for that.
Yes absolutely. So who would you be talking about then when you’re talking about the kind of benefits of the additional profit you can generate from serviced accommodation?
When it comes to profitability and cash flow you’re not going to be going out and pitching this to a letting agent. It doesn’t work on guaranteed rent.
Well yeah, they’re not going to be making more money are they?
No unless they take the deals and do them themselves and make the money.
They might do if you show them the feasibility on it.
So this really works if you’re going out to landlords or for landlord joint ventures and if you’re looking to pitch the management model.
Yeah because they’re the people who are actually going to be benefiting from that aren’t they?
Yes, yeah it’s about what’s in it for them and what the benefit is for them.
Yeah absolutely and the only other thing on that is that sometimes the positive cash flow benefits you’re not necessarily going to get because yeah, you’re talking about like landlord JV management model. And both of those cases you’re actually going to be taking a positive cash flow right?
Yes and holding it in a trust.
Exactly yeah so I mean if we take, we have a management company and if one of our properties has a booking for say three months’ time then we’ll take that money, we’ll put in the client account and then only settle that money afterwards.
Because obviously what happens if we’ve given them the money and then there’s a refund. We don’t have the money to refund it there so yeah in terms of the additional profit it’s fantastic when working with people but sometimes the positive cash flow doesn’t necessarily work in that way.
So another major benefit around serviced accommodation I think this is a huge topic at the moment is around interest rate relief. And of course at the moment a lot of landlords are worried about the recent tax changes called Section 24 which affects higher rate taxpayers. What it effectively means is that you’re suddenly not going to be able to write off all of your interest as a cost as a landlord and so for higher rate taxpayers that means that the bills are going to be going up in some cases very substantially where people are quite highly leveraged.
The other area that’s going to have a massive impact I don’t think it’s quite so widely publicized is that because interest isn’t going be a cost anymore then essentially the profit is going to go up massively for landlords even if you’re not you know a higher rate taxpayer. And what that means is because that’s now part of your income that’s going to push a lot of people who aren’t actually making any more money on their properties suddenly into a higher end tax bracket. So they’re making the same money but because that interest isn’t being taken off their turnover essentially they’re now higher rate tax payers and then they’re paying a lot more tax on what they’re doing so that’s going to have a big impact as well and so what we’re seeing is a lot of landlords are worried about this they’re looking at their portfolios, how they can mitigate some of it, are they going to be selling some property as they begin to pay them off or are they incorporating.
And of course a fantastic opportunity around this is that with serviced accommodation everything we’re doing qualifies them as furnished holiday lets as defined by HMRC and it’s exempt from the changes.
Yeah, in actual fact the very first consultation which went out if you look at it, the first paragraph says none of these changes apply to furnished holiday lets. So it means that as serviced accommodation operators we have an opportunity to really help people with a major tax problem by essentially sidestepping Section 24 by using the property as serviced accommodation.
And that’s side stepping Section 24 in an HMRC approved way.
Absolutely, yeah because of course a lot of the time people think Okay that sounds a bit dodgy but you give them two links, both of which are the HMRC web site and they come round.
It kind of reassures them.
And who will you be talking to about this about?
This applies to all the different models you might be working with on the deal. Now obviously if someone’s not a higher rate taxpayer or they’re not going to be after the changes come in or if they own a company then this won’t be applicable as a benefit to them. But any situation where someone owns a property in their personal name and they are currently a higher rate tax payer or they are going to be made a higher rate tax payer because of these changes then it’s going to be very relevant to them. And that’s whether you’re working on a kind of rent to rent, purchasing, management, whatever type of deal it is.
Now I know there’s been some talk around kind of guaranteed rent and does that still have the same impact on Section 24 and certainly the tax advice that we’ve had is that yes this is the case, HMRC will look at it in terms of the end use and they’ll say well it’s been used as a furnished holiday let and therefore you can you know claim the income as furnished holiday let income even if it’s a fixed amount each month. Now what we would do in those particular cases is just to protect that further so that if HMRC did want to look into it and make sure that was the case then the guaranteed rent agreements would be management agreements. And it says on it furnished holiday let management agreement so that you know it’s a furnished holiday let at source and then the terms of that agreement are they’re managing for you and what they’re going to do is pay a guaranteed rent of X amount per month, guaranteed income you might say of X amount per month.
Another benefit of serviced accommodation is the tax deductible costs. So other than that it’s just about the money you make but the money you do not spend i.e. the money you save.
With residential properties you’ve got complicated rules about what you can and can’t claim against tax. In most cases you can’t claim for a refurb as this is considered improving work so you’re improving the asset.
Yes so it’s a capital improvement right?
Yes it increases the capital of the asset by doing those works.
Yes you could claim it back when you sell the property but you can’t claim it back now.
Exactly, yeah. So the rules of businesses and trades working in your own name are very different, completely different. So refurbs can be claimed against tax along with furniture, dressings etc. Basically all the money that you’ve spent on the refurb can be claimed against tax.
Yeah and that can have quite a big impact can’t it?
Can be a significant impact.
Even if you, you know a fairly standard refurb of £20k certainly to offset that all against tax as a higher rate taxpayer that’s £8000 tax saved is that right, definitely a big saving.
So who might you be talking about then about this benefit of the tax deductible costs?
So this will benefit people working in all models with all models or any model. This will apply to any model, particularly relevant people who are currently refurbing their properties.
Yeah because obviously they’ve got an immediate tax advantage if that’s the case where you’re spending a chunk of money, good people to be targeting.
Another major tax benefit from serviced accommodation is capital allowances. It’s not something we’ve talked about a lot yet, the reason being that there’s a lot of misinformation out there at the moment of capital allowances. So we’ve wanted to talk to a lot of different people about it, we wanted to go through the process of sales before we stop talking to you about it.
But the essence of a capital allowance is it comes from the commercial property world and if you consider the example of buying a warehouse or an industrial unit, that type of thing. So let’s imagine you’ve paid £500,000 for this warehouse. Now what capital allowances basically allow you to do is say okay you paid £500,000 for the warehouse and as a property we know unfortunately that’s not tax deductible right. We can’t get that off our tax bill, that would be really nice!
But what you can do is look at it and say well of that £500,000 actually £300,000 was for the property but £200,000 was for the equipment, for the lighting, the heating, the air conditioning maybe, all those extra things which aren’t part of the bricks and mortar which still adds value to the property and because these are things that you can have down as an expense against your tax. That then means that in this particular case with this property you’d have £200,000 which you can offset against your tax bill so particularly if that’s in your own name and you’re a higher rate tax rate payer then that’s a massive difference.
Yes it is.
Absolutely, so like I said we don’t want to go into that in too much detail now because we do have an episode coming up next month or so and it’s going to be an interview with capital allowances surveyor where we’re going into this in a lot of detail and we’re also going to be taking a case study of a property we’ve just done this with. But it’s definitely worth understanding that this is the case because what it will allow you to do is essentially take a bunch of money from that property completely tax free. Now there is a misconception out there that with serviced accommodation you can claim full capital allowances which you might be able to offset against say a capital gains bill or your income tax and that’s not normally the case which again we’ll get into a lot more detail. However any income from that property as furnished holiday let you’ll be able to claim it against that. So that can still be a massive benefit.
Who will benefit from capital allowances?
Pretty much anyone you’re going to be working with where you can kind of add value to them by introducing them to this concept. So even with a rent to rent deal for instance the landlord could claim capital allowances and then potentially get the guaranteed income from that property for next five to 10 years completely tax free.
What about with the lease option?
With a lease option you probably wouldn’t want to do it because one key thing with that capital allowance is that you can only claim that once per property. Now obviously if you show the existing owner how to do that then when you eventually purchase the property…
You won’t be able to do it?
Exactly, exactly so I would say that it’s worth addressing this in any situation where you don’t have the future chance, not necessarily a lease option but even if it’s something that you discuss, but the future chance to own that property.
Another benefit of serviced accommodation is that you know do not have any tenants. So when you post the property you potentially have spent hundreds of thousands of pounds on this expensive asset and when you get someone in on AST you effectively hand over this asset to a stranger. That stranger now has control and legal protection to protect that control.
Yeah it’s very heavily regulated, ASTs, residential properties.
Very and it’s mainly the side of the tenants isn’t it. It can take a long time and lots of costs and lost revenue to regain possession of your asset. With serviced accommodation we don’t have any ASts. So yeah you don’t need to worry about the long winded process, everything is on a licence. Sso what this means is if someone breaks the terms and conditions which are clear on the booking confirmation, if someone breaks the terms and conditions you can just eject them straightaway. So they don’t pay their bill, they trash the apartment, anything small, too noisy, anything! You can just go in and eject them.
Without having to go through that whole legal palaver that you do.
That takes months and months and months and years.
Yeah and so who do you think this is going to appeal to as a benefit then?
This works for all models. So yes be it vendor joint venture or guaranteed rent, be it the management model, however it’s particularly relevant to landlords with problems.
Particularly fresh problems like this.
Absolutely so we’ve been talking about benefits of serviced accommodation and how pitching should be a conversation so if you were talking to someone and they were you know maybe having a conversation and telling you about a tenant that they’re having to take to court and regain possession, that kind of thing. So how would you position one of the benefits in that particular situation?
Well so firstly you need to listen to what they are talking and they’ve told me about the problem with their tenant so first thing I would highlight is the tenant issue, that sticks out in my brain and then the other thing okay they would benefit from is cash flow.
So if I said well that’s enough about me what do you do then?
I help landlords never have a tenant again and make more money.
Well that sounds really interesting Ritchie, can you tell me a bit more about that?
And that’s the conversation Chris that’s it!
I think that’s a common phrase isn’t it?
Yeah it’s not like you’ve got a kind of rehearsed pitch for that that, you’re talking around the benefit, you’re positioning it in a way that they can clearly see the benefit and then you’re starting a conversation.
So it’s about listening, responding and then positioning.
And then kind of engaging and having an interactive discussion rather than “what I do is this and this and this and this.”
I am a robot!
So Ritchie this is kind of your area of expertise really with your background in sales and particularly financial sales. So one of the key things I’d seen in my limited knowledge of sales is about overcoming objections. So obviously we’ve kind of positioned one of the benefits with someone that we’re talking to, we’ve had a conversation to talk them through a bit more details of exactly how it is and what it works. Now human psychology tends to be then that they go okay that all sounds great but and then it is kind of a bunch of objections which they tend to have so..
Absolutely so I think one of the big objectives we tend to see is well what about planning. I’d need planning for that wouldn’t I?
No you don’t, you don’t need to change use class. Most properties already fall under C3 which is residential property use class. So you do not need to change the use class at all and for more information you can refer to our podcast episode 3 on planning use class.
Makes sense, okay so what about leasehold. What if they said oh yeah but I think it might be against the terms of my lease.
Yes. A lot of people are falling foul of this because they’re not actually checking the lease prior to signing up any documentation. So this should be part of your feasibility where you check the lease documentation to make sure that you’re not breaking the laws when you are setting up serviced apartments, that doesn’t allow serviced accommodation or furnished holiday lets as they call them.
So as a landlord if I’m asking you well won’t it breach my lease, what would your response be?
Oh okay, I can check the paperwork if I’m unsure and then I can refer them to our solicitors.
OK, so what about mortgages? Because again I think this is another big one which people think well it’s like okay that all sounds great but you know am I going to be okay in my current mortgage? What’s the situation?
Yeah this kind of falls down my previous mortgage adviser role! So you don’t want to breach terms of the mortgage, it’s worth checking with the provider what the provider allows and disallows. And if it’s problematic you can always then move to another mortgage provider who permits this.
So what if I say well that sounds great but it also sounds like an awful lot of work, kind of dealing with guests and cleaners and maintenance and all that kind of stuff.
It is a lot of work but then that’s where we come in! So we take care of that work. What we do is we take care of the guest relationships, managing the guests, managing the bookings, the cleaners, the maintenance teams. We take care of the marketing; we take care of the bookkeeping so you don’t have to deal with that.
OK and what about if someone asked well you know I keep seeing these news articles about these horrific parties on Airbnb and all the damage it’s caused and how the neighbours now hate them, all those kind of things. So how do I know this isn’t going to be a party in the property?
Yeah I’ve had this asked of me a few times. So yes it does play on people’s minds and we have processes in place to identify high risk or potentially high risk guests. And 95 percent of the time you can spot a mile off you know.
It’s kind of quite often they’re young or they’re nervous or there’s something dodgy around the booking.
Yeah we did have a person where one of our booking managers was on a holiday and someone else picked up thought oh yeah this person sounds a bit suspicious. They were very young and then all we asked them to do was follow the process so they asked them to send in their ID with the address so they sent in their driver’s licence and their driver’s licence and the name on the driver’s licence matched the card which made payment. So that’s just trying to alleviate the problem and you kind of filter them out that way.
In extreme situations we spot check.
So what would be an extreme situation?
An extreme situation would be where you’ve gone through the whole process and it’s ticked the right boxes however you still have your suspicions. So we can always you know send the maintenance guy out late at night you know, 11 or 12 at night just to go check, drive past the property, sit outside the property for 10-15 minutes just to make sure there’s nothing happening.
And should of all else fail we always have insurance in place to cover ourselves.
And what about fraudulent cards? What about if someone uses stolen credit card to stay in my place?
Yeah we are in2017 and it’s easy, well people have loads of sources for these stolen cards. So what we do to kind of help ourselves stamp out the problem is we take I.D. matching the card that they use to make payment.
Yeah because if someone’s got stolen credit card then they’re unlikely to have some ID in exactly the same name, right?
That’s it and what people tend to do as well is some people would do a charge back like oh I never stayed in this apartment so if you got the I.D. and you’ve got a card that you used and you’ve got images of those people sent to you from their email address then you’ve got the evident to cover yourself.
And what about, how do I know if there’s actually going to be enough bookings?
It’s like I said earlier you know that’s what we’re here for so we take these problems away. To begin with before we even take the property on we carry out a strenuous feasibility study to make sure that it stacks up, it’s going to be profitable now and profitable in due course. And the other thing as I mentioned earlier is that we constantly market the properties so we actively market the properties on a daily basis to make sure that the properties are filled up.
And what about if somebody said to you well that’s all very well but why do I have to register the VAT?
Yes you will have to register the VAT if you go over the VAT threshold however we take this into account when we carry out the feasibility prior to taking the property on to make sure that it’s going to stack up now before you get up to flat VAT and when you go to full VAT.
Okay so when we’ve talked about pitching we’ve talked about why you shouldn’t pitch – not in the conventional sense. Not in a talking at people, sales-y kind of way. But instead you should just you learn your benefits. I think the key thing is listening other people isn’t it.
Yes. Yeah. It’s about listening to them, actively listening to them. Not just listening to respond but actively listening to people.
Yeah cause there’s listening and there’s listening because a lot of people, you look at them and you know that they’re kind of pretending to listen but actually they’re just waiting for you to stop so they can jump in. It happens all the time.
So listening is so critically important in this because it allows you to understand the person a bit more and position what you’re doing accordingly with one the benefits which you think would be appropriate for them. But of course most important of everything remember it’s a conversation. You’re not selling to people, you just wanted to have a chat about that. Yes. And that that is when pitching gets really effective.
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