What Is ‘Rent To Rent’? Is It A Good Idea For Landlords?
Are Rent 2 Renters something landlords should avoid, or a simple solution to their property problems? We spill the beans...
Ask the Average Joe to define ‘Property Investment’ and you should receive an answer something along the lines of...
”Property investment? That’s essentially investing in a property with the aim of making a monetary gain, either through generating a rental income or selling it on for a profit.”
Correct - an A* in the eyes of any economics teacher. But that's not to say that with other property jargon Joe wouldn't struggle. Ask him (or her) to define a maisonette, restrictive covenants or chain break and you'll likely be met with a long “ERRRRM” followed by a rather bemused expression.
And until the 'let's be a pop-up property investor' fad swept the internet a couple of years ago, things were much the same for ‘Rent to Rent’ (or ‘Rent 2 Rent’ if you’re down with the kids). Which as you've probably twigged, is fast becoming one of the most talked about strategies for making money through property.
This is because while property (as you know) is a great way to generate an income, it's property ‘investment' that the average Joe finds hard. Why? Because to invest in property requires substantial amounts of money - something they don't either have, or if they do, don’t want to tie up in an asset. This is probably explains why if you scour your inbox, it won't take you long to find someone encouraging you to Rent To Rent your investment property - that's unless of course they've all gone into 'Junk'.
So this beggars the question, what is Rent To Rent? And should you be marking any Rent To Rent requests as spam? Or, is handing the responsibilities of your property over to a Rent To Rent investor actually quite a clever thing to do? We answer this, and more, below...
First things first, what is Rent To Rent?
Rent To Rent is in essence a form of subletting, where a tenant would rent all (or part of) your property with the intention of re-letting it out to someone else. And through doing so would provide you with a guaranteed monthly rent and take on the majority of the responsibilities. You’re best looking at it like this…
A Rent To Rent investor is a professional middleman, who’s trying their best to leverage your property in some way, shape or form. The most common of which is changing its usage (a subject we will cover further on in this blog), although other factors like them already having a tenant lined up, may also be explain why they've approached you.
But while this all sounds reasonably straight forward, don’t be fooled because this kooky little strategy is anything but. Rent To Rent deals can be incredibly complex, especially in legal terms - far more complex than the hordes of ‘YouTube property gurus’ make them out to be. You see, it's not only being clued up on the Rent To Rent strategy that's vital, but aslo how to do your homework on any potential investors.
How does a Rent 2 Rent deal work?
While a large proportion of the Rent To Rent journey resembles that you experience through buy to let, there are some key differences that you NEED to be aware of, especially if you leave your lettings agent to handle negotiation.
Here’s a quick step by step run down of how a typical Rent To Rent deal goes ahead…
STEP 1: Invite the Rent To Rent applicant to your property
Inviting a Rent To Rent investor to your property is a great way to suss just how committed they are to doing a deal. Typically those in Rent To Rent will contact a long list of landlords (at least ten) in hope of bagging themselves a bargain. So if you find yourself talking with an investor who’s desperate to see your property quick, then take it as a good sign. After all, being the landlord (i.e. the homeowner) you have the upper hand – as you’ll discover this trend continues throughout most of the Rent 2 Rent process, which certainly isn’t a bad thing.
STEP 2: Get to know the Rent 2 Rent applicant
Just like tenants, Rent To Rent investors come in all shapes and sizes, so getting to know them and their situation is vital. As you’ll discover later on in this blog, fail to do this properly and it could come back to bite you later on.
What we’d suggest is that you see your conversation as a game. Create a tick list of the key information that you’re looking to get out of your conversation with the Rent To Rent investor and think of ways to get the answers you want indirectly. What we mean by this is plan ahead and most importantly take your time (it’s not a time trial). Probably the worst thing you could do would be to shake the investors hand and dive straight into their financial situation, as they’ll likely adopt a similar covert conversation tactic with you.
NEGOTIATION TIP: Take a leap of an estate agent’s book - casually pepper questions throughout your conversation until you get the answer you want. And ALWAYS leave anything financial until you’ve established a rapport. Even for a wealthy investor money can be a sensitive subject.
To put a stop to any awkward silences, here’s 3 questions that’ll get a Rent To Rent investor talking...
1. How long have you been in property? – A good first question to pose, as whether they’ve been in property 20 years or 2 months, most Rent 2 Renters will jump at the chance to talk property. Besides that’s why they’re here. Not only that, but knowing someone's level of experience can clearly indicate whether they're a worth your time. You don't want to be doing your first deal with someone who's largest Rent To Rent achievement is graduating from a property course.
2. What's attracted you to my property in particular? – If there’s silence in answer to this question, politely show the Rent To Rent investor to the door. The entire reason they’ve met with you should be because they’ve got an exciting vision for your property, and if they don’t, then why waste your time? Not only that but if you know why they want to Rent To Rent your house, you can compare them with other investors and pick the solution that’s most viable for you!
3. What’s been your best deal so far? – Because this could very easily lead to 'moneytalk' we'd suggest waiting a while before asking this. While it’s not asking their bank balance, it could lead to them spilling the outcomes of past deals – all useful information. It’s also help you gauge their levels of success.
WARNING: People can uphold the appearance of a high flying businessman both in person and over social media, so do your homework… sharp suits, car rentals and decent photographers aren’t that hard to come by.
STEP 3: Touch on Rent To Rent intentions and how they plan on making money
Providing you’ve already asked them Question 2 (above) you may have already touched on this. When considering a Rent To Rent agreement with someone you need to be clear on the vision they have for your property and trust that they will carry out the work toat least a good standard. You don’t want your house wrecking by a cowboy!
To help you understand what you should expect, here’s two common Rent 2 Rent proposals…
Studio flat = Hotel
Yes, you read that right – Rent To Renters would jump at the chance to turn your studio flat into a hotel. Let us explain…
As unorthodox as it may sound, this is the likely the Rent To Rent strategy you’ll be pitched by an investor if you own a studio flat. But once you take a look at the hotels and leisure industry, it’s not that hard to see why.
With homeowners on the hunt for a second income and tourists wanting to stay somewhere more unique than the typical Travelodge, online marketplaces like AirBNB and Booking.com have become incredibly popular. So much so that the price for one night in these types of accommodation can often be as much as a hotel itself. Kit out a studio flat to a high standard and, providing it’s in an attractive location (city centres are usually the best), it could easily be booked out for months on end.
To show you just how profitable this Rent To Rent model can be, we’ve done the maths below…
Say as a residential studio flat you’d achieve an average monthly rent of £600. But, through AirBNB/ Booking.com you could achieve £50 - £60 a night, even at the lower figure you’d be turning over £1500 in the average month, providing it’s fully booked. And even if it isn’t, all you need is for it to be let for 12 nights each month at that lower figure and you’d be no worse off than a residential let.
NOTE: Don’t forget that AirBNB earnings ARE NOT exempt from tax, so if you decide to let a Rent To Renter go down this route, be sure they’re aware of this from the start. You don't want a huge tax bill limiting their ability to pay you later on.
Large house = HMO
At the other end of the spectrum there’s large houses – another popular Rent To Rent strategy because of yet again, how they can be leveraged. As you’ll know, in most areas large houses have ceiling rent, which can often mean that the difference between renting a five bed or a six bed house is actually pretty small – typically a lot smaller than the step between renting a two and three bed.
To bridge this barrier, what a Rent To Renter will propose is turning your property into a House of Multiple Occupancy (HMO). By doing so, instead of letting out the whole house to one set of tenants, they’ll split the property into X amount of rooms and rent each out separately to its own set of tenants. This would mean that the kitchen and living space would be shared; student accommodation is a good example of a HMO.
To get a better idea of how this would work, jump into the Rent To Rent scenario below…
Let’s say you own a six-bed property and as a residential let you’d be achieving between £1500 and £2000 per month. If you were to convert your property into a HMO and rent out each room separately for £500, you’d already close to double your return. Some investors even squeeze an extra bedroom out of a house by converting a large communal area (i.e. a living room) into a separate bedroom. In the instance you managed a conversion to a 7-bed, you’d be touching £3500, providing the rooms were all tenanted. Near on double the residential let.
NOTE: HMOs are far less common than they used to be, because new laws brought in by the government have specified that a HMO can only be sublet to four or less people without the need for a HMO licence. An additional cost ranging from as little as £55 to over £1000 (Landlords Guild), which as you can imagine makes larger HMOs a far less viable investment.
STEP 4: Talk figures and guaranteed rent
Arguably, this is the most crucial part of the whole process (that is if you’re sold on the Rent 2 Renter’s vision). Here an Rent 2 Renter will disclose how much they’re willing to pay you in guaranteed rent to use the property how they’ve outlined previously.
NOTE: Bear in mind, this price will be less than you’d achieve residentially, but in the instance that you’re struggling to get a property tenanted, can be a far better option, particularly when the market is slow. The Rent 2 Renter should also take on the majority of the associated costs, so that guaranteed rent would be more or less yours to keep.
However, that’s not to say that you should settle for a lowball offer. Quite the opposite. As the landlord (the one with the asset) you have the power here - don’t forget that! If you were to ask us, we’d avoid agreeing to anything on the spot.
Tell the Rent 2 Renter that while you appreciate their offer, you have a couple of other parties you need to see first before making a decision. And this applies even if you don’t. Time and competition are two of the great tools of negotiation. A Rent 2 Renter who is motivated and fears losing a deal is likely to up their offer.
Want to learn more about negotiation? Click here to discover how we suggest you deal with estate agents.
But while price is important, it’s important that you don’t let it govern your decision. Aside from money, you’ve also got to consider your property’s welfare. So, for instance…
If ‘Investor A’ offers you a lower guaranteed rent than ‘Investor B’, but has a background in Rent To Rent and isn’t planning to turn your five-bed family home into a ten-bed HMO, then accepting that lower guaranteed rent may actually be the way to go.
Less start-up costs & lower guaranteed rent = the Rent To Rent investor can make a bigger margin = less likely to default on your agreement.
STEP 5: Make the Rent To Rent deal legally binding
Once you’ve settled on a figure, you then need to make the Rent To Rent agreement legally binding. To do this you need two types of agreement…
A Management Agreement - gives you the right to manage the property on a specific basis (so as an AirBNB type apartment/ HMO).
A Lease Agreement – a commercial lease that allows the Rent To Rent applicant to let your property to tenants for a specified time period.
TPBC TOP TIP: Always consult a solicitor if you’re unsure about any legal process. DO NOT assume the Rent 2 Renter knows best! Doing a Rent To Rent deal without the proper contracts could turn what you think is a good deal into illegal subletting and leave the door open to fines and potentially prosecution.
Rent To Rent: the advantages and disadvantages as a landlord.
Rent To Rent is a tricky strategy to weigh up as a landlord, so to assist you in this decision, we've compiled a list of common Rent To Rent advantages and disadvantages below...
Advantages of Rent To Rent for Landlords
Rent To Rent = less stress – A clear advantage of a Rent To Rent deal as a landlord is that the stress of managing and maintaining the property is for the most part taken off your shoulders for the reasons you’ll discover below. Although it is worth remembering that if a Rent To Rent deal goes wrong that it can be a tricky situation to rectify both legally and in terms of money.
Rent 2 Renters foot the majority of repairs - Typically repairs with a Rent 2 Rent agreement go something like this: The Rent 2 Renters covers cosmetic and internal repairs, so that’s decorating, replacing door handles etc., whereas you as the landlord are only responsible for structural repairs like the roof or foundations. This makes the likelihood that a Rent To Rent property will cost you money less likely than with a traditional buy-to-let. The only instance where you may have to splash the cash is if an appliance that you supplied breaks or there's a major structural issue. Make sure small details like this aren’t missed out of your Rent To Rent agreement.
Rent 2 Rent = property makeover – One of the major costs for the Rent 2 Renter is getting a property into a lettable condition. Aside from doing a property up to let, they also have to ensure it’s returned to its original condition when it’s handed back to you. But don’t worry – that doesn’t mean they’re legally obligated to trash your property if it was in bad nick before. This requirement is simply there to make sure that you as the homeowner aren’t left dissatisfied or out of pocket.
You benefit from capital appreciation – Despite the Rent 2 Renter leveraging your property to make a yield, you’ll still benefit from capital appreciation and reserve the right to sell your house if needs be. One of the major advantages of being the homeowner.
Disadvantages of Rent To Rent for Landlords
Rent 2 Rent strategies could invalidate your house repayments/ home insurance - Before tying up and Rent To Rent deal you must consider the affect it may have on your house repayments (if you have one) as well as your home insurance. As you’d expect with all the new variables brought into the mix by a Rent To Rent deal, your existing policy will likely not cover you in this instance. If so, this may restrict the type of Rent To Rent deal you can opt for, or pull Rent To Rent strategies off the cards altogether. At the very least you’ll have to upgrade your policy which will likely come at a cost.
Rent To Rent could affect your tax situation - Previously Rent To Rent deals came with less complications for you as a landlord, but since section 24 came play in 2017, the profitability for smaller landlords in particular, has somewhat decreased. And while you no longer use your rental income to offset your house repayments interest, UK landlords do receive a 20% tax credit. So the question to ask yourself here is, would the Rent To Rent proposal leave you in negative cash flow? For instance, if a Rent 2 Renter is offering a guaranteed rent that is LESS than 20% off what you’d achieve on the residential market, then providing you’re having no issues finding tenants, you’d be out of pocket.
So landlords, is Rent To Rent a good idea?
As with most things in property, whether Rent To Rent is a good idea depends entirely on your situation.
To come to a firm conclusion, you’ll have to take into account a whole host of property-related factors. These include your property’s location, its condition, tenant demand in the area and the Rent 2 Renter’s profile - plus more personal details like your plans for the next couple of years and if you’d be willing to give someone else control over your asset.
Not a quick process by any means but one that if done accurately, can prove Rent To Rent to be a valid option. After all, it allows you as the landlord to take the backseat from property management (a refreshing change) and could see you home undergo a free makeover. All the while you’re receiving a guaranteed rent each month and benefiting from capital appreciation, which the Rent 2 Renter may boost further through any of their home improvements.
Although, choosing to delve into Rent To Rent can be tricky, and throw up some nasty surprises, especially if you fail to do your homework. Not only that but due to the extra party that’s involved with a Rent To Rent strategy, you must have a LOT more trust than your average Buy To Let.
STOP: Any control freaks or micro managers reading this, we urge you, don’t waste your time with Rent To Rent. The strategy relies heavily on trust, which if you don't have, can turn what's appears to be a great Rent To Rent deal, into a ball of stress and paranoia.
But, that’s not to say the risks that come with Rent To Rent make it a bad idea for everyone. Strip it back to basics and Rent To Rent is in essence a simple trade-off. You’re trade the responsibility for finding the tenants and property maintenance for slightly less money. Ultimately, whether Rent To Rent is a good idea for you comes down to what you value the most. Lowering your responsibilities or boosting your finances.
Only, what would you say if we told you that we could give you both?
Yes, you heard us right – both.
You see, as an industry leading cash buyer of property, we’re well aware that being a landlord can be stressful and comes with a plethora of responsibilities that quite frankly, are more a hindrance than a help.
Hence why our team, with its combined 50 years of property buying experience, has built a reputation for detoxing the nation’s landlords, by helping them release their equity fast.