Done correctly, Rent to Rent can be accomplished legally but, as a fairly new concept, there are so many risks involved with this “get rich quick” scheme.
So, what is Rent to Rent exactly?
Rent to Rent involves an “investor” signing an agreement with an existing landlord to rent their property from them for a period of time, providing the landlord with a “guaranteed rent”, with the intention of sub-letting the property. The investor can make additional income in two main ways:
- To rent the property to multiple tenants, like with an HMO
- To rent the property on a short-term basis, increasing the risk of voids, but taking a significantly higher rent.
Let’s start with the positives. You can start out with very little money and create a good income quite quickly without actually owning a property. Initially, you are not taking on any lending, paying stamp duty or legal costs… essentially anyone can do this, so it will attract the masses.
I personally have a problem with this. It is encouraging people to take on responsibilities that have consequences that they cannot afford to cover financially. Traditionally, property investment has been limited to those who can afford to buy a property and survive the peaks and troughs that this diverse industry can bring. It’s so easy to focus on the upside and play down or even ignore the potential dangers when, on the face of it, you are getting something for nothing. Put this opportunity to someone in debt and they effectively have nothing to lose... or so they think!
For me, this rings the same alarm bells that self-certification mortgages did in the late noughties! And you saw where that led us and the property industry. For estate agents, sellers and landlords, these schemes seem extremely positive as they open up the market to the masses.
The so-called internet property “gurus” are taking advantage of this because it more than doubles their potential audience. These “gurus” are more focused on putting bums on seats in seminars, selling tickets and getting revenue from their ever-growing following on YouTube. It gives their offering a real “wow” factor, and they are making so much money out of these vulnerable “want-to-be property investors” that some of them are offering free seats in their seminars, knowing that the commission they can generate from selling the properties is huge… and what does the buyer need?
- A deposit? NO
- A job? NO
- A good credit rating? NO
They only need to be able to sign their name in order to potentially sign away their lives for the next 12 months.
So, what are the risks to the investor and the landlord?
- Landlords may sign up for 12 months but there is no long term commitment, so any investment that you make to adapt or improve the property to make it more attractive to your new target market, you will need to recover before you make any money at all. To adapt a property into an HMO can cost thousands, even before you address the aesthetics of the property. I have seen investors pay tens of thousands of pounds on a one-bedroom apartment to make it an attractive option on the short term let market.
- If the freehold of the property is not owned by the landlord, the lease may prohibit short term letting, in fact, this is a very grey area in the wording of most standard leases used in the industry and legal proceedings have usually favoured the prohibition of short term lets or sub-letting. The only exception has been where the property (or properties within a new development of apartments) were initially designed and purchased with the intention of doing so. Every day, we receive calls from investors who have taken on a rent to rent agreement (or “guaranteed rent” agreement) who have seen their intended rental model prohibited by the leaseholder, and having spent money on the property, and being part-way through their agreement, they are desperate to secure a 6 month AST to limit their losses.
- Both the HMO and short term let model are prohibited by most standard BTL mortgages. The landlord is required to notify their lender of any non-AST rentals and any sub-letting. Remember that lenders see the AST model as a risk-free mechanism for the landlord to repay their mortgage and this is usually the basis of their decision to lend. Lenders are fully aware of these new market trends and are actively looking for those who break the terms of their mortgage as large penalties can be handed out and they can even force a landlord to repay their mortgage in full. As a rent to rent investor, you are unlikely to secure a second-year extension, and worst case, the property could be taken from you prior to the end of your rental period. This could also lead to you paying compensation to those who have booked your property in advance.
- These changes in rental are also likely to be in conflict with the terms of the landlord’s landlord insurance. This can pose huge risks for both the landlord and the tenants.
- Professional Letting Agents and short term let companies are fully aware of this scheme and avoid it wherever possible, There have been some high profile cases where “investors” have disappeared with deposit monies, so most potential marketing partners who could potentially find you tenants for either an HMO or for short term lets are now doing extra checks to ensure that they are dealing with the actual landlord. This usually means that investors are forced to find tenants through private advertising such as social media or classified adverts which can be costly and time-consuming.
- The growing popularity of rent to rent HMO’s has seen it hit the news and has made potential tenants more aware of the risks involved. For example, most issue the tenants with a licence for the property as opposed to an AST agreement. This does not give the tenant the same rights (for example, the landlord may have access to all of the property at any time) and can infringe on the privacy of the tenant. This has made it difficult for rent-to-rent investors to find willing tenants. These less stringent requirements normally attract the wrong profile of tenant. Those who have poor references, poor credit and low income, which in turn can lead to more hands-on management and the potential for non-payment.
- Many investors under-estimate the work involved with both short term let properties and most marketing outlets are putting more emphasis on promoting those who have good reviews. One bad review early in your career as a maverick part-time property manager can kill your business. I have experienced many cases where taking on too much has caused personal issues for investors.
- For the landlord, if the investor does rent the property out as an HMO, then the landlord may need a licence. It is their responsibility, not the investors and could lead to a large fine.
- If the rent-to-rent is created under a commercial tenancy in order to overcome the laws against sub-letting, then the investor has the right, at the end of the tenancy to demand a new tenancy agreement under laws designed to protect commercial tenants such as shop owners. This can lead to the landlord losing control over the property.
So, as you can see, there are many risks involved, but in practice, the people who suffer the most are normally the actual tenants. For R2RHMOs, tenants usually find that every inch of the property they live in is rented out, there is no space, cramped shared facilities, too much noise, dangerous conditions and illegal living conditions, after all, their sub-letting investor landlord is only really focused on draining as much money out of the property as possible and they have little concern over the upkeep of the property as they don’t own it.
For R2RSAs, a lack of investment into most properties mean that they are tired and regularly fall short of expected and legal standards. As these tenants pay up-front, they risk finding an unsuitable, poorly managed property or service and in many cases, double bookings.
Rent to rent is a fad! It will not last as there is no longevity in a business where everyone involved loses. The only person who will gain out of this system is an agent who will either charge a finders fee for a property or charge seminar ticket prices to gullible “get rich quick” investors. The concept offers absolutely nothing to a real property investor!