Rent To Rent Guide For Beginners: What is Rent To Rent?
To simplify it, rent-to-rent is renting a person’s property…and then sub-letting it to others at a higher rental price than what you are paying…and then pocketing the difference.
You might ask, “Okay, if I were a landlord, why would I allow my property to be rented to someone at the lower price?” That is a good question. Some answers to this question are…because it is convenient for a landlord, because the landlord may avoid void periods by agreeing to rent it now, even if at a lower price, because the landlord will get some certainty in payments, because the landlord may get a longer term agreed with you…hopefully you get the rest.
Benefits of rent-to-rent
The landlord gets a steady flow of cash and is freed from the hassles of renting out a property for a number of years. He/she doesn't have to worry about tenants not paying up, building maintenance, and other costs of owning a property.
The advantages for the individual brokering the rent-to-rent are as follows:
- Zero mortgages: you get to earn income from a property without buying it and without worrying about mortgage payments.
- Zero deposit: if you are purchasing a property using mortgage finace, you first must be mortgageable. Then you need an average deposit of 25% which will be impossible if you have limited cash. However, with rent-to-rent, you don’t need to buy the property to earn income from it.
- Zero legal expenses or stamp duty: since you are not purchasing the property, you do not need to pay stamp duty and the usual transactional costs that come with buying a property eg, legal fees for the property conveyance.
Cons of rent-to-rent
- Zero capital growth: even if you are a newbie in the property business, you should know that the value of a property can rise and fall – and they do. With rent-to-rent, you obviously do not own the property and so if there is an increase in the value of the property over time, you get nothing from it.
- Property ownership risks: although you do not own the property, rent-to-rent exposes you to the risks associated with owning one. These risks include tenancy gaps, maintenance, and bills. You will still have to pay the landlord even in situations where there’s no rent coming in and you have maintenance to run.
- Initial costs involved: you may need to spend some money modernising or remodeling the internals of the property to make it attractive for your sub-tenants.
- Zero control: because you do not own the property, you don’t really have control over it. If the landlord decides to take back the property for whatever reason, or fails to pay the mortgage, then you have a very serious situation on your hands eg. you’d have a lot of explaining to do with your tenants (who obviously will not be happy with you).
- Legality Issues: Often, landlords aren’t allowed to enter these types of rent-to-ret agreements. Their mortgage lenders will not allow it. Some mortgage lenders only allow sub-lets for a shirt period of time in a year. Some mortgage lenders do now allow it at all.
- Opportunity issues: There are not that many landlords that will sign up to this. First you will have to find a landlord that wants to rent their property to you at a lower rental rate. Then you have to explain how the system works. Then they have to agree to this…then you may spend some money to spruce up the property…and then you have to find and manage tenants and ensure that they pay you. Can you see how much effort and risk this requires?
- Huge saturation in the market: Too many people are trying to do rent-to-rent. Not enough opportunities exist. You won’t have first-to-market advantage. Most people doing rent-to-rent are unsuccessful simply because there is too much competition and not enough opportunities.
- Compliance Issues: You may need a guarantor and the right legal agreements and structures in place to protect you from a number of things that could go wrong.
- Scalability Issues: Rent-to-rent is a niche market. Who knows whether it will exist in the future. You can’t confidently predict whether legislation will be passed to make it even more difficult. You will have to become an expert in it to have a chance…and eve n if you do become an expert, will the niche continue?
- Too much time and effort: Initially you’re going to spend lot of time finding sellers and trying to agree terms. If terms are agreed, you will then spend most of your time finding and managing sub-tenants. You will find it difficult to scale.
Models for profiting from rent-to-rent
As mentioned earlier, one of the reasons that rent-to-rent is viable is because the landlord chooses to accept a lower payment than if they rented it out themselves. This helps you make profit without renting the property out at a price above the market rate. Here are the three models:
- Convert the property into a HMO: if the property you are renting is a 4 bedroom property, it will be more profitable to convert it to a House of Multiple Occupancy (HMO) and rent it out to more than one tenant to share. Even converting the reception room (if it has one) to a fifth room increases your profit. This is a great option because you don’t need to go into hardcore negotiations, you can just offer the landlord the normal rate and then rent it out as a HMO, making you profit. Before you do this, you have to inform the landlord of what you want to do. There are a few things you need to be aware of though, they include: the bills associated with a HMO; the setup cost for a HMO (avg £5,000); you should get information about licenses and regulations governing HMOs; it might be a violation of the mortgage terms. Alternatively, you could take an existing HMO and make it more profitable.
- Rent it out as serviced accommodation: this is another rent-to-rent strategy. You can rent a 2- or 3-bedroom property and then sub-rent it out as serviced accommodation on a daily, weekly or monthly basis. This will work well if the property is located in or around a tourist destination. This involves a lot of management though…and again, you must understand the restrictions within the mortgage.
- Bargaining for a discount: this is the simplest of all three models and the most basic. You have to negotiate a lower rate to allow yourself to make some profit from the whole idea. Given that the landlord will make a guaranteed income for years to come without any effort at all, this is the main driving factor for the landlord to agree a deal with you. This strategy is all about how good you are at negotiation.
Rent-to-rent is an interesting niche strategy in the property business that in theory can make you a lot of money or cost you a lot of money. In practice though, it is a very tough market that is probably not scalable on a consistent basis. You must do serious volume and agree lots of properties to make a true impact on your income. There are several ways to find rent-to-rent opportunities such as pay per click, free adverts, pasting notices and posting mails directly to the landlords. Be sure you do your homework before you venture into this business and be prepared to work extremely hard!