To Rent… or Not to Rent? What is the best option?
Depending on your stance, the practice is either considered “highly profitable” or “ethically dubious”. We’ll go over everything there is to know about Rent-to-Rent in this post.
During his time at The London School of Economics, Daniel Burton came across an ingenious way to make money: he found rental properties where landlords had not maximised their income, rented them, and then sublet them to different tenants.
He claimed he earned £35,000 a month by subletting 40 properties throughout London during an online webinar advising potential investors. As a result of the Guardian Money article, Daniel Burton disappeared shortly thereafter, leaving landlords out of pocket and sub-tenants worried about their housing status.
Rent-to-Rent may have burst, but it’s still a thing, and there are plenty of self-proclaimed experts selling their strategies.
Rent-to-Rent: What is it?
A Rent-to-Rent arrangement occurs when a landlord rents out a property to a third party. The typical three-bedroom house with two reception rooms could be easily converted into a five-bedroom house share with a decent profit margin. Renting more properties can increase your income.
Several landlords don’t care as long as their tenants pay their rent on time. Consequently, tenants often offer a landlord guaranteed rent in exchange for permission to sublet. It’s a win-win strategy for landlords. While making a profit, the landlord takes on the responsibility of managing their tenants and property maintenance.
Different Rent-to-Rent Options:
For aspiring property entrepreneurs, there are several Rent-to-Rent options:
You can make money from Rent-to-Rent by convincing a landlord to accept a reduction on the rent, in exchange for guaranteed rent. To make a profit in this model you need a tenant paying the full market rate and you are responsible for all tenancy costs. Unless you are an experienced negotiator and your profit margin allows for some likely costs, it’s up to you to deal with a non-paying sub-tenant or property needing expensive repairs.
Alternatively, you could find a three-bed family home and advertise it as a single rental, with the landlord’s permission, of course.
By turning it into a three-bedroom house share, you’ll generate more income than renting it out to one family. You can convert the living room and dining room into bedrooms, as many older homes have, to make it a five-bed HMO (i.e. Home Multiple Occupancy). Although HMOs can be profitable theoretically, you should keep in mind that they take a lot of time and effort to manage.
It is also possible to rent an existing HMO and take over its management and improve the profitability of the HMO.
Another profitable business model is subletting to short-term tenants. In areas popular with tourists and business travellers, tenants look for short-term rentals on sites like Airbnb. Although this business model requires work, such as cleaning and maintaining the property between rentals, it can be very profitable in high-demand areas like London, Edinburgh, or Lake District.
Finally, if you find a property with potential, you can pass along the lead to other investors. It may also be beneficial to educate potential investors on the art of Rent-to-Rent. As well as earning commissions for leads, you can also charge fees for online and offline courses.
Is Rent-to-Rent Profitable?
Investing in Rent-to-Rent can be profitable, which is why so many people do it. A model’s profitability depends on how well it is managed, as well as the model you choose.
Assuming the Landlord chooses model 1, in exchange for a guaranteed rental income, you offer a below-market rent to the property owner. You know the property can easily generate £700 per month, but the landlord agrees to accept £500. You can earn £200 a month without any significant investment if you can find a good, reliable tenant willing to pay £700 a month.
There will be more costs involved in converting a family home into an HMO, but it can be profitable as well. HMO licenses and additional safety requirements may be required, for example. The landlord must also approve the HMO conversion.
If you manage an existing HMO, you have a steady income stream while you can do a better job. This could include more efficient use of an existing space, reducing voids and increasing the rent. In the long run, it’s less hassle than converting a family home into an HMO.
You can make excellent money doing option 4 if you find a suitable property. Many Landlords don’t want the effort of managing short-term rentals. It’s time-consuming when you have a high turnover of tenants.
There is potential for profitability with this model if you can find a suitable property and have the time to list it on websites like Airbnb, handle inquiries and handle the other tasks associated with holiday rentals. Maybe not now, but once tourism is back to pre-Covid-19 standards, it’s a model worth considering.
Do your math before you rent a property in anticipation of letting it out on a short-term basis. The more desirable the location, the more rent you can change, and the easier it will be to find tenants.
Always remember, you will have to get the landlord’s permission before you do this.