Rent to rent is a method of managing property in which rent is guaranteed to the landlord. Unlike the cases where a rent guarantor is used, there is no chance that used by real estate investors to generate passive income.
It involves renting out a property that you do not own, but rather manage on behalf of the owner, and then renting the property to multiple tenants.
Rent to rent as a business model
The rent 2 rent model involves renting a property for a period of time, usually 3-5 years, and paying a guaranteed rent to the owner or letting agent.
You then rent out the property to tenants at a higher rate, and the difference between the rent you receive and the rent you pay to the owner or letting agent is your profit.
There are three main ways to implement this model with residential properties.
What is the difference between guaranteed rent and rent to rent?
Guaranteed rent refers to the range of methods that are available for landlords who want to secure the amount of rent they are able to earn and rent to rent is just one of these methods.
For example, a landlord may be interested in some kind of guaranteed rent method and therefore choose the rent to rent business model.
The other types of methods available include having rent guarantee insurance, hiring a rent guarantee scheme company or even reaching out to the council who can provide guaranteed rent to landlords in some cases.
However, rent to rent is definitely the most popular choice. Especially for those landlords in the private sector.
What are the different rent to rent business models?
While rent to rent may seem straightforward at first, there are actually a few different types of rent to rent and they all have different names as they are done on different types of property.
These included rent to rent for HMOs, serviced accommodation and for single lets.
Rent to rent for HMOs
The first method of rent to rent is using HMOs. This is very common because Homes of Multiple Occupation (HMO) are easy to increase the value of by adding rooms to the property.
For example, if you had a single let property and then you added a few rooms to the property to turn it into a HMO.
You would then be able to increase the rents enough to keep a profit in between and guarantee the landlord the initial rent for the single let.
Conversely, if there is a HMO that is already established but there is the opportunity to add rentable rooms, this would be a good opportunity for those doing rent to rent to take over the property from an existing landlord.
They would then be able to make more rental income than if the landlord was to leave the property themself.
This allows the person to either guarantee the rent that the property was currently listed at or offer a guaranteed rent that is slightly more than before the rooms were added.
However, they would then be able to keep the profit in between the net rental income and the rent that is agreed to be paid to the landlord of the property.
Rent to rent by offering a discounted rent
Rent to rent can also work by reducing the rental income rather than increasing the rental income.
One way this can be done is by guaranteeing the rent that is currently there with the hope that you can increase it or you could guarantee a lower rate.
This rate would be there with the knowledge that you know you can already rent out the property for the current market rate.
You may wonder why a landlord would agree to this if you are telling them they would lose money but some landlords agree to this because they do not want to deal with a property anymore.
You would be able to guarantee these discounted rates by making a guaranteed rent every month seem appealing in comparison to managing the property dealing with tenants and potentially dealing with legal issues too.
Hence, it may appear like a commission of the rent where are you taking a part of the rent every month to manage the property much like a property manager would.
However you would have the added risk of still having to pay the landlord in the event of rent arrears which is not something a property manager signs up for.
Rent to rent by subletting
Much like the reference method of using a HMO, subletting allows you to increase the income from a property so you are better able to guarantee a lower rent to the landlord.
This would involve you paying a rent every month regardless of whether the property makes a profit or not and then becoming the head tenant who is responsible for all the other tenants in a property.
This is perfect to pitch to a landlord who does not wish to manage multiple tenants and would rather take a subsidised amount of rent that is more stable.
As opposed to negotiating tenancy agreements all of the time and managing void periods of rent too.
Why is the business model of rent to rent considered efficient?
One of the biggest reasons rent to rent is considered efficient is because there is very little money required in order to start the process.
This is because the person managing the property does not need to buy the house they’re managing, they simply need to find tenants and guarantee the rent to the landlord over an agreed period of time at an agreed rate.
In addition, because of this small amount of capital required, it is often that properties can become profitable within just a few months and most rent to rent businesses turn a profit within the first year.
Someone doing rent to rent may just have the expense of refurbishing a property and then collecting the rent in order to make back this cost and this isn’t much to cover.
Furthermore, rent to rent provides the person managing a property with recurring income that is constant in the very beginning of a business.
This means the business is able to produce the cash flow necessary to scale the business very early on and there is no debt that has to be paid back or uncertainty as to whether the business will make money.
Finally, rent to rent is considered efficient because you can get repeat customers from the same landlords.
For example, if you are already managing a property from one landlord, you can then ask them for additional work and finding new property will become easier the more you network and develop a reputation.
What are the benefits of the rent to rent business model?
As well as rent to rent being considered efficient, there are additional benefits that make it an attractive proposition to those wanting to benefit from rental income without buying the house they are managing.
These benefits include:
No deposit is required for rent to rent
If you don’t have a mortgage when you embark on managing a property with rent to rent then it also removes the need to have a deposit in place too.
No mortgage is required for rent to rent
The rent to rent business model doesn’t require a mortgage and in order to start and take on a mortgage also comes with a lengthy application process.
First, you must obtain a mortgage in principle from a bank in order to prove to the home buyer that you have the funds available in a mortgage in order to make an offer.
Then, the mortgage application will be approved if the buyer accepts the offer made for a house.
Someone doing rent to rent can forgo this process and not deal with mortgages at all.
There is minimal upfront costs involved
The only costs involved will be the maintenance of a property and the marketing involved in order to find new tenants.
In addition to this, if you already have the network to find tenants and you use free tools in order to advertise without the need for letting agents, you can significantly reduce your costs further.
Are you a tenant? Check this article to know which questions to ask when renting.
What are the drawbacks of the rent to rent business model?
Like any business model, there are drawbacks and things you have to look out for.
That is not to say that rent to rent is a bad business model but if you’re aware of the risks you’ll know what can go wrong and be prepared.
Costs of rent to rent
Rent to rent costs a certain amount to set up. For example, if there is a property that needs renovation in order to increase the rent, then this is a mandatory expense for those managing the property.
In addition, there is a chance there are additional expenses that crop up that are unexpected after contracts have already been signed with the landlord of the property and the rent to rent company.
This can set a rent to rent company back in expenses and may mean they go in to debt or take a significantly longer period of time to recover these costs as they rent out the property.
Responsibility of repairs during rent to rent
In addition to costs there is an additional responsibility that rent to rent arrangement companies have to deal with.
This means if there is any damage done to the property accidentally or on purpose by the tenants, the rent to rent company will have to cover this.
In particular, if they are renting out a furnished property, this will result in more potential for damage and for the costs of the property to increase.
No opportunity to benefit from appreciation
Another reason that rent to rent may not be the best business model is because rent to rent companies take on all of the responsibility and costs for a property but they only get to benefit from the rental income rather than the capital appreciation that the property brings.
The capital appreciation only benefits the landlord if they choose to sell the property in the future as they own the property and are responsible for the mortgage on the property too.
This means if a rent to rent company applied the same effort to the management of a property but they were able to buy it instead, they would benefit from this capital appreciation and potentially make more money.
Nonetheless, this would mean the rent to rent company or the person doing rent to rent would have to become a self managing landlord which comes with additional problems anyway.
However, it is worth noting that the process of managing property is not all that different to if the property was owned instead.
The landlord remains in control of the asset
Because a landlord is in control of the asset even if they work with a rent to rent company, it is up to them to decide if and when they want to sell the property.
If they do decide to sell (given it is within the terms of the rent to rent agreement). The rent to rent company will then lose all of the income they got from the property as the management would be reinstated to the landlord.
Does rent to rent break the law?
Some people think that rent to rent is illegal because it means that the property is sublet.
However, contrary to popular belief they are in fact different processes and rent to rent does not break the law.
If the rent to rent company does it with the consent of the landlord and the building safety regulations and tenant rights are kept within the law.
What is the difference between subletting and rent to rent?
Rent to rent is the process of managing the property on behalf of a landlord with the consent of a landlord by an external individual or company.
They will agree on a set amount of rent that should be paid to the landlord to cover their mortgage payment but this means the profit the landlord is able to produce will be severely reduced.
Subletting on the other hand is where there is a head tenant who lives within the property and with the knowledge or consent of the landlord finds other tenants who also pay the rent.
In this case, the head tenant is still responsible for paying the rent every month unless there is an agreement between the subtenants and the landlord to pay rent too.
What AST do you have to use?
The AST that must be in place for rent to rent companies is an assured shorthold tenancy (AST) and there is no difference between the contract that must be signed for tenants than if they signed with the landlord or a property management company.
As well as using the same AST, rent to renters must also give all tenants a how to rent guide as usual
Who can do rent to rent?
You may be wondering who is able to conduct rent to rent and if there is a specific person that must be involved in the process of managing a property in this way.
There are three different types of people who can do rent to rent including local authorities, rent to rent letting agents and private individuals.
Local authorities
Local authorities, you may find here, could take on tenancies from landlords who are owners to accommodate families or homeless individuals when they are unable to place them in private rentals.
Because they are sponsored by an experienced local authority corporation, these rents are frequently regarded as the most preferred and advantageous rent-to-rent configurations.
But even these rentals with local authorities have run into problems, so it’s crucial for landlords to read the contract thoroughly and get legal counsel before signing.
At the end of the term, the property must normally be returned in a liveable condition with a guaranteed rent payment.
Rent to rent letting agents
Rent-to-rent arrangements are what some businesses and letting agents are turning their focus to.
Even though these types of rent to renters could be riskier than local authorities, by doing thorough due diligence, it is easy to identify respectable ones with a decent track record.
However, it’s important to be aware that there are also letting agents and businesses who have a poor reputation in this market who have a history of giving landlords trouble.
It is essential for landlords to conduct extensive research and pick a trustworthy business or agency from the start if they want to prevent these problems.
Private landlords
Private landlords who conduct rent to rent are sometimes just looking for fast cash and trying to find a landlord who doesn’t have much time to manage a property and are looking to take advantage of this.
While this is part of the business model, it is common for a private landlord wanting to become a rent to renter to have little to no experience.
However, this is not all bad as lower level rent to renters like private landlords may have more time to speak to landlords about the state of their property and may actually do a better job.
These professionals are just starting off in their management journey and have lots of time to invest in their craft.
Practical rent to rent examples
For some, the process of managing a rent to rent business is quite hard to get your head around so you can understand how the money is made.
Remember, rent to rent can be applied to HMO’s, Serviced accommodation, or even single lets if there is a profit margin that can be found for the rent to renter. Find out here how to calculate this for yourself.
Rent to rent example with a HMO property
If you had a 5 bedroom home which has two reception rooms, the rent to rent company could take over the management of this property.
This could turn it into a 7 bedroom HMO with some work done to the property perhaps by utilising the additional rooms and extending areas of the house.
If the property had an original rent of £2,000 per month, the rent to renter could rent out every room of the property for £400 each on long or short term lets and make a total of £2,800.
They could then guarantee the landlord £2,000 every single month and keep the £800 month in between as profit.
In conclusion
In conclusion, rent to rent is a viable option for property investors looking to generate passive income through rental properties.
It allows you to learn a lot about property before you’re able to afford a deposit yourself.
However, it is important to carefully consider the risks and challenges involved, and to thoroughly research the market and the property before making a decision.
In addition, rent to rent is not a method in which a tenant can gain approval for a property with bad credit but is instead a way for landlord to achieve guaranteed rent.
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