In the past few years, the concept of ‘Rent to Rent’ has become more popular, but is still fairly rare. In this blog post, we’ll explain how it works and what you need to consider before entering into such an agreement. We’ll also give you a brief overview of its advantages and disadvantages.
What is Rent to Rent?
Rent to Rent, or RtR, involves a person (or in some cases a company), paying a landlord rent on a property, usually on a fairly long term basis. This individual, known as a ‘middle’ tenant, then finds other ‘end’ tenants to live in the property. The middle tenant effectively acts as the landlord, assuming responsibility for the expenses associated with the maintenance and upkeep of the property, but by charging more in rent to the occupiers than they pay to the landlord, they make a profit. Whether the middle tenant manages to let out the property or not, they must pay rent to the landlord at the pre-agreed price.
There are three ways a middle tenant might make a profit. The first and most simple, is by operating a single let, rented at a discounted price from the landlord. The middle tenant then rents out the property for a higher rate (but not one that’s markedly above market value as tenants will not be interested) to an end tenant and turns a profit this way.
The second method, which is becoming increasingly popular, is to turn the property into an HMO. Whilst there will be considerably more work involved in managing numerous occupiers, there is greater potential for a higher return. The middle tenant must notify the landlord that they intend to operate the property in this way; depending on the landlord they may then require a higher rent to reflect that the property will no longer be rented by the end tenants on a single let basis.
Remember though that there are considerably more regulations involved with HMOs and there may be additional setup costs to convert the property, for example by turning a lounge into another bedroom. Depending on these costs, it may be a year or more before the middle tenant turns a profit. Furthermore, such a conversion may actually breach the restrictions of the landlord’s mortgage so this should be checked carefully. For more information on HMO property investment, please visit the Mistoria Group website.
Finally, the property could be turned into serviced accommodation, where occupiers pay by the week or even by the day. They might be to holidaymakers or people on business trips. The middle tenant may offer services such as cleaning. Again, a lot of work is needed for such accommodation to operate effectively, but if the property is consistently occupied, it’s possible for the tenant to make more money than through a traditional single let.
One of the main reasons a landlord will enter into such an arrangement is that they will always receive their monthly rent payment, whether the property is occupied or not. This removes the inherent risk of renting out a property, which is that of void periods. This risk is passed onto the middle tenant. Landlords also need not be responsible for bills and maintenance costs. They then do not have to go through the hassle and stress of managing the property themselves.
However, there are also a number of advantages for the middle tenant. They do not have to purchase the property themselves and do not have to take on the burden of mortgage costs. This is particularly useful for the tenant if they do not qualify for a mortgage (for example due to a poor credit score). The tenant may also not have the money saved needed to put down a deposit on a property. This is a fairly easy way for them to enter onto the property investment ladder without considerable funds.
That said, there are a few disadvantages. In return for managing the property on a landlord’s behalf, the middle tenant will expect a lower than market average rent. Landlords may therefore not make as much money as they would if they managed the property themselves.
The key consideration for the middle tenant is that they will not be able to take advantage of the capital growth of the property, which is one of the greatest benefits of owning a property outright.
The middle tenant has taken on the landlord’s risk. If they cannot find suitable tenants, they may lose a considerable amount of income. Even if tenants have been found, there is still the chance that they fall into arrears. In this situation the middle tenant will still have to pay the landlord rent, effectively covering for the occupiers who have fallen behind.
RtR, whilst niche, is still completely legal. However, before entering into such agreements, both middle tenants and landlords must ensure that they are complying with all relevant legislation and that they are both adequately protected. A landlord would not want to end up in the difficult position of having a middle tenant who has fled after collecting deposits and rent from end tenants, for example. Therefore, any agreement must be specifically tailored for an RtR arrangement. It would be well worth employing a solicitor to check any documentation over. In particular, it should specify who is responsible for major repair work on the property. Whilst the middle tenant is responsible for everyday maintenance, where does the boundary lie? It may be agreed that it is the landlord’s responsibility to repair things such as the roof, otherwise the middle tenant could lose all their profits in one go. Landlords should also check that their mortgage agreements do not prevent this kind of arrangement; if they do not, their property could be at risk of repossession.
The landlord should also carry out extensive checks and cross references on the middle tenant. After all, it is this individual who will be responsible for vetting end tenants and the landlord needs to ensure they will carry out their duties in the correct manner. If the middle tenant is a company, landlords should check that they have always worked in full compliance with the law and try to find previous clients to ensure their suitability. Remember that the tenancy can’t be ended by filing a Section 21 notice, as these only relate to Assured Shorthold Tenancies (ASTs).
Equally, the middle tenant should also check that the landlord is reputable and that the property is in good order before signing anything. When it comes to renting out the property to end tenants, specify that the rental term to be one day less than that agreed with the landlord. If this is not done, in certain circumstances the landlord could theoretically directly claim the rent from the occupiers, cutting the middle tenant out of the equation entirely.
There are many ways to find landlords willing to enter into such arrangements. Most commonly, they can either be found through an estate or letting agent, though many middle tenants also opt to advertise on free listing sites such as Gumtree.
Rent to Rent arrangements are not appropriate for everyone and serious considerations of the pros and cons is required before making any decisions. If you intend to rent out a property, you should still purchase it if you can afford to do so, so that you retain control of its management and take advantage of its capital growth,
However, if you don’t have much capital, RtR is a good investment starting point and could enable you to start saving to build up your own portfolio in the future.
For more information on these arrangements, please do not hesitate to contact the team at Walkden estate agent, Pick My Pad. We are members of ARLA Propertymark which means we meet higher industry standards than the law demands. Our experts undertake regular training to ensure they are up to date with best practice and complex legislative changes so they can offer you the best advice. We are also backed by a Client Money Protection scheme which guarantees your money is protected.