With interest rates on the rise yet again, it’s possible we’re about to see the rent to rent debate heat up once more. For those who are not familiar with the concept of rent to rent – that’s where an individual or company promises a landlord ‘guaranteed rent’ in exchange for being able to sublet their property for profit. (We’ll get into the finer details below).
Because, of course, rising interest rates and purchase prices make it harder to buy property, many property investors (current or aspiring) may now struggle to start building or to grow their property portfolio. rent to rent, on the other hand, allows investors to gain access to the rental market with a much smaller capital investment.
Then there’s the thriving serviced accommodation sector to consider (think AirBnb and other holiday homes), which enables landlords to charge higher rates than with a single let or even an HMO. Perfect for those in the rent to rent sector who are looking for opportunities to turn properties into big-profit generators. Current short-term accommodation hotspots include York, Liverpool, and Manchester.
With all this in mind – we thought it’d be well worth looking at the specifics of rent to rent again. How exactly does it work, does it pose any ethical challenges, and is it a viable route to take for all investors involved? Let’s get stuck in 👇.
Quick recap – what’s rent to rent and why did it take off in the first place?
The term “rent to rent” first took off in 2013 when stories of how one entrepreneur was raking in £35,000 a month by subletting properties across London began circulating. It quickly became a hot topic, with many pointing to the fact that cramming tenants into properties to make huge profits amid rapidly rising rents was unethical. In the following months, that specific company disappeared amid scandals and legal inquiries. But since then, there’ve been arguments for a more legitimate side of rent to rent. One where the landlord, rent-to-renter, and sub-tenants win.
So, in theory, how does rent to rent work? In short: an individual or company promises an existing landlord guaranteed rent for a set period (say, a few years). They’ll take on the responsibility of finding tenants and running the rental property, including general maintenance and minor repairs. And even if the property’s empty – they’ll still pay rent to the landlord.
Theoretically, the landlord is happy because they can take a fully hands-off approach and know they’re getting guaranteed rent 12 months a year. The rent-to-renter is happy because they can make a profit (see below). And the sub-tenants still get a great service.
So, how do the rent to renters turn a profit? They can do one of the following:
- Pay the landlord less than the market rate: the landlord provides a discount in exchange for having guaranteed rent. The rent-to-renter then charges the full market rate and turns a profit.
- Turn the property into an HMO: the rent-to-renter pays rent for a single let but (with the landlord’s permission) turns the property into an HMO. Meaning they can potentially earn a lot more from the property than the rent they’re paying.
- Turn the property into serviced accommodation: same as above, but instead of turning the property into a HMO the rent-to-renter turns it into serviced accommodation. (Through putting it on Airbnb, for example.) Again, this means they can potentially earn a lot more than the rent they’re paying the landlord.
This all sounds pretty win-win. But there are a lot of legal, ethical and logistical factors to consider. In reality, the world of rent-to-rent can get extremely convoluted and does come with very real risks – for both the landlord and the rent-to-renter. Still, the scheme has proven popular for a number of reasons:
- A growing population and shortage of affordable housing means there’s a very high demand for rental properties.
- It’s much easier to rent to rent than to buy a property. (Or at least, there’s a lot less cost and commitment involved.)
- There’s the potential to make high profits – for the landlord, who gets consistent rent, but particularly for the rent-to-renter, who can run the scheme across a number of properties while not having to put up much capital.
Let’s take a closer look at whether the benefits outweigh the risks 👇.
Rent to rent benefits, risks & challenges for landlords
As a landlord, there’s a lot to consider before entering a rent to rent deal. He’s an overview some of the pros and cons:
Benefits for landlords
All being well, landlords know their property is going to garner rent consistently for a set period – no void periods, no hassle. And this is no small weight off their mind for many landlords. They also don’t have to worry about carrying out the vast majority of property management tasks. The rent-to-renter will take all that on.
Many rent to rent individuals and companies claim they’ll also hand back the property in a better condition than it was when they took it on. It’s in their interest to improve the property so they can charge more for rent and attract tenants consistently. If they stay true to their word, this could work out well for the landlord, whose asset is going to be improved and well maintained on their behalf with no additional fees.
While all this sounds positive – it’s crucial to be aware of the risks too:
Risks and challenges for landlords
The most obvious rent to rent risk for landlords is being out-and-out scammed – or having the rent-to-renter fail to meet their side of the deal in some way. There are stories of ‘rent-to-renters’ who’ve sublet properties and then simply not paid the landlord rent before doing a disappearing act, for example. Even if a rent-to-renter doesn’t do something as drastic, there’s a chance they won’t pay rent if they encounter too many void periods. There’ve also been stories of rent-to-renters exiting a contract early, leaving the landlord to deal with troublesome tenants who they did not choose themselves.
Of course, there are always risks involved in renting out property, whether to a tenant or rent-to-renter. Other than scammers, landlords must be aware that they still shoulder the legal burden of renting out a property via rent to rent, only this time they’re further removed from what’s going on in their property.
Say, for example, a rent-to-renter split a property into an HMO where the rooms were smaller than legally allowed. The landlord may be held responsible, even if they were unaware. Having said that, one recent ruling from the Supreme Court had important implications here. In the case, a rent to rent company had failed to get a licence for a property that needed one. In the initial tribunal, it was ruled that a Rent Repayment Order could be applied for against the landlord (not the rent to rent company). However, this was later overturned, with the Supreme Court ruling that, where a rent to rent company is running a property, the landlord can’t be expected to pay for their legal failings.
It’s well worth noting that many tenant charities aren’t happy with this ruling, though. There are issues around holding rent to rent companies responsible and not landlords, as it leaves more scope for the use of shell companies to run rent to rent activity, for example.
The benefits, risks & challenges for the rent-to-renter
If you’re on the flipside of the equation and wondering whether renting to rent is a good move for you, it’s worth reading through these pros and cons:
Benefits for rent-to-renters
First up – money. If you can’t afford to buy a property just yet, renting to rent could be a viable investment strategy for you in the meantime. You’ll likely need some initial funds to cover things like home improvements or converting a property into an HMO – but nowhere near as much as you’d need for a deposit.
You also don’t need to fork out for other costs associated with buying property, such as Stamp Duty Land Tax and legal fees.
Now let’s talk profits. There’s potential to generate a healthy flow of cash pretty quickly when renting to rent – especially if you go with an HMO or serviced accommodation strategy. But unlike some media hype would have us all believe, being a rent-to-renter does not provide a purely passive income. Letting properties takes time and effort, which brings us onto…
Risks and challenges for rent-to-renters
Not a risk or challenge per se, but a downfall to consider: rent-to-renters don’t make anything in the way of capital growth. The landlord gets to enjoy and develop an investment that can grow in value over time (unless house prices drop), while rent-to-renters don’t get in on any of that.
Then there’s the actual time, money and effort that goes into running the property. Maintenance, bills (for HMOs), finding tenants and dealing with them – all that’s the rent-to-renter’s responsibility. As are void periods. Costs can be managed with well-thought out financial planning – but (as we mentioned above) being a rent-to-renter will never provide a passive income.
Finally, rent-to-renters don’t get to have the same level of control as people who actually own properties. The landlord could sell up, for example, or simply decide to take the property back before the end of the contract.
What about the tenants – is rent to rent ethical?
Rent to rent is a hot topic because it does seem to open up tenants to greater risks. Having often been sold as a ‘get rich quick’ scheme, it may attract actors who are looking to exploit tenants and landlords alike, rather than to build a solid property business with a long-term view. There’s also the argument that the premium required by rent-to-renters may drive up rent rates unfairly.
However, others argue that legitimate, fair-acting rent-to-renters can act as a lifeline for landlords while providing an excellent service for tenants and holidaymakers. Advocates of the sector may highlight that skilled rent-to-renters both ensure landlords get a steady stream of income and improve the standard of housing and holiday lets across the country.
Rent to rent: closing thoughts
Rent to rent tends to be associated with rather extreme narratives, bouncing back and forth from a hyped “get rich quick” scheme to a source of scandals and investigations. However, when done legitimately, it can be a viable business and benefit all involved – including tenants. There are risks to consider on both sides, though, and it’s still very much a niche investment strategy, to be considered only under fairly specific circumstances.
Ultimately, whether or not rent to rent will ever shake off the negative PR that surrounds it is unclear. But if your intentions are good, and you’re confident you’ve got the knowledge to make it work, it might be worth exploring.