Strategies

KPS XI – RENT TO RENT

Is there a way you can make money from renting out property if you own no properties and cannot afford to buy any?

The answer is “yes you can”. You simply need to tap into the killer property strategy known as “rent to rent”.

Rent to rent is not rocket science; you rent a property from an owner and then rent it out to a tenant for a higher rent, pocketing the difference.

It sounds so simple, you may think any idiot can do it. But of course you would be wrong.

It is one of the less complicated property strategies and has the benefit of not requiring a huge capital investment, but like any strategy it requires careful study and knowledgeable application.

1. Getting properties to rent

To rent to rent, you need properties to rent! There are three main ways you can do that:

  • Lease option
  • Lease
  • Guaranteed rent scheme.

Each method is a property strategy in its own right. 

A lease option is a legal contract or process by which you lease a property from an owner with an option to buy it at a future date and the right to rent it out in the meantime.

But to rent out a property you do not need an option to buy it.

Therefore, you could simply lease a property from its owner without an option to buy.

Having an option to buy may be to your benefit, but it may also come at a cost since an option fee is normally payable.

That fee can be as little as £1, but it could be thousands of pounds.

As a rule, you would only be interested in taking an option if you have a genuine and realistic intention to buy the rented property at a later date.

If you want to get into rent to rent for the smallest amount of money, you would simply lease the property from the owner.  You could always negotiate an option at a later date if that became something you wanted.    

You may also be able to secure properties to rent by offering landlords a guaranteed rent scheme whereby in return for renting their property you formally guarantee their rent for a few years, typically 3-7, giving you time to make a profit before handing the property back.

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2. Making your money

You make your money in rent to rent by receiving a higher rent from your tenant than you have to pay out to your own landlord.

There are two main devices to achieve that:

  • You negotiate a rent lower than the regular market rent
  • You find a form of letting which will bring in a higher rent than the regular market rent.

A good strategy to persuade an owner to rent to you below the regular market rent is to offer to rent their property for a long period (say 4 to 7 years) giving them an extended, hassle-free period when they don’t have to worry about dealing with everyday tenants and can simply deal with you – hopefully, a reliable business person with a longterm business plan who can be counted on to pay the rent in full and on time. 

Ideally you want a discount of at least 20% on the regular market rent.

If the owner is only prepared to offer a smaller discount or even no discount at all, you need to work out if you can still make a profit by renting.

One way to do that is to rent out the property on a room by room basis to several tenants instead of just renting the whole property to a single tenant or a couple.

This process of letting the property on a room by room basis is sometimes referred to as multi-letting.

In some circumstances multi-letting will fall into the category of an “HMO”, a house in multiple occupation, making it subject to premises licensing which will involve compliance with statutory requirements.

With your first rent to rent venture, it would make sense for you to go for multi-letting which falls outside the restrictive confines of being an HMO.

There are no hard and fast rules but multi-letting could easily secure a rental 20-25% greater than renting to a single person or couple. 

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3. Reasons for doing rent to rent

The main reasons for getting involved in a rent to rent strategy revolve around:

  • Cost
  • Speed
  • Simplicity
  • Poor credit record.

If you wanted to make rental income by buy to let you would need a relatively large capital sum for the deposit and the purchase costs – which would include stamp duty, legal fees and mortgage costs.

You would also need a good credit rating if you needed a mortgage.

In contrast, with rent to rent, you can get going quickly and relatively inexpensively by having:

  • The first month’s rent
  • A month’s rent by way of deposit
  • Funds to light refurbish the property (if necessary)
  • Funds to furnish the property (if necessary)
  • Funds to find tenants (if you are not going to do that yourself).

Rent to rent has the benefit of being simpler and quicker to get going than buy to let and similar strategies such as lease options and guaranteed rent schemes.

Rent to rent is particularly attractive if you want to earn rental income but don’t yet have the credit score to get the mortgage you would need to buy a property.   

You can use rent to rent to gain experience of what is involved in renting to tenants.

You can save the profits to amass a deposit or down payment which you can use to buy a buy to let property at a later date when your credit record improves.


SOME MUST KNOW PROPERTY STRATEGIES
Buy to let (buy and hold a property for income and/or capital growth)
Rent to buy (property is rented before it is bought)
Delayed completion (completion is delayed to make a profit)
Lease option (controlling and profiting from someone else’s property)


4. Reasons for not doing rent to rent

A major reason why many property people don’t get involved with rent to rent is that they do not see it as a property investment in the strict sense.

There isn’t a property asset which will appreciate with time.

Of course if rent to rent is combined with an option to buy, there is an investment element. However, with pure rent to rent, there is simply the renting element and no real investment.

In addition, there are a number of risk factors which may cause you to think twice about rent to rent.

As the property does not belong to you, you are somewhat at the mercy of the owner, your landlord. For instance, the owner may fail to pay their mortgage, causing the property to be repossessed in the middle of your lease or rental period.

If your rental agreement with the owner requires your landlord to carry out certain repairs or replacements to the property – for instance to replace the boiler if it is non-repairable – issues or disputes as to responsibility could arise, putting the entire agreement at risk.

Critically you could over-estimate the rents you are likely to achieve, agreeing too high a rent with the owner and finding yourself in a loss-making position which becomes unsustainable.

There is also the issue of the work likely to be involved with rent to rent.

To protect your margins you may need to operate pretty much as a letting and managing agent; that will involve time and effort on your part, making the strategy very much like a job, with the hard work and setbacks that can involve. 

If the property you rent is mortgaged, issues or problems could arise as to the right of the owner to rent to you. You will definitely want the owner to get the prior consent of their lender to the rent to rent agreement.

Most fundamental of all, there is also a practical reason for not getting into rent to rent – it is not an easy area to get into.

It is a niche strategy and relatively unknown; even if you promise an owner you will look after their property for say 5 years, keep it in good repair and pay the rent on time, they may be unwilling to get involved.

They will probably have doubts about your ability to perform, to keep your word; especially if you are a newbie without a track record or references.

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5. The need for good advice & assistance

To minimise the risks with rent to rent, it is highly desirable for both parties to any agreement to seek and take independent legal advice from lawyers familiar with the strategy and its finer points. 

The rent to rent agreement should be in writing. The agreement should be with the consent of any lender and should be crystal clear as to the responsibilities of both parties for maintenance, repairs and replacements.

The agreement should also address what should happen if the property is repossessed and you have tenants in occupation. 

You could just dive into rent to rent and sink or swim. However, you may decide it is wiser to precede your start up by suitable reading, training or coaching.

You could look for a joint venture partner or mentor with knowledge and successful experience of the strategy.

As with all property strategies, if you are going it alone, it is very much advisable to seek out an “accountability partner”.

An accountability partner provides you with someone you can engage with on a regular basis, giving you a sounding board or a source of ongoing advice plus the impetus to keep going through difficult times.

6. Conclusion

Rent to rent is a relatively inexpensive but usually labour intensive way of getting into property. It is especially attractive if you don’t have a large amount of money to play with.

It can be a worthy way to “kill time” if for good reasons or bad you are not yet able to secure the mortgage you need to get into buy to let.

However, it is a challenging strategy. You need to find properties which will give you the level of rental uplift to justify the chunky time input you will need to make.

Have you been involved in rent to rent? How did it go? Do you have any tips or advice for other readers?   Please leave your comments below.

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Dalton Barrett
Rebel Property Coach

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1 reply »

  1. Interesting read RPC. I suppose another angle on this would be to rent the space on Air BnB and such like? Could work for coastal/touristy areas or business types visiting the big smoke.

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