What is rent-to-rent?
It seems like the clue is in the name...but let's start by getting totally clear on what rent-to-rent actually involves.
So where do both of those “rents” come from? Well, basically:
- You rent a property from a landlord…
- To rent it out yourself, to a tenant
Effectively, you’re taking control of the property and acting as if you’re the landlord – just like you would if you owned the property yourself.
Now, of course, this is all pretty pointless unless you make a profit from the arrangement – otherwise you’ve got all the hassle of property ownership with none of the benefits!
That’s why in rent-to-rent you normally give the landlord a guaranteed rent which is lower than you’ll be able to charge to your tenants.
The landlord is happy because they have a guaranteed income, without any of the effort that renting out a property normally involves.
You’re happy because you’re making a profit – which is effectively your reward for taking on the effort and risk of managing the property.
At least…it can be a win-win. We’ll come to the dangers – for both you and the landlord – later on.
The benefits of rent-to-rent
Rent-to-rent is still a niche property strategy, and is far from being suitable for everyone – but it does have some unique plus points that make it a good choice in some situations...
No need for mortgages
You’re not buying the property – you’re just renting it. That means, obviously, that you don’t need to worry about getting mortgages.
Now, mortgages can be brilliant: leverage is one of the best things about investing in property. But if you can’t qualify for a mortgage – perhaps because you don’t own your own home, you have shaky credit history, you have limited earnings or you’re new to the country – rent-to-rent gives you a way of generating an income from property while bypassing the need to go anywhere near a lender.
And related to this…
No need for deposits
When you buy a property with a mortgage, you’ll need a deposit of at least 20%. With rent-to-rent, you’re (obviously) not buying the property – so no need for a mortgage or a deposit.
That’s what makes rent-to-rent a popular strategy for people with limited funds. For example, if you’ve got £10,000 in savings that’s not going to be anywhere near enough for a deposit on a property – but it could be enough to set up a couple of rent-to-rents.
No legal costs or Stamp Duty
Again, you’re not buying the property – so there’s no Stamp Duty to pay. And while you might pay a solicitor to put an agreement together for you, it’s not going to be anywhere near the cost of regular property conveyancing.
(And as a side-point, you don’t have to contend with the time it takes for normal property legals – so you can theoretically get a deal tied up in a matter of days rather than months.)
…rent-to-rent allows you to generate cash quickly, with far less of a need for capital than normal buy-to-let.
It’s far from perfect (we’ll come to the drawbacks in a moment), but if you’re keen to get involved in property but don’t have much in the way of cash…it’s probably sounding pretty good to you at the moment.
And what about the landlord?
We’ve touched on this already, but it’s worth getting clear on the benefits for the property owner too – because these are the benefits you’ll need to explain to them if you’re going to convince them to rent their property to you.
The twin advantages for the landlord are a guaranteed income and no effort. They get to hand over their property to you, and (all being well) they’ll get paid every month for the next few years without having to do anything at all.
They won’t have to worry about:
- Gaps between tenancies, because you’ve promised to pay them regardless
- Maintenance (up to a point – we’ll come back to this later)
- Tenants not paying (other than you not paying!)
- Bills and other costs of ownership
(At this point it’s worth emphasising that the reason the landlord doesn’t have to worry about these is because they all become your responsibility!)
From the landlord’s perspective, this is different from just giving their property to a letting agent – because while an agent could remove a lot of the hassle, the landlord would retain responsibility for costs and only get paid as long as there are tenants in place and paying.
Of course, there has to be some degree of compromise – and in this case, it’s that the landlord will probably (but not necessarily) need to accept a lower monthly rent than they’d be able to charge if they were doing everything themselves. Otherwise, there’d be no room for you to earn a profit in exchange for the risk and effort you’re taking on.
From the landlord’s side just like from yours, rent-to-rent is a solution that won’t work for most people – but in some situations, it could be ideal.
The drawbacks of rent-to-rent
Like I said, if you've got limited cash and want to get involved in property, rent-to-rent probably sounds great. And it can be – but it's important to be aware of the drawbacks too...
No capital growth
This is a biggie.
You don’t own the property, so you won’t benefit from any increase in its value over time.
Imagine you have a rent-to-rent agreement in place, where you’re making £300 profit per month.
Over five years, you’ll make £18,000 in exchange for looking after the property. Great!
But if the property is worth £200,000 and it grows in value by 5% per year, over the same time period the landlord will make £55,256 – without doing any work at all!
Capital growth is a huge, huge benefit of owning property: for some investors it’s all they care about, and historically the gains from growth have far outstripped the returns from rent. And with rent-to-rent…you don’t get any of it.
(One happy side-effect though: if the property falls in value, you don’t suffer!)
This is why rent-to-rent will always be a niche strategy. If you can afford to buy property yourself, it’s far better to do so: you have control, and you benefit from the rental income and the capital growth. But if you don’t have the capital, this just isn’t an option – so rent-to-rent can at least generate an income – which you might be able to save up to build your own portfolio.
You’re exposed to all the risks of property ownership
As we saw earlier, all the joys of property ownership now become yours:
- Voids (gaps between tenancies)
Even if you have a month where there’s maintenance to do and no rental income comes in, you still need to pay the landlord.
You don’t have control
Effectively, paying the landlord is like the mortgage payment you’d need to make if you owned the property yourself – so it’s not that different.
But ultimately, you don’t have control in the same way as you would if you owned the property yourself. If the landlord failed to pay their mortgage (assuming they had one), or just flat-out changed their mind and insisted on taking the property back before you agreed…at best you’re out of pocket, and at worst you’ve got a very tricky situation to resolve with your own tenants.
It’s not necessarily likely that anything will go wrong if you’ve set the arrangement up correctly and stuck to your side of the bargain, but the lack of control is still a risk that you need to be aware of.
How do you make money from rent-to-rent?
There's obviously no point to rent-to-rent if you're renting the property out for the same amount you're renting it for. But at the same time, you can't charge your tenants more than the market rate just because you want to make a profit. So how do you make the whole endeavour profitable?
There are three basic models:
1: Single let, with the landlord accepting a discount
The landlord in a rent-to-rent scenario is getting a guaranteed income stream without the usual risks and hassles associated with renting a property, so it’s not unreasonable that they should accept less than the market rent from you.
So if you then rent the property on at the market rent, you’ll make a profit. In theory, at least.
Say the market rent is £600 and you manage to get the landlord to accept £400. On the face of it, that gives you a £200 per month profit.
Remember though: all the costs of maintenance and voids are your responsibility now. If you get unlucky, this profit could easily disappear completely – but with the work remaining very much intact.
This model is by far the simplest and easiest of the three. To make it work, you just need to negotiate hard to make sure you leave enough room to make a good margin even after your likely costs.
2: Turn the property into an HMO
If you have a 3-bedroom property that’s always been rented to a single family, you’ll make more money by renting it out as three separate rooms to sharers – and even more if you convert a reception room into a fourth bedroom.
The advantage of this method is that you might be able to pay the landlord the full “single let” rent and still make a profit – or at least not have to negotiate so aggressively. (Of course, you’ll need to tell the landlord what you plan to do and make sure they’re OK with it.)
The obvious disadvantage is that managing an HMO is more work than managing a single let. You’ll also need to bear in mind that:
- You’ll be responsible for the bills in an HMO, which increases your running costs. This needs to be factored into your calculations, and means you’ll be even more out of pocket if the property is empty for any reason.
- There may be set-up costs to convert the property into an HMO. Say this costs you £6,000 and you’re making a profit of £500 per month – that means you won’t make any profit from the first year of operation.
- You’ll need to be aware of any licensing requirements, which are beyond the scope of this article.
- If the landlord has a mortgage, it might be a breach of the terms for the property to be let to multiple occupants.
Still though, even after taking the negatives into account, turning the property into an HMO is probably the most popular rent-to-rent strategy.
(A variation of this strategy is taking an under-performing HMO and making it more profitable by improving its condition, adding an extra room, or just marketing it better.)
Now is as good a point as any to talk about time. With rent-to-rent there’s seldom enough margin in the deal to use a letting agent, so it will always take up your time. Using the property as an HMO (or as a short-term let, which is the next model we’ll talk about) is more profitable, but takes up more of your time. If you put a price on your time, it’s possible that they’d even work out equally profitable.
This isn’t anything to worry about: it’s a fact of life that if you don’t have as much money, you’ll need to put in more time. You may well decide that it’s a trade-off you’re prepared to accept in order to get the property rolling income coming in – it’s just important that you don’t kid yourself that a trade-off isn’t required.
3: Turn the property into serviced accommodation
Serviced accommodation just means renting the property weekly or daily, usually fully furnished and sometimes with additional services like providing cleaning and linen. Depending on the property’s location and type it might rent on a short-term basis to holidaymakers or business travellers – or not work as serviced accommodation at all.
The tasks involved are very different, but the considerations are the same as using the property as an HMO: it takes up more of your time, you’ve got bills to worry about, there are set-up costs (like furniture and accessories), and it may well be a breach of the landlord’s mortgage conditions. If the property is a flat, short-term lets are likely to be a breach of the lease too.
And the advantage is the same too: more money than you’d make with a single let, assuming you’re able to keep the property occupied for enough nights and keep your costs under control.
Finding rent-to-rent opportunities
Rent-to-rent can be a true win-win: profitable for you, and removing hassle for the landlord. But just as it's a niche strategy for you, it's not going to be suitable for the majority of landlords either. Most of them are happy either self-managing or using a letting agent – and finding the landlords for whom rent-to-rent is the right solution is a point where many people fail and give up.
Really, it’s a marketing exercise: understanding your target market, putting together a message that highlights the relevant benefits, then spreading that message in the channels where it’s most likely to reach the people you’re after.
The methods you can use are endless. Once you understand who you’re trying to reach, you’ll be able to come up with methods of your own – but to get you started, here are four…
The easiest way of finding landlords is to go via a letting agent: after all, letting agents already spend lots of time and money attracting landlords, and they conveniently list all their available properties online.
Just one obstacle: the letting agent has no particular interest in working with you. They’re in the business of finding tenants the normal way, so at best you’re giving them extra work to do by understanding your model and presenting it to their clients – and at worst, they’ll resist because they think you’re trying to cut them out and they won’t get their fee.
Making this method work is an exercise in relationship-building. Many letting agents just flat-out won’t get it, and that’s fine – but if you spend time building rapport with the few that do, there’s a possibility that they’ll be willing to put your offer forward to landlords.
Like anyone, agents are interested in what’s in it for them. So, you’ll need to explain from the start that you’ll make sure they get their fee as usual – and (particularly if they’re managing the property), they’ll have no work to do (as you’ll be managing) but get paid anyway. “Get paid the same for no work” is a compelling pitch, if you can get them to understand the benefits of your model.
Alternatively, you can cut out the middle-man and advertise directly for landlords on free listing sites like Gumtree – and possibly relevant local Facebook groups too.
Again, it’s a case of putting forward the relevant benefits of your offer: guaranteed rent, no void periods, no hassle. The challenge is that because listings are free, you’ll have lots of competition – so you’ll have to be creative in order to cut through the noise and get someone to call you.
Letters and leaflets through the letter box work for letting agents, and they can work for rent-to-rent too.
Assuming you can explain the benefits in a concise and compelling way, the main obstacle then becomes: whose doors do you put them through?
It’s beyond the scope of this article to go into too much detail, but there are various ways of getting smarter than just blasting every house within a certain radius. Those include:
- Getting a list from the council of who owns all the HMOs in the area, and writing to them
- Finding properties listed for rent on Rightmove and Zoopla, and sending letters to the properties
- Finding roads that you know are popular for HMOs, and just targeting those streets
Google and Facebook are by far the most popular places to advertise online. There’s a learning curve to figuring out how each platform works from a technical point-of-view, but the basic task is the same: figure out who you’re targeting, then put the right message in front of them.
Depending on how naturally “techy” you are this might be something where you just wouldn’t know where to start, or it might sound like by far the best option in the list. If it’s the latter, just be careful to start with a small daily budget while you get your targeting and your ads right – then up your limits when you start figuring out the best way of getting results.
Analysing a rent-to-rent deal
So your marketing has paid off, and you've got a list of prospective properties – great! The next step is establishing whether the property would work for rent-to-rent, and how much you can offer the landlord while still making your desired margin. There's a lot more detail to consider when you really get into it, but broadly speaking there are four main steps you need to run through when assessing a rent-to-rent deal:
1: Is there tenant demand?
It’s possible that the landlord is so keen because they can’t find anyone else who’ll rent the property from them – so a first step is to assure yourself that there’ll be demand when you turn the property around and market it to potential tenants.
This is particularly relevant with HMOs, because there might be a property that works brilliantly as a single let but just isn’t in an area where sharers want to live.
Establishing demand can be a combination of using your own local knowledge, talking to sales and letting agents, and looking on the portals to see how many “let agreed” adverts there are for similar properties. For HMOs, Spareroom.co.uk is a good place to gauge both supply and demand for rooms.
2: Find out how much you could charge in rent
If it’s a single let, you need to know what the normal market rent is – or what you could charge after improvements, if there’s work you can do to the property.
For HMOs, it’s a case of working out how much you can charge per room – which again, Spareroom.co.uk is very useful for – then adding it up to calculate the total rent for the property. Bear in mind how many rooms you can fit in, whether they’re singles or doubles, whether they have en suites, and generally what the quality level of the property is – and make sure you’re comparing like with like.
3: Calculate your net income
Next, deduct all the costs you’ll have in the running of the property – including bills (if it’s an HMO), likely maintenance, and a reasonable allowance for rooms being empty for periods of time.
Say you can charge £1,000 in total rent, which nets down to £700 after factoring in all your costs. This determines how much you can offer the landlord: clearly £700 or more wouldn’t work because you’d make a loss, so you need to decide how much of a margin you’re happy with making for all your hard work. Would offering £500 be reasonable – giving you a £200 per month profit? That’s for you to decide.
Here, you see the benefit of being able to generate more income than the landlord would have been able to on his or her own. If the landlord is used to getting £1,000 in rent and you’re offering £500, they’re unlikely to accept. But if they normally get £600 as a single let, accepting £100 less for certainty and no hassle could sound like a pretty good deal.
4: Work out your payback period
You’ll have some kind of expenses when it comes to setting up the property – which might be just a quick clean and a few items of furniture, but could involve full redecoration or even some internal work to reconfigure the property as an HMO.
Once you know how much this will cost you and what margin you’ll make per month, you can calculate your “payback period”: in other words, how long does it take for you to recover your costs and start making a profit from the deal?
If you’re making £200 per month and it costs you £3,500 to prepare the property, that means you won’t break even until you’ve been running the property for nearly 18 months.
Is that acceptable? That’s for you to decide. Clearly, if you are OK with this, you’ll need to agree a long rent-to-rent period – perhaps five years – because if you agreed a two year period you’d only have six month where you’d actually be making money.
Securing the rent-to-rent deal
There's only one hurdle left to overcome now you've found your rent-to-rent opportunity and the landlord has accepted your offer: getting them to sign on the dotted line, and hand you the keys.
You’ll be nervous at this point, because you’ve already put in a lot of work and you don’t want the deal to fall through at this late stage. But don’t let this nervousness turn you into a pushover: if you give way on too many terms in your eagerness to get the deal done, you might later be wishing you’d never taken it on!
Alternatively if you’re extremely persuasive, don’t be tempted to bulldoze the landlord into accepting a deal that’s weighted heavily in your favour. You’ll need to maintain a working relationship for the length of the agreement, and if they feel ripped off they won’t be in any rush to help when you need their help – and at worst, they could try to end the deal early.
There’s lots of think about when it comes to the deal, and you’d be well advised to consult either a specialist solicitor or someone who’s done this type of deal before. While this doesn’t cover anything like everything that should be in your agreement, these are probably the three biggest deal points you’ll need to consider:
Who pays for what?
In your pitch to the landlord you’ve told them that you’ll cover routine maintenance – but there’s a point at which you’ll probably want to draw a line.
For example, say the whole heating system needs replacing, or the roof caves in, or a new regulation comes in that requires expensive energy efficiency measures. You’re unlikely to want to pay for these, because it’s ultimately not your house – so one big expense could wipe out years of profit, and you’ll never benefit from any capital value uplift.
The tricky part is being clear about where the line is drawn, so there’s no arguing when the time comes about who should pay for what. Then there are other considerations to think about: for example, the landlord will probably need to continue insuring the property, but who should pay for the policy?
How long is the agreement?
As long as the arrangement is profitable, it’s in your interest to agree as long a term as possible – because as we’ve seen, it takes time to recoup the upfront cost (and effort) involved in setting the property up.
The landlord may feel similarly, or might want to keep the term short in case they want to sell the property or maximise their income by doing something else with it. One solution to keep both sides happy might be to have a longer term with a shorter break clause – but you should make sure it will still be worth your while even if the landlord breaks the arrangement at the earliest opportunity.
What type of agreement?
The right rent-to-rent agreement is a matter for a solicitor or a subject-matter expert, not some guy with a blog – so there’s a limited amount I can say, other than make sure you get it right.
It seems that typically either a management agreement or a commercial lease is used, but there might be others too – and you’ll need to consider the specifics of the situation and any other parties who are involved.
Again: this section is short, but that’s because of my lack of knowledge (and the impossibility of saying anything that will cover all scenarios) rather than because it’s not important. Take advice, and make sure you have an appropriate agreement in place.
So, 4,000 words later, what have you decided about rent-to-rent?
1: It’s an exciting way to get into property quickly and start generating some cash
2: It’s all the bloody hassle in the world, and you don’t even get the biggest benefit of property investment – capital growth
For me, it’s both. It doesn’t make any sense for me to get involved in, but I can see why it suits other people.
The one thing it’s definitely not is an easy way of making money from property. As you’ve seen, you really earn your profit from your hard work managing the property – and that’s only after a potentially exhausting marketing operation.
But if you’re willing to put in the work and it’s your only option…well, rent-to-rent might just be the foothold in property you’ve been looking for.
How do you get started with rent-to-rent?
First, you need to understand that a rent-to-rent agreement is just one type of “deal” in property – and work out whether you need deals as part of your strategy to achieve your goals in property. It all starts with how much cash you have, and how fast you want to go…Continue reading