- What is rent to rent?
- How does rent to rent work?
- Is rent to rent legal?
- What type of properties can be involved in rent to rent?
- What are the pros and cons of rent to rent?
- What insurance do I need if I take on a rent to rent property?
Rent-to-rent involves renting a property from a property owner, so that the ‘renter’ can then let the property to a tenant. In this scenario, the ‘renter’ is agreeing to pay rent to the property owner for a specific amount of time (usually between three and five years), and then collecting rental payments from their tenant.
As far as the tenant is concerned, it’s no different from any other rental agreement. The owner of the property receives guaranteed payments during the entire period of the agreement – albeit slightly lower than the going market rate – and the renter profits from the difference between what they pay the owner and the rent they collect from their tenant.
It means that it’s possible to enter the rental business without having to purchase your own property first.
Once an agreement has been signed to rent the property, you guarantee to pay rent to the property owner for the duration of the term.
The bills are now your responsibility, and it’s your job to carry out any work on the property and make sure it’s habitable.
It is then down to you to find tenants for the property. The rent you charge your tenants will cover the costs of your regular payments to the property owner plus the costs and bills you are responsible for. You will then make a profit from the difference.
Yes, it is legal, as long as the correct contracts are drawn up.
Rent to rent is a form of sub-letting. The term “sub-letting” can come with negative connotations as in the past it has hit the headlines when someone has sub-let a property without the consent of the landlord.
When it comes to letting a property, any lease arrangement is only as good as the people involved. Rogue landlords can give the rental sector in general a bad reputation, but well-managed rent to rent arrangements can be beneficial to all parties.
The tenant has a home to live in, the owner receives guaranteed income for the period of your agreement, and you earn money from the arrangement without the need to invest heavily to build a portfolio of homes to rent out.
Rent to rent schemes are recognised as legitimate arrangements by The Property Ombudsman Service.
As long as the owner is a willing partner in the arrangement, any private residential property can be used for rent to rent.
But you need to decide what sort of tenancy you want to offer.
House of multiple occupation (HMO)
This involves letting out a number of bedrooms to several different people, with shared communal areas such as a kitchen or bathroom.
A house converted to student accommodation is a typical example of an HMO.
The money you can earn from letting an HMO is often greater overall than if you have a single tenant in the building.
With multiple occupants you are increasing your admin and paperwork, but also spreading the risk – if one tenant moves out, you’re still receiving rental income from the others.
If you are interested in letting out an HMO, it would be sensible to opt for a property that has already been adapted for multiple occupants. Otherwise, it might be expensive adapting a house into an HMO. You need to bear in mind that the owner will expect it to be returned in a suitable condition when your rent to rent agreement is over and might not be happy with the long-term changes you have made.
This is a potentially lucrative rent to rent option, but offering serviced accommodation does involve more work and your income can be irregular.
If you rent out a property on a night-by-night basis, it’s possible that you’ll receive significantly higher returns than if you have a longer-term tenant staying.
But you’ll need to market the property, spend money cleaning the place between every stay, and have some nights when the property is not let.
A single let is when one party – an individual, a couple or a family – rents a property from you.
If they remain there for the long term, this can provide you with a steady income stream. You also won’t have as much work to do as you would with serviced accommodation.
But it’s likely to provide you with less income than you’d get from an HMO, with the margin between what you are paying in rent to the owner and what your tenants are paying you significantly lower, so the reduction in potential profit is something to bear in mind.
One of the biggest advantages about going down the rent to rent route is that you can become a landlord without having to invest huge amounts of money at the outset.
You don’t need to buy a property, so you don’t need to put down a deposit, pay stamp duty or take on a mortgage.
Once your tenants have moved in, you can quickly see the financial benefits of the rent to rent model.
But on the other side of the equation, when you don’t own a property, you don’t get the benefits of capital growth. At the end of your rent to rent agreement, you hand the property back to the owner, and any increase in property prices mean their investment will have gone up in the meantime.
Given that some buy-to-let landlords see capital growth as more important than rental income, you need to understand that you won’t get this benefit if you opt for a rent to rent arrangement.
(Of course, you also won’t suffer if property prices fall, but historically prices have always gone up over the medium to long term.)
Another possible pitfall is that you may struggle to find tenants, or have a gap between tenancies. Under the terms of your rent to rent contract, you’ll almost certainly have to keep making payments to the property owner in the meantime.
As with all insurance, it’s imperative that your provider understands the set-up of your business.
If the insurer thinks they are providing cover for a particular arrangement but then finds out when you make a claim that it was a different scenario, you could find your claim being denied and the property without cover.
Both property owner and ‘renter’ in a rent to rent contract need to make sure there are appropriate policies in place.
You should both consider having liability cover to offer protection against the risk of claims for injury, loss or damage to third parties.
You should also both consider taking out loss-of-rent cover, as you could both see your income dry up if the property becomes uninhabitable following damage caused by a fire, for example.
And rent-guarantee insurance can give you peace of mind if your tenants default on their payments or you run up any expenses should you need to start an eviction process.
Specific details should be provided within each rent to rent contract, but the property owner will usually need buildings cover (and contents cover if they provide any contents) while you’ll usually need cover for anything you have in the property as well as anything you’re responsible for under the rent to rent contract, such as fixtures and fittings.
As a general rule, insurance cover for you should be fairly straightforward to secure, but the property owner might find it a little trickier, as they have assigned control over what happens to the property to another party – something which insurers can be more wary about.