One thing the coronavirus pandemic has shown us is the difficulty of relying too much on one form of income. For anyone looking at alternative ways to boost their monthly salary, property investment is a good option. But if you don’t own a spare house or have the capital to secure a buy-to-let mortgage, this can be tricky.
Rent-to-rent – or rent2rent or let-to-let as you sometimes see it written – is an alternative model, which might suit you if you’re looking to get into the rental market but your funds are limited.
But what exactly is rent-to-rent, how does it work and what are the pros and cons? We delve into this emerging method of property investment.
Pretty much what you’d expect. Rent-to-rent involves you renting a property from a landlord then, in turn, letting it out to a tenant. It may sound a bit dodgy, almost like subletting, but with the right contracts and agreements in place it is perfecting legal and can be a good solution for you both.
Landlords may opt for rent-to-rent if they are struggling to find tenants for a property or don’t have the means to refurbish it to the right standard. Once you rent a property from the owner, you will carry out the necessary refurbishment then let the property for a higher rent, making a profit.
Rent-to-rent to rent has been a thing for a while in the UK’s business property sector but is growing in popularity with residential lets too. It usually works by you and the landlord agreeing a guaranteed rent over a long period – maybe three to five years. This rent will be at a lower level than they would receive on the open market.
The benefit to the landlord is that they will receive a stable income without having to worry about void periods or finding a tenant for their rental property. By doing the improvements that make the property attractive to tenants, you can let it at a higher rent. The trick to making a profit is being sure there is enough of a margin between the two rents to cover your refurbishment costs and any bills and void periods.
Many rent-to-rent investors let the property on as a house in multiple occupation (HMO). This is likely to bring in a higher revenue than a single let but may mean you need to spend more on converting the property.
The main advantage is that you can become a landlord without the large outlay of capital needed to get a buy-to-let mortgage. Banks generally ask for a high deposit, especially if you’re new to buy-to-let and for you to demonstrate a certain level of income beyond the expected rent.
With rent-to-rent you won’t have to pay the other costs associated with buying – legal fees and stamp duty, which comes with a 3% surcharge for second properties.
As an example, if you have £10,000 in the bank, this probably wouldn’t be enough for a deposit on a buy-to-let mortgage but could be enough to set you up with a rent-to-rent property.
The main disadvantage is that your only financial gain from the project will be the rental income, not the capital growth that comes with a property investment that you keep hold of for some time.
You will need to account for the risks and obligations of being a landlord – covering your costs if there are void periods or your tenant defaults on their rent. And if the costs of bringing the property up to a rentable standard spiral out of control, you could find yourself facing a loss.
It can be considerably more time consuming than buy-to-let. With a standard rental you have the option of farming out many of your landlord responsibilities to a letting agent. You can still do this, but it will eat into your profit margins.
There is also less control over the property than if you owned it – you can’t simply walk away from the project during the term of your contract in the same way as you could sell up if you owned the place. And if the landlord defaults on the mortgage, this could have serious implications for you and your tenants.
There are different types of tenure to consider if you’re thinking of rent-to-rent, here are the main ones.
This simply means that you rent the property from the landlord and let it out to an individual, couple or family with a single tenancy agreement. It’s the simplest form of rent-to-rent but may be the least lucrative so you need to be careful with your margins.
With this model you rent the property from the landlord then let it out as an HMO to three or more unrelated tenants who each pay rent individually. The benefit is that HMOs generally bring in more money and if one tenant defaults, you may still collect the rent from the others. The drawback is that converting the property into an HMO may cost you more initially. You will also be responsible for bills with this model and managing the property will take up more of your time. Be aware that you may need to a licence from your local council to operate an HMO, depending on the number of tenants and the rules locally. Your landlord may also be in breach of their mortgage conditions, so they will need to check.
For this option you’ll need the property to be fully-furnished and you may need to include services such as cleaning or linen. You’ll then let the property on a daily or weekly basis – or longer, maybe through a site such as Airbnb. This type of let will bring in higher rents but will take up even more of your time than an HMO. Again, you’ll need to check out the legalities and you may struggle to find tenants 365 days a year.
If you’re thinking of dipping your toe into the rental business in Brighton and Hove, speak to us. We can talk you through the options, whether buy-to-let, rent-to-rent or something else.
Do you have any questions about the topic above? Our team of experts is here to help in answering any query you may have.
Fueled by his desire to be the best, most reputable estate and lettings agent in town, Steve has spent his career cultivating The Property Shop. Steve prides himself on his authenticity, honesty, and knowledge-base which is emulated by The Property Shop and his team.
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