Imagine a way of getting started in property investing and growing a cash flowing portfolio without the need for 25%+ deposits, Stamp Duty or even solicitors!
That’s exactly what the rent to rent strategy allows you to do.
In this complete guide we’ll cover everything from what rent to rent is, how to analyse rent to rent deals and how to manage your portfolio as effectively as possible.
Whether you’ve got no property experience at all, or you’re looking at diversifying your portfolio using the rent to rent strategy, there’s something in this guide for you!
Rent to Rent is the strategy of ‘renting’, or leasing, a property from a property owner and then renting it to tenants for a monthly profit.
Unfortunately, this definition throws up all sorts of questions like, “is that not sub-letting” or “is that legal”?
This is why we felt the need to go into a lot more detail about the process itself, the correct way to do it and why it’s perfectly legal and a fantastic way to get started in property investing.
Let’s dive a little deeper into exactly how the rent to rent strategy works.
Whilst there are a few different models you can use with rent to rent, the principle behind each of them is the same. You find a property owner (usually a landlord) who is tired of dealing or unable to deal with the hassles of lettings and property management.
You offer a solution that takes all their headaches away.
The solution includes:
In return for this service, you agree to pay them a fixed amount per month, usually a little lower than “market rent” and then you take that property on, find tenants, achieve a higher rental amount, and keep the profit.
It all sounds straightforward, right?!
Well, it is! Which is one of the reasons why rent to rent is such a popular property investing strategy! Done correctly, it’s a great strategy to build a cash flowing portfolio quickly.
The ability to take on multiple properties in a short span of time means you can achieve job replacing income far more quickly than it would take you if you chose the traditional buy to let method.
Traditional property investing strategies require large sums of capital (deposits, Stamp Duty, solicitor fees, survey fees, etc).
With rent to rent you can take on a property and generate immediate cash flow with literally no money required up front.
Whilst these deals are rare, and require incredible negotiation skills, they demonstrate what is possible with the rent to rent strategy.
For every Yin there is a Yang and rent to rent does come with its negative side.
You are promising a fixed “rent” payment to the property owner per month which means you need to ensure the property is generating enough income every month to cover that and then provide enough to generate you a profit.
If the property isn’t generating profit, then you’re working hard for nothing!
There are also so many variables (rent arrears, maintenance issues, property damage, anti-social behaviour etc) to consider when looking after property and you are taking on the associated risks with those.
You’re solving the property owner’s headaches which means potentially inheriting them.
However, you must remember these negatives can also be associated with traditional property investment so it’s not unique to rent to rent.
The big difference is that you’re not going to benefit from the capital appreciation (house price growth) so you need to ensure you’re doing everything required to generate profit every month.
We’ve covered what it is, how it works and some of the negative sides of rent to rent. If you’re still here then great, let’s move onto the more technical stuff to see if you’re still keen.
Some of the most common ways the rent to rent strategy is used include:
Taking on a property, offering the property owner a fixed rental income and letting it out to a single tenancy.
SINGLE LET TO MULTI-LET
Taking on a property that is currently a single let (lived in by one household), offering the property owner a fixed rental income and letting it out on a room by room basis.
Taking on a property that is currently let out on a room by room basis, offering the property owner a fixed rental income and letting it out on a room by room basis.
SINGLE LET / MULTI LET TO SERVICED ACCOMMODATION / SHORT STAY RENTAL
Taking on a property that is currently either a single or multi-let, offering the property owner a fixed rental income and letting it out on a short term stay, holiday let basis (i.e. using sites like Airbnb)
|IMPORTANT!Each of these strategies has its own considerations to think about regarding the amount they will cash flow, the amount of property management required and most importantly, the legal requirements and regulations around the use of the property.Ensure you check with your local Council regarding local restrictions on applying any of the above changes to properties.You will also need to ensure that the property owner has the appropriate mortgage and insurances in place for the strategy you choose to follow.ALWAYS CHECK THE ABOVE BEFORE TAKING ON A RENT TO RENT PROPERTY!|
Understanding what you want to achieve from your rent to rent business is an important first step to ensuring you choose the right model for you.
Have you got a low start up budget and are happy to just start with a few smaller properties to generate a “side income” and build it up more slowly whilst building your experience? Single let rent to rent might be the best place to start.
Maybe you’ve got a “pot” of cash and are prepared to get your hands dirty and do a bit of refurbishment work? Single let to multi let would be a fantastic way to get going. In our opinion this is also the best for cash flow.
Are you prepared to get stuck in and be very hands on managing multiple guests staying per month including all the work required to turn properties around after each guest stay? Serviced accommodation / short stay rent to rent might be a route to explore.
There are pros and cons for all the strategies so it’s important to know what you want to achieve first and then go and find the right model for your goals.
As with all property businesses, there are things you need to consider when setting up.
As a rent to renter, you usually operate in the same way a letting agent does and therefore need to be set up in the same way in terms of compliance.
We’re not talking about rent to rent contracts at this stage, we’ll come onto that later.
What we’re talking about is rent to rent business setup.
So, to ensure rent to rent business is set up correctly, you will need to:
The approximate cost for setting your rent to rent business up legally and correctly is £1000 although bear in mind you should be able to pay your insurance monthly (the largest % of that start-up cost).
Ok, so we’ve covered off getting set up, so let’s move onto how to find rent to rent deals. After all, without deals you won’t have a rent to rent business!
The obvious place to start with any property strategy is with managing agents or letting agents, however maybe not so much with the rent to rent strategy until you’re able to get them to understand what it is that you do.
You see, to an agent, you are potentially competition!
You offer landlords a service where you take all their headaches away for a fixed amount paid every month. Well, that means they no longer need their managing agent! That means you’re “stealing” their clients! That could make you the enemy!
Don’t worry, we’ve got you covered…
With agents, you ideally want them to refer landlords who they struggle with.
You want to become the agent’s “knight in shining armour” and save them from their headaches!
You do this by offering a win/win where you take the landlord off their hands and potentially pay a referral fee for doing so.
You could even get them to find tenants for you!
So remember, agents can be a fantastic source of deals for you but you must approach it in the right way!
The ideal scenario would be for landlords to come to you directly.
No middle person to consider, no referral fees to think about, no need to play Chinese whispers when trying to explain what it is that you do!
Marketing of course!
There are so many ways to get in front of landlords, but the trick is knowing which methods are most effective.
You could write letters to them offering a solution to their property problems.
You could target them using online advertising such as Facebook or Google Ads.
You could even host local events for landlords offering help and advice regarding how they can be better landlords! Sounds counterintuitive right, but it works!
The important thing to remember with any marketing that you do is:
Keep those 4 “nuggets” in mind whenever you’re doing your property marketing and you should hopefully be just fine.
One of the most common mistakes we see with rent to rent deals is poor analysis.
Poor analysis can lead to serious problems down the line but it’s extremely easy to avoid!
Knowing your numbers is incredibly important for EVERY property strategy, not just rent to rent.
Rent to rent does have strategy specific numbers you need to understand which include:
You will also need to be able to work out the NET rental income that a landlord is currently getting.
The formula for this is quite simple:
|GROSS RENT (what they’re asking tenants for) – RUNNING COSTS (per month)|
|= NET RENTAL INCOME|
This is very important as it will form the basis of your proposal to the landlord when you make your offer.
Once you know the NET rental income you can work out your own numbers, including the profit you wish to make each month, and then make your offer to the landlord.
Just a quick one before we move away from deal analysis.
When calculating your numbers, you must ensure you always factor in allowances for things like maintenance, voids, management fees etc.
Whilst we all hope our properties will run smoothly with no maintenance and stay fully occupied for the time we have it, the reality is quite different.
Tenants will leave, things will break, rent might not be paid some months, it’s all part of running a rent to rent property (or any property in fact).
So to protect ourselves we should always provision some of our rental income to one side for that “rainy day” we hope never comes!
You will speak to a lot of landlords who want to benefit from your services but still want to get as much rent as possible. It’s only natural, most are investors themselves after all!
What this does mean is that you need to be strong with your numbers and don’t increase your offer if the numbers don’t make sense.
You win some, you’ll lose more. That’s part of the journey! Just remember that when you’re tempted to increase by a few quid just to get the deal. More often than not you’ll regret it!
There is a lot of misinformation out there regarding what type of rent to rent contract to use when setting things up.
Having worked in the property industry for over 16 years now, nearly 10 of which were spent in sales and lettings agencies, I know a thing or two about property contracts.
Unfortunately, there seems to be a lot of “experts” suggesting incorrect contracts to use for rent to rent which concerns me a lot.
The reality is that you will always “get away with it” if nothing goes wrong.
Where contracts come into play is when things do go wrong and you don’t want to be left in a precarious position because the contracts you used at the start weren’t right.
There are only really 2 forms of rent to rent contract that you should be using to ensure you’re protected as much as possible:
Management contracts will likely be the most common contract you use as Lease Agreements are only useable on commercial properties or properties that are unencumbered (have no mortgage on them).
I don’t want to go into the legal detail of rent to rent contracts here as it’s a whole separate topic but I do want you to understand that anyone suggesting other contracts, especially with agents, may potentially be putting you in a dangerous position should things go wrong.
When drawing up your rent to rent contract you need to ensure you include all the terms and conditions that you agree to with the landlord.
This includes any “special” conditions you may agree to regarding things like maintenance, “break” clauses (which allow either party to terminate the agreement under certain conditions) and even specific rules around usage of things like parking spaces.
I’m going to let you in on a couple of contract negotiation tips to help give you a bit of a head start.• Always try and agree to pay the landlord in arrears (i.e. at the end of the month rather than upfront)
You want to try and conserve as much of your money at the beginning as you will usually have some works to do to the property and it’s going to take you time to find tenants, collect their monies and move them in.
By negotiating rent to be paid in arrears, you will be able to get the works done and find tenants before your first payment to the landlord is due (hopefully)!
Not all landlords will agree to this but it’s the first thing we always try to negotiate when drawing up our rent to rent contracts.
• Always limit your liability in terms of monthly maintenance costs
One of the benefits of the rent to rent strategy for landlords is they don’t have to think about maintenance costs.
However, you need to protect yourself against incurring high monthly maintenance costs on a property you don’t own, especially if those works are adding value to the property!
We always negotiate a maximum maintenance spend limit per month (cumulative amount as well, i.e. not per issue). We also agree that the landlord will remain responsible for “major” maintenance issues such as boiler replacement, roof repairs, etc.
Whilst we’re offering a fantastic service for landlords we always need to ensure the rent to rent contracts protect both parties and offer fair terms whilst also protecting yourself from major costs.
Make sure you get all the terms agreed and confirmed before starting your agreement. The last thing you need is an argument over an unexpected maintenance cost that wipes out your profit!
You will likely need to do some form of sprucing up to the property when you take on a rent to rent deal but there are some things you should remember before moving forward.
Remember, you do not own this property, which means any upfront refurbishment work you do will need to be recovered from your monthly profit.
The higher the refurbishment costs, the longer it will take you to get your initial investment back and then start collecting monthly profit.
As a rule we always recommend aiming to get your initial investment back within 6 months for smaller projects and 12 for larger ones, but never more than 12 months.
The amount of work you do will also depend on the rent to rent model you choose. Converting a property into a multi-let will cost more than simply decorating a single let. Furnishing a holiday let will cost a lot more than letting a property unfurnished.
Depending on the model and the longer term benefits for the landlord, you could try and negotiate a contribution from them for the works. Just saying!
It wouldn’t be a complete guide without us covering the actual running of your rent to rent business.
Needless to say I can’t cover everything but I do want to give you the basics so you understand the ongoing responsibilities you will have running your rent to rent portfolio.
You can have the most beautifully presented property in the world but if you haven’t got tenants in it who pay their rent it means nothing!
But it’s important to ensure you find the right tenants and don’t rush to put people into your properties because you’re keen to start generating cash flow!
Remember, you’re paying the landlord a monthly payment whether the property’s empty or not, so it’s important to ensure you do everything you can to get the right tenants from the start.
Always do reference checks, including credit score, employment, and previous landlord references.
Failure to provide these is usually a warning sign something’s not quite right.
You also need to meet with your prospective tenants and ensure you’re happy with them as people. They are potentially going to be staying in your rent to rent property for a while so ensuring they’re right is essential.
Above all, trust your gut. You might think this is difficult if you don’t have previous experience but trust me, your gut has an ability to tell you when something doesn’t feel right and you certainly don’t want to regret ignoring it if things go wrong!
I’d love to tell you that after your tenants move in it’s all “hands off” and you can sit back and enjoy the cash flow, but I can’t.
Even if you choose to use a managing agent to look after your rent to rent portfolio, you will need to stay on top of things as the buck really stops with you.
It’s your relationship with the landlord that’s on the line at all times.
It’s your pocket that any rent shortfall will come out of.
It’s your time that will be spent managing issues that can be avoided
So make sure you keep on top of things. Check up on the property regularly via periodic inspections. Keep a record of everything that’s going on and most importantly, maintain a flow of conversation with your tenants to nip any issues in the bud quickly.
There’s a lot more to property management of course, especially more specific requirements depending on the rent to rent model you choose, but one thing that applies to all models and tenant types, you must stay on top of things at all times!
The rent to rent strategy is a brilliant way to get started in property investing as you get to do everything you would do normally but without the upfront capital required if you were to buy.
Of course, not buying comes with its drawbacks, but unfortunately, we’re not all blessed with huge pots of cash stashed away so it’s a great, creative way of getting started.
As with every property investment strategy, you need to understand the risks as well as the rewards and always ensure you’re moving forward with eyes wide open (without the rose-tinted spectacles on).
But, as long as you’re getting into it for the right reasons, you understand the work and commitment involved and you’re not under the false impression that this is “easy” then you’re ready to start your rent to rent journey. Good luck!