The best way to describe a rent to rent is as a sub-letting. This property strategy is perfectly ethical and legal – just as long as the landlord or owner that we are renting from knows exactly what we are doing.
We find a property, negotiate terms with an owner to rent the property from them and we then agree terms with a tenant or tenants who will then go on to rent the property from us.
Agreement with the Vendor
Many people ask: “Why would a landlord rent their property to us when we are earning more rent for it – why don’t they just do it themselves?”. Good question.
The answer is, we can offer them a hassle-free, guaranteed income for 36 months, with no voids, paid in full, with a monthly contribution towards maintenance of the property. The contract with them lasts for approximately 36 months, with a 6 or 12-month break clause, so either we or the landlord can terminate it. Of course, they have to accept a slightly lower rent than the monthly rent they are used to getting, but they will have security and peace of mind. During the lease period, we may even agree to take on more responsibility for the repairs and insurance, which might be an attractive proposition.
Not every landlord will be interested in this strategy, but there are plenty for whom it works. They want to keep their property for their pension pot, but they just don’t want to deal with it on a day-to-day basis. We could step in as an intermediary, so that they don’t have to deal with tenants or the management issues and hassles that come with being a landlord. We are probably not going to find these types of landlords through estate agents. We have to approach them directly.
Progressing with the Deal
When we have made contact with the landlord, we have to decide how we can enhance the property to achieve a higher rent. We might rent it out as serviced accommodation on a nightly basis in a high demand area. We might turn a front living room into another bedroom to create a HMO. Rent to rent can be so varied, for example, we can choose either HMOs or one bed or two bed houses or flats. Anything can work if the demand is there.
However, if we decide to change the layout (with the landlord’s consent) and undertake works to turn a property into an HMO, then we might request a 5-year lease to make it more worthwhile and viable.
Where to Find the Opportunities
There are two places to start looking. Firstly, speak to sole letting agents (without an estate agent attached to their office). Admittedly, some have mixed successes with this, as not all agents understand this model. And secondly, attending landlord meetings rather than investor meetings. At these types of meetings, we’ll meet a different type of a property owner.
On websites Spare Room or Open Rent, we can see everything that is advertised in the area and contact them directly. Meet them at the property to talk face to face. Then present the benefits we offer as frequently as possible: No voids for 3 years, £200 maintenance, no commission for full management, refurb etc. There is only one chance to make a first impression with an offer, and that is by doing it face to face.
Rent to Rent HMO
We need demand from tenants and there must be a margin between house rental and room price. With this option, the owner may be renting the property to a family, but we could spend a bit of money, add an additional bedroom to create a HMO and earn additional rent by renting the whole property out to a local firm who require accommodation for their contractors or employees on a long-term basis.
Rent to Rent Service Accommodation
Again, we need demand from tourists or workers and business support (cleaners and linen). We can use Air DNA to check corporate demand.
If the numbers don’t work, you are looking at the wrong numbers! Don’t think about what the landlords are asking for, think about what you can afford. Reverse engineer the process. For example:
- Monthly payment to the landlord to cover their rent: £1,000 pcm
- You pay a management fee to deal with all utilities, cleaning etc.: £700 pcm
- You charge a nightly fee for the rooms/property: £2,500 pcm
Rent to Rent in Summary
Know when to walk away. Always stick to your offer, it’s a numbers game. It can be difficult when you become committed to a property, and you could be tempted to up your offer after seeing you are not far off what the landlord wants. But this could be a very bad move, and could wipe any profit away, what is the point of that? Do your area analysis using Air DNA to find out nightly income, occupancy rates and a monthly income?
To find out more about rent to rent investments, download the Ultimate Guide to Rent to Rent.