Rental property investments, if done right, are a great way to generate income. But any landlord will tell you that property isn’t without its challenges and tribulations. Increasing in popularity are rent to rent models.
The rent-to-rent option is an arrangement that involves three parties — the landlord or property owner, the initial tenant, and the tenants who the renter uses. Sound confusing? It doesn’t have to be.
In this article, we’ll explain exactly what rent-to-rent means, where to get landlord leads, how this arrangement works, and tips for success.
What Does Rent-to-Rent Mean?
As the name suggests, a rent-to-rent arrangement involves someone renting a property from a landlord only to turn around and rent that same property out to someone else.
Essentially, the initial renter is taking on the landlord’s responsibilities for the third-party tenants by acting as a “middle man”.
This is also known as sub-letting which happens when someone rents a property from the landlord and then sub-lets it to another tenant.
Most landlords don’t mind this arrangement since the initial tenant is taking on all the responsibilities including rent collection, maintenance, and repairs.
In most cases, the initial renter offers the landlord guaranteed rent at a reduced cost and then charges the third-party tenant more. After all, if the “middle man” isn’t making a profit, what’s the point of taking on all the responsibility and stress of managing the property?
While the rent-to-rent arrangement sounds relatively straightforward, there are numerous things to consider before making a commitment or signing a contract. Not only are there different rent-to-rent models available and numerous benefits, but also potential pitfalls to watch out for — for both the initial renter and the landlord.
Knowing all the options upfront can help you make the best decision for your financial needs and offer peace of mind.
Rent to Rent leads
A big challenge for rent to rent operators is where to find landlords that are happy for their property to be managed using this model.
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If you’re interested in getting leads through other means, check out our letting agent marketing tips.
5 Rent-to-Rent Models
There are five typical rent-to-rent models to choose from, each with its own benefits or risks.
This is the simplest and most popular rent-to-rent structure. By convincing the property’s landlord to accept guaranteed rent at a discounted rate, you can then charge a third-party tenant more in order to turn a profit.
Remember, by sub-letting the property, you’re not responsible for all costs and maintenance associated with the property. This includes repairs, property damage, and late rent. Model 1 works best if you’re a skillful negotiator and you can establish a large enough profit margin.
The next way to pursue a rent-to-rent arrangement is to find a family-size home and turn it into a House in Multiple Occupation, or HMO. This term is used to describe a property that is owned by a landlord and occupied by several people or families.
For example, find a three-bedroom home that’s being advertised for a single tenant. You can rent this house from the landlord and then turn around and sub-let it to three individuals, generating more income and increasing your profit.
Some landlords get even more creative and utilize basements, dens, and other living spaces to increase the number of possible tenants from 3 to 5.
Just know that the more tenants you have, the more chance of unforeseen issues like damage, late rent payments, and even domestic disputes among renters.
Model 3 is an extension of model 2 where an ambitious entrepreneur finds an existing HMO and propositions the landlord to take over the management responsibilities.
With the right business model and management skills, you can increase profits and reduce overhead costs.
Model 4 is another business model for those interested in a rent-to-rent arrangement. Short-term tenants offer their own financial benefits.
Business travelers, vacationers, and tourists make up most of these tenants. Some landlords use websites like Airbnb to advertise these properties and find tenants.
There is a lot of legwork involved since the property needs to be cleaned and serviced between each tenant. For this reason, this model works best for properties close to your current location. Otherwise, you’ll need to add a cleaning service to your list of overhead expenses. Model 4 also works best in larger cities that attract lots of tourists and travelers.
The last rent-to-rent model is more of an investment and less of a hands-on approach to property management. This works by tipping off other investors to potential leads. By educating other investors on how a rent-to-rent arrangement works you may earn commission on the leads.
You can also charge for your expertise or offer online courses. This model is ideal for landlords and subletters with plenty of experience in the rental industry.
The Benefits of a Rent-to-Rent Agreement
Let’s start on a positive note. Rent-to-rent agreements offer numerous benefits in addition to just income. The structure itself isn’t for everyone but if you’re prepared for a challenge, you can turn quite a profit and become a reputable name in your area.
Here are a few things that make this property strategy easier and more profitable than others.
When you purchase a rental property there’s a lot of red tape that goes along with the sale. One of the biggest headaches when buying a property is applying for a mortgage — especially if you don’t qualify. Good news! As a renter, you don’t need a mortgage.
That means you can generate income from a property without applying for a mortgage or even speaking to a lender. This is ideal for anyone with poor credit or messy finances.
No Down Payments or Deposits
When you buy a property and apply for a mortgage, most companies require a 20% down payment. That’s a pretty big chunk of change for some people. With rent-to-rent, you aren’t buying anything and that means there’s no deposit needed.
One thing to keep in mind is that a lot of landlords will require a security deposit and the first month’s rent upfront. You’ll need to produce this before subletting the property to anyone else.
While you’ll need some financial backing to get your rent-to-rent endeavor off the ground, it won’t be nearly as much as you’d need for a home sale.
Fewer Overhead Costs
When you purchase a property, the overhead costs are extensive from stamp duty to additional taxes and closing costs, you’ll end up paying significantly more than you originally planned.
With rent-to-rent, these costs are minimal. Chances are you won’t need a solicitor for a basic rental agreement which means there are no conveyancing fees. Although some renters ask a legal representative to oversee the contract to err on the side of caution.
Your biggest expense will be property maintenance and advertising. One way to reduce these expenses is by letting out newer properties that don’t require as much upkeep or repairs and utilizing social media for fast, free marketing.
Rent-to-rent properties are notorious for a fast turnaround which means minimal time passes between signing an agreement with the property owner and finding and moving in tenants. With fewer steps in the process and experienced landlords at the helm, you can make fast cash.
Benefits for the Landlord
Speaking of the landlord, there’s something in it for them too when discussing rent-to-rent. Knowing these benefits will help you convince property owners and landlords to let you sub-let their property.
For starters, offering them guaranteed rent means they’ll receive steady income without worry. They’ll get the same amount, consistently with no need to chase payments or deal directly with unruly tenants. All of these responsibilities now fall on you.
The same goes for maintenance and upkeep. When the landlord hands you the keys, they’re leaving their property in your hands. Now, they can sit back and collect guaranteed rent without ever lifting a finger.
It’s important to note the difference between a landlord renting the property to you and then you sublet it and them using a letting agent. Although the letting agent will take on all of the abovementioned responsibilities, the landlord won’t get paid unless there are tenants present. In this scenario, the landlord would also be responsible for all overhead costs.
Rent-to-rent allows landlords to forfeit all of the responsibilities to you — but at a cost. They’ll need to compromise and agree to lower guaranteed rent in exchange for the workload you’re taking on. It’s in this area that your profit margin lies.
The Downside of Rent-to-Rent
Up until now, it sounds like rent-to-rent property structures are the way to go. And while this is true in many ways, not property investment is without its drawbacks. Here are a few things to consider before jumping head first into this arrangement.
No Capital Growth
This tops the “pros and cons” list when discussing rent to rent. Most properties increase in value over time but since you don’t own the rental property you won’t benefit from any of these increases. Only the property owner or landlord will.
For example, let’s say your rent-to-rent agreement brings in £200 per month. After 5 years, that’s £12,000 income, which is great. But let’s say that the same property is worth £200,000 and increases in value by 5% annually. Now, the landlord is making over £55,000 during that same time period for doing nothing at all!
Capital growth is such a lucrative part of property investing that some landlords focus solely on these figures without giving monthly or annual rent much thought. Historically, the gains made from property value growth far outweigh rental income for investors.
One benefit is that if the property loses value, you aren’t in the same negative financial disarray as the person that owns the property.
You Still Take On the Risk of Property Ownership
Another downside of rent-to-rent is that you take on all the stress and responsibilities of a property owner without any of the financial gain. You take on the basic costs and headaches associated with owning a rental property including monthly bills, gaps in tenancies, maintenance, and repairs.
On top of that, if you agree to pay the landlord guaranteed rent, you need to do so consistently — even if the property is empty. This puts you on the hook for coming up with the money regardless of how long there’s a vacancy.
No Control Over the Property
At the end of the day, you have no say over what happens to the rental property. The owner/landlord can change their mind, increase the payments, or take back the property with little to no warning. This would leave you in a pretty compromising position with your current tenants.
Your only protection, in this case, is whatever contract or agreement you signed. While this does offer peace of mind, the risk is still there and it can be quite unnerving.
How to Make a Profit with Each Rent-to-Rent Model
The basic structure of rent-to-rent sounds pretty straight forward. Offer the landlord guaranteed rent at a discounted rate, charge the tenant more, and turn a profit.
But what if the figure you want to charge your tenants exceeds market value? You can’t charge more for a property than its worth.
Keep reading for some insider tips on how to make money with rent-to-rent.
Discounted Rent and Single Tenant
This is the simplest and most common way to make money from rent-to-rent. The benefit for landlords is a steady stream of guaranteed income without the hassle of maintaining the property, collecting rent, and covering additional costs.
Because of this, most landlords have no problem accepting below market value. This allows you to turn around and charge more and turn a profit. This only works if all the pieces fall into place.
For example, if the market is suggesting £500 and you negotiate £350 with the landlord, you’re now bringing in £150 per month. While this sounds great, that £150 needs to cover any repairs, maintenance, and other overhead costs.
You’re also responsible for paying the landlord during vacancies, which could cause financial hardship long-term. The best way to succeed using this model is to negotiate an agreement that gives you plenty of wiggle room to cover unexpected costs and vacancies.
Home of Multiple Occupancy (HMO)
Another viable option is the HMO rent-to-rent structure mentioned above. Finding a multi-family home and renting it out to several individual tenants can double, if not triple your income. Now, you continue to pay the landlord your agreed-upon amount while collecting rent from not just one but 3 or 4 tenants.
This means you won’t need to negotiate so hard with the landlord for a discount but you will need to get their approval to rent their property to multiple tenants.
Keep in mind though that with more income and tenants comes more work. Not to mention, the property itself will be much bigger than a single-room apartment. That means the potential for more maintenance, repairs, and upkeep.
Here are a few other factors to consider before creating an HMO rent-to-rent agreement:
- Converting the property to an HMO may require additional upfront costs. Repairs and renovations may run you a few thousand pounds, cutting into your initial profit. Choose carefully so that you get the most ROI for the work you do.
- You’re responsible for the cost of running and maintaining the HMO. The electric, water, and other utility bills will be higher than if it was a single-occupancy property. More tenants also use more of these basic assets. It also means higher costs during vacancies.
- HMOs may require additional licensing and certifications.
- The landlord’s mortgage may prevent them (and you) from letting the property out to multiple occupants. Be sure to ask about this upfront.
HMO rent-to-rent strategies are popular because you can maximize your efforts by focusing on one property with multiple tenants instead of managing several properties at once. Another option is to find an existing HMO and make renovations and improvements before increasing the rent along with your profit.
The last rent-to-rent structure involves turning a property into serviced accommodation. In short, this means renting out the property on a daily or weekly basis. This is popular among tourists and vacationers. These properties are run similar to an Airbnb.
In addition to the rental space, service accommodations are usually furnished properties with other perks like linens, kitchen supplies, and cleaning services. While the services you perform are unique, the workload is similar to that of an HMO.
Offering service accommodations takes more time, effort, and work. There are also set-up costs involved like furniture, linens, and other accessories. You also have to check with the landlord’s mortgage company to ensure this arrangement isn’t a breach of contract.
If everything works out and you’re able to establish service accommodations, you can stand to make a pretty hefty profit. That is, of course, if you can keep the property occupied on a consistent basis. Service accommodation works best in cities and other popular areas that attract plenty of tourists and other travelers.
Other Tips for Succeeding with Rent-to-Rent
Each rent-to-rent scenario is unique. Things like market value, location, and overhead costs all play a role in how much profit you can make and if a specific deal makes financial sense.
Here are a few additional things to consider before deciding on a rent-to-rent strategy.
Skip the Letting Agent
Another way to ensure you make a profit off your rent-to-rent efforts is to avoid using a letting agent. This can be tempting for subletters that are managing multiple properties. Unfortunately, paying a letting agent’s fees will only cut deeper into your profit margin which is already quite small.
When you negotiate with a landlord to sublet their property, you’re ultimately taking on the role of letting agent. It’s now your responsibility to advertise the property, find and reference tenants, draft the paperwork, and maintain the property. This is all part of the deal.
Bringing on a letting agent will make your job easier but will likely eliminate any potential profit you could make.
Find the Best Rent-to-Rent Opportunities
Start by asking around if anyone knows landlords interested in this type of arrangement. Some may shy away immediately while others will be tempted by the idea of guaranteed income and less hassle.
While you don’t want to necessarily hire a letting agent to manage the property, you can ask local agents if they know any landlords in the local area. You can also approach landlords directly.
Use a few strategies like finding local HMOs through advertisements, check property rental websites like Zoopla and Rightmove, browse social media, and stay active on other property investment portals and websites.
Once you find a willing landlord, don’t agree until you do some research. If the property owner is overly eager to enter a deal with you, it could be a red flag that something’s wrong. Find out how long the property has been vacant and why.
Ask plenty of questions and research the local market. Find out the profit potential, market value of the property, and how it’s being advertised. While you should expect to do some work to get your investment off the ground, you don’t want to waste too much time and energy on a failing property in a poor location.
A few things to consider are:
- Is there tenant demand?
- How much can you charge for rent based on the market and property value?
- What will your costs and net income be?
- Calculate how long it’ll take you to recover any expenses you paid upfront (renovations, furnishings, advertising, etc.)
- What costs are both you and the landlord responsible for?
- How long will the agreement last?
- Choose the right type of agreement (the two most popular are a management agreement or a commercial lease)
Take a Course
If you’re new to the world of subletting and property investment or you need a refresher, there are courses available that teach you how to succeed using rent-to-rent. Both online and in-person classes will give you a crash-course in how to establish a rent-to-rent agreement.
Similar to finding reputable landlords and tenants to work with, don’t choose the first rent-to-rent course that pops up on your Internet search. Read reviews and the comments of former students to find a course that fits your needs and budget.
Make Rent-to-Rent Work for You
With the right amount of research, planning, and dedication, rent-to-rent is a viable strategy for entering the world of property investment. Interested landlords secure guaranteed rent without the hassle and subletters can turn a profit without the worry of homeownership.
Be sure to do plenty of research and calculate your costs before taking the plunge into a rent-to-rent agreement.