What is Rent to Rent?
Rent to rent or guaranteed rent arrangements are where landlords let their properties out to third parties under a type of “commercial lease”.
That “original landlord” – i.e. the owner of the property – will continue to earn a base level of rental income via a “rent to rent landlord”.
This individual or company collects rent from the tenant(s), pays the property owner a pre-agreed sum and makes a profit on what remains after costs. The rent to rent landlord may also refurbish or improve the property, adding value as they go.
Once the tenants move out (and decide not to renew), the rent to rent landlord can seek new tenants. At this point, where feasible, rents may be increased at the individual’s or company’s discretion without consulting the property owner.
These agreements are most commonly applied in the House of Multiple Occupation (HMO) sector. This is because renting multiple rooms can often result in a better return on investment and gross yields.
In recent years, more rent to rent operators have also moved into the Serviced Accommodation space (such as short-term holiday lets). When managed correctly, the margins can be notably high.
So how exactly does the process work? Is it a good idea? How can you make money safely and easily via this particular business model?
In this article, Property Solvers Auctions explore the best ways to manage operations in a way that benefits the landlord, the business or individual that is planning to rent a property for this purpose. Crucially, we’ll also discuss legal compliance, tenant rights and risk management.
Why Does Rent to Rent Appeal to Property Investors?
“Rent to rent” or “guaranteed rent” has become an increasingly popular strategy in the property investment world.
These types of rental agreements have emerged over the last decade or so as more people seek ways to earn extra income in property.
Similar to property sourcing, it can also be a great way for new investors to gain a practical understanding of the industry without needing to invest a huge amount of capital.
How the Rent to Rent Property Model Works
When reduced to its simplest form, there are just a few steps to the rent to rent process as follows:
1. The rent to rent business owner signs an agreement with the landlord
The first step involves the rent to rent operator approaching a property owner in order to make suitable arrangements. It’s then a case of working out “win-win” terms that suit everyone involved.
For instance, a property owner (rather than sell up) may decide to lease the property for three to five years to a trustworthy individual or company who will take full control.
As part of the written agreement, the rent to rent landlord promises to pay a guaranteed rent amount back to the property owner. This lasts for the entirety of that lease period.
Note that this strategy is different to subletting – where tenants (often without the authority of the landlord) rent out rooms to other tenants.
2. The new “landlord” takes over property management from its owner
The next step is for the rent to rent landlord to take control of the property over the course of the agreed lease term. There may also be an agreement for the property’s renovation and/or conversion into an HMO / multi-let property. Here, the rent-to-rent landlord may agree to pay for all of the costs. Other times, a specific joint venture agreement is drawn up between both parties.
The result is often that arrangements of this kind can take a little time to become profitable.
Nonetheless, the idea is to improve the value of the property in order to achieve the highest rental income.
3. The rent to rent landlord lets and manages the property
Once all of the improvements are complete, the rent to rent business owner then arranges to rent the property to tenants. This process is broadly similar to sub-letting. This landlord pays all the required bills. They also take on the costs and legwork of making improvements whilst maintaining the rooms / communal areas within the building. They will therefore need to have a “float” to deal with these ongoing expenses.
If, as a rent to rent business owner, you have been able to make sufficient positive changes to the building, you will be able to fairly charge an increased amount of rent.
4. The rent to rent landlord receives rental income and makes a profit
Here’s where the acting landlord receives the return on their investment in the form of gross rental income. After subtracting the property owner payments and costs – such as bills and other overheads – the remainder is profit.
5. The end of the lease term
At the end of the lease, the rent to rent landlord returns the property in a pre-agreed manner. Should this not incur, the individual or company may be subject to financial penalties or legal action. Other times – assuming the endeavour is going well for all involved – property owners may well choose to renew the agreement.
Other times, the rent-to-rent landlord buys the property (perhaps at a pre-agreed price secured by an option agreement, for example).
Rent to Rent in Action
An example of the rent to rent model might go as follows…
Rent to Rent / Guaranteed Rent Business Model (Example)
The rent-to-rent agreement states that the property owner will receive £450 per month for individual rooms in one of their HMOs.
The rent-to-rent landlord makes some improvements to the property averaging £150 per room (£1,800 over the year).
These improvements increase the property’s rental income to £750 per month per room.
The rent to rent business’ gross profit is £150 per month per room.
One year later, local market rents have increased and the rent-to-rent landlord can charge £825 per month per room. This boosts the gross rental profit to £225.
Why is Rent to Rent Becoming So Popular Amongst Landlords?
Rent to rent is often an attractive prospect for a landlord or a letting agency because it saves them time and energy.
Indeed, they don’t have to put effort into managing the HMO or buy to let properties themselves.
Not only will they receive guaranteed rent as the result of an agreement with the rent to rent specialist, but they usually won’t have to pay for or manage the renovations. They also do not have to handle any other issues relating to ongoing maintenance and repairs (cosmetic or otherwise).
An added bonus is that they won’t have to chase rental payments from individual tenants plus there’s no need to pay the insurance premiums or other bills. What’s more, rather than sell the property, they can benefit from future capital growth.
What Do You Need to Arrange to Make Money from Rent to Rent
In order to get started with your rent to rent business and make a profit from property without running into legal trouble, you will need to make sure that you are fully compliant.
Here are some of the matters you should consider…
Planning Consents and Permissions for all Properties Involved
Be sure to inform yourself of all the planning regulations related to HMOs in the local area. In most cases, the Local Planning Authority can help with this. Also, check the changes or improvements you will be able to undertake when renovating a house.
Failure to apply for consent or to understand the permissions you need may result in a hefty fine. You’ll also be forced to return the property back to its original state (which will likely cost many thousands of pounds).
Get Your HMO Licence
All HMO properties usually require specific licences obtained from the respective Local Authority. Indeed, a house cannot be legally converted into an HMO without one.For example, if three individuals who are not part of one family “unit” are all renting rooms in a single house – that property will legally constitute an HMO.
You should not involve yourself in the rent to rent process as a landlord unless you fully understand all the relevant requirements.
Non-adherence can result in financial penalties and even legal action. Note that the individual or company found to be at fault – i.e. anyone receiving income from the house or flat in question will receive a fine.
As with any planning breaches, you will also be required to convert the property back to its original state.
Check the Lease for Serviced Accommodation
Many rent to rent operators work with flat (leasehold) property owners with the aim of renting out accommodation on a short-term basis. For example, if a property is located close to a popular tourist area, sporting or music event, it’s often possible to generate excellent returns.
However, most leases have restrictions that prevent such activity from happening.
Register Any Deposit You Receive from Tenants
Any deposit paid to you by the tenants of a property while you are their landlord (rent to rent or otherwise) must be registered at a government-approved scheme within 28 days.These are:
- The Deposit Protection Service (DPS)
- MyDeposits – including deposits previously held by Capita
- The Tenancy Deposit Scheme (TDS)
Make Sure the Property Has the Right Mortgage
It’s always a good idea to check that the landlord with whom you have your rent to rent agreement is doing everything “by the book”.Primarily, check that the mortgage they have is suitable for an HMO, serviced accommodation or whatever type of property you are working with.
Indeed, most buy to let lenders do not allow for rent to rent arrangements. There is a good chance that if the mortgage company catches wind, the loan could be called in early and the property owner could face financial penalties. The property owner, however, may be able to find a commercial property lender that may be more amenable.
It’s also important to undertake credit and due diligence checks whilst researching their track record.
Should you discover any issue with their mortgage, access to capital or anything else that may affect their ability to run HMOs legally, you will need to demand that they make the required adjustments.
Remember – if you see serious red flags, it’s better to walk away.
Become a Member of the Property Redress Scheme (PRS)
The Property Redress Scheme (PRS) protects the rights of tenants and other consumers within the property industry. If you fail to register with this body as a landlord or rent to rent specialist, you may face a significant fine. It’s also a very good idea to register with the Property Ombudsman Scheme (TPOS).
Not only is registering with regulatory bodies a responsible thing to do, but it will also make you more credible. Property owners, for instance, will feel confident that you are a trustworthy partner. Positive experiences often then result in repeat business and facilitate the expansion of your rent to rent portfolio.
Undertake a Thorough Risk Assessment
It is vital that you take proper precautions when approaching a rent to rent project. This involves checking that the property that you are managing meets to all health and safety, fire and other regulations. Renew all risk assessments on at least a yearly basis.
You should also take care to study the potential risks to your business – particularly from legal, regulatory and financial perspectives. Remember also to account for potential void periods.
Sadly, there are multiple stories of rent to rent specialists unexpectedly getting caught up in illegal activity.
Arrange All Required Landlord Certificates
As part of the above step, you must look into arranging all of the certificates that are likely to be needed for the safe management of your property. All appliances provided must be PAT tested. The building must have an up-to-date EPC with a minimum grade E. This will increase to grade C in 2025 for new tenancies and in 2028 for existing tenancies.
You should also have an updated Electrical Safety Certificate produced every 5 years and a Gas Safety Certificate annually.
Be sure to undertake careful research into the paperwork you are likely to need and the regularity with which it should be updated. If you fail to do this, you run the risk of being caught out with insufficient documentation and getting into legal trouble.
Of course, it will also mean that you have not been properly testing certain fittings and services associated with your property – putting the tenants at risk.
Take Out Buildings, Public Liability and Professional Indemnity Insurance
Arranging the right insurance is vital for any person or company planning to take over the property’s management. You will usually need to arrange for buildings, public liability and professional indemnity cover at the very least. Most HMO mortgage lenders require landlords to have the right insurance before they will be willing to approve a loan.
If you are not sure what insurance you are likely to need, speak to a licensed broker and give them as much detail about your arrangement as possible.
Calculate Your Taxes Resulting from the Guaranteed Rent Business
You need to fully understand the amount of tax you will need to pay as a landlord working on a rent to rent basis. Most operators will run their properties through a Limited company, resulting in an annual corporation tax liability. However, there are a number of running expenses that can be offset.
For those who receive the rent personally, income tax will apply.
If you evade or intentionally pay an incorrect amount of tax, you are likely to face hefty penalties. In extreme cases of tax fraud, the “perpetrators” may even face custodial sentences.
Keep Track of Your Finances Carefully
It is vital to always remain in control of your finances in order to protect your business interests. This will ensure that your rent to rent arrangement remains profitable. Before you get started, you will need to understand the costs that are likely to be involved in pursuing a rent to rent model. Try to anticipate the amount of income you are likely to receive.
Your findings should clearly reveal whether the enterprise is likely to be viable in a commercial sense. This should inform your strategy moving forward.
If things aren’t adding up, you will need to revise your approach, seek out further ways to improve things or simply cut your losses. Indeed, a lot of rent-to-rent deals do not stack up financially.
How to Find Rent to Rent Properties
Discovering viable rent-to-rent properties is certainly not easy and will require perseverance.
Below are some ideas on where to find suitable opportunities…
- Local authority landlord lists followed by a consistent direct mail strategy
- Rental pages on portals such as Rightmove and Zoopla. Although finding the address requires some digging, you can then download the Title Register from the Land Registry and write to landlords directly
- Landlord / property investor forums and Facebook groups. Here, it’s important to build a reputation first (rather than overtly “touting your wares”)
- Gumtree’s property rental pages where you can contact landlords directly by direct message
- Facebook Marketplace (although quite a lot of sifting is required)
- Social media “networking” (feel free to connect and DM us on Instagram, LinkedIn, Facebook or Twitter)
- Local lettings agencies. We would recommend the smaller operators rather than the chains or franchise operations
- Local business networks such as BNI plus other landlord networking events
- Open Rent – now the leading website for landlords to market their properties directly to tenants
- HMO portals such as Spare Room
- Listen to property podcasts such as Rent 2 Rent Success for ideas
- You may want to explore commercial rent to rent where larger buildings are divided and let to smaller businesses.
How to Get Started as a Rent to Rent Landlord
Before deploying a rent to rent business model, it’s worth running through the checklist below…
Make sure you have sufficient capital in place.
Matters such as cash flow should be considered in order for any rent to rent strategies to be fruitful beyond the short term. It’s therefore vital to ensure that the overall potential income outweighs expenditure.
Related to the above, there must be a clear strategy to incrementally grow profits.
Find a property that fits within your strategy and budget. There should clearly be room to improve the building. The aim should always be to earn profits through rent without any significant risk.
Discuss significant works required to the building before signing the guaranteed rent agreement.
Speak to an accountant or financial advisor to ensure that all of your bases are covered.
Carefully research all the legal aspects of the transaction. Make sure you cover all “worse case scenarios”.
Speak to experienced insurance and mortgage brokers too to find out about the relevant products and the likely cost.
Make sure the landlord (and owner) is willing to negotiate an agreement that works for you both. Don’t be afraid to walk away if not.
Take care to discuss every detail of your rent to rent agreement with your potential landlord. Make sure no stone is left unturned before you sign on the dotted line.
Make sure you uphold your responsibilities as a landlord, providing a secure and safe place to live for the tenants.
Be willing to provide updates on the property’s condition and other details throughout the length of the lease agreement.
At the end of the agreed term, make sure it is clear how the property will be returned to the owner. You may need to invest some capital to bring the property back to its original standard.
Remember, any rent to rent renewal agreement should also be looked at with fresh eyes following the steps outlined above.
Careful planning is key to a successful rent to rent project. If you have any concerns about the commercial or legal viability of your plan, it may be time to go back to the drawing board and revise your strategy until the numbers work.
If anything falls through the cracks, you run the risk of legal action and significant fines. Great care should be taken at all times. What’s more, failure to plan properly may result in highly detrimental outcomes for your tenants and the owner of the property/properties in question.
As a rent to rent business owner, you will be providing guaranteed rent to the owner of your chosen property. You must also improve the building and make each room more attractive and comfortable for any individual or family of tenants that will eventually live there.
This makes it a highly rewarding form of property investment – both personally and financially – as long as proper attention to detail is applied and no corners are cut.
Rent to Rent’s Future
Rent to rent as a strategy is often touted as a means of getting involved in property for those that do not have the financial capacity to invest directly.
If you are thinking about taking the plunge, remember that it is certainly not a passive strategy. Frankly, nothing in property is. Despite the countless YouTube videos extolling the benefits (and simplicity), rent to rent is hard to get right.
You will be running a business that requires a good financial, people management and analytical skills alongside a lot of hands-on commitment (particularly at the start). It’s also important to appreciate the wider (macro) market risks.
We wish you the very best of luck…