Rent-to-rent is one of the strategies that anyone can apply, even if you have bad credit or no starting capital. For that reason, both new and experienced investors are highly interested in understanding how this works.
Rent-to-rent is simply a deal structure that anyone – with a little know-how – can put together. It’s a way to control a property creatively, without needing large amounts of capital or a mortgage to get started.
It’s not a strategy on its own, as such: It’s purely a way of acquiring properties. Once you have control of a property, you need to find an actual exit strategy for it, such as a HMO or serviced accommodation, which are normally the two most popular strategies to apply, when you’ve acquired a property on a rent-to-rent basis.
If you don’t know what a HMO or serviced accommodation is, or are just interested to discover more about rent-to-rent, sign up for free to expert investor Caroline Claydon’s webinar, the Property Wealth System. This live online event is hosted weekly to help aspiring property entrepreneurs understand the multitude of options available – even to those without starting capital – in 2021:
One of the ways that I can spot an uneducated investor from a mile off, is if they just say, ‘I want to do rent-to-rent’ and not really expand on that or know what they’re going to do with the property once they’ve actually got the property on a rent-to-rent basis.
The actual principle of rent-to-rent, is very, very simple. Instead of buying a property to rent it out, you’re simply getting control of someone else’s property, by renting it from them. Lots of investors do try to cut corners when it comes to rent-to-rent, but in order to do it legally, safely and ethically, you need to let the current property owner know exactly what you’re doing with their property. You need to have complete transparency and make sure that they are aware, because otherwise they might end up being very exposed and liable for things that they shouldn’t be.
One of the reasons for example that you need to do this, is that they may be in breach of their mortgage terms and conditions, by renting it to you on the wrong agreement or in the wrong way. That could also invalidate their buildings insurance, which as I’ve said, could leave them vulnerable and in a particularly difficult position. So, it’s very important to be completely transparent with the property owner.
Why might a landlord want to rent a property to you, on a rent-to-rent agreement, knowing that you’re going to be making more money out of the property? The reason they’re going to do, this is because you can entice them with the opportunity of guaranteed rent and a hassle-free rental experience. This is going to make any landlords ears prick up.
In order to secure a property, you’ll usually have to pay a month’s rent up front, as well as a month’s rent as a deposit (roughly around that much). Ensure that the property is actually rentable in the state that you want to rent it in. So, for example if you want to rent it out as a HMO, it will need to be compliant with HMO legislation – so we might be needing fire doors, we might be needing smoke alarms in there as well. So, on this basis there will be some costs that you will have to front-up, however that is often far cheaper than the deposit, the refurbishment and the fees to buy a property from scratch.
The three key exit strategies that you might be wanting to operate, once you’ve secured a property on a rent-to-rent basis, are simply renting it out as a long-term AST let – as a buy-to-let. This might be quite tricky as there might not be enough margin in the deal for you to do this. You could be renting it out by the room, so in that case that becomes a HMO (a house of multiple occupation) and the other strategy is to rent it out nightly, which is what we call serviced accommodation. It’s usually those last two strategies (the HMO and the serviced accommodation) that are used to maximise your profits from doing this.
If you do rent the property out as a HMO, it will need to be compliant, so it may require a licence, smoke alarms, fire doors, things like that as I’ve already mentioned. As my mum always taught me, just because you can, it doesn’t mean you should. You need to run your numbers and do thorough due-diligence when securing a property on a rent-to-rent contract, to make sure at the end of the day you’ll still going to be making money from it.
I’ve met uneducated investors at networking events, who have taken on a rent-to-rent property just to get involved in property, and to feel like they’re doing something, only to find out that they end up losing money from a rent-to-rent property. So, it doesn’t always guarantee cash flow.
Remember to factor in the costs that you’re going to need to pay – things like bills and licence fees. They’re going to have to come out of your pocket and you’re going to be guaranteeing the landlord rent, so if you don’t have a tenant in that property, it’s going to be coming out of your pocket.
You need to think about things like – who are your customers going to be, who’s going to be renting that property from you, how much demand is there for rooms – all the things you should be wary of when buying a property, you still need to be focusing on when securing one on a rent-to-rent basis. How long are you actually going to be taking control of that property for – obviously if you are spending money on it, and hitting it up to HMO legislation, then you don’t want to be going that for just one year, because all those costs would have been sunk in and you won’t be able to make them all back. So, a longer-term agreement might be more beneficial for you.
These are some of things to be thinking about – how are you going to be finding and actually managing the tenants, are you going to do that yourself, or are you going to have a letting agent in place. Again, that is going to potentially impact your cash flow.
These are some of the things that uneducated investors don’t even think about, before diving headfirst into rent-to-rent.
If you’re keen to learn more and discover the ideal strategy for your property journey and wealth goals, click below to sign up to The Property Wealth System webinar. This free to attend online event, and a must-have for anyone looking to kick-start their journey to financial freedom in 2021 and beyond: