You may have heard of ‘rent-to-rent’ (also known as ‘guaranteed rent’, ‘multi-let’ amongst other names) – this has been a topic of much interest and debate in recent years, with questions around earning potential, effort required and even the fundamental legality of the practice. Read on to find out what all the fuss is about, and the risks you need to be aware of should you consider earning some passive income this way. Estimates are that a portfolio of 3-5 ‘rent-to-rent’ homes could net passive income similar to an average monthly UK salary.
First, what is rent-to-rent?
Let’s take the traditional property-letting method first; ‘buy-to-rent’. This is where you buy a property, then earn income as a landlord by renting out the accommodation as a single let to an individual or one family. ‘Rent-to-rent’, as the name implies, means you rent the property instead of buying it, but you have a specific contractual agreement with the landlord that you will pay rent for a fixed term (usually 2-3 years), and typically be responsible for bills and minor maintenance, in exchange for the right to sub-let the property. You may need to incur initial refurbishment costs to create additional room(s), as this would translate to a higher rental yield. You keep whatever you make after costs and rental payments to the landlord.
Why choose to be a rent-to-renter?
Buying a property requires a large deposit, good credit history for mortgage approval, legal costs and months of due process. Whilst ownership of a property would be the ideal, most cannot afford the costs associated. So, for the cost of a monthly rental, there is an opportunity to create sustainable passive income without large financial outlays or extensive time and effort. Think Uber and Facebook - neither owns their assets (cars for the former, media content the latter), but they control them and drive profit from them. Same idea, except instead of large corporations, individuals can tap into the same business model.
What’s in it for the landlord?
Well, from the landlord’s perspective, they no longer need to worry about a gap in occupancy – as the ‘middle tenant’, you have committed to a fixed term rental; that means you must pay even if you have no sub-tenants. Secondly, you are responsible for all the bills and small repairs, which means less hassle for them. Of course, there needs to be trust between you and the landlord for this arrangement to work.
Types of rent-to-rent models
There a 3 ways to make this business model work. The most common is…
House of Multiple Occupation (HMO)
This is basically a flat share. Each bedroom in a house is rented out separately and the sub-tenants share the kitchen and bathroom. Some HMOs may have ensuites too. Ideally you will want to find an existing HMO to minimize any upfront refurbishment costs. As an example, a 4-bedroom/2 reception home rents for GBP1,000. With one reception converted to an additional bedroom, rental of GBP600 per bedroom would net a monthly profit of GBP1500 even after payment of utility bills. Next is the…
Unlike an HMO, this arrangement centres around daily rentals for one sub-tenant rather than multiple sub-tenants. This method has good earning potential but the costs are high as well, because you are responsible for laundry and cleaning in addition to electricity and water. Given the daily-based rentals, you will need to pay online booking portals to source sub-tenants. And finally, the…
Single let means one family or couple and less management time involved, but the potential for cashflow will be lower as well.
Bear in Mind
You need to keep all the risks in mind.
Make sure you have the full written agreement of the landlord detailing the ‘rent-to-rent’ roles and responsibilities
If you opt for an HMO arrangement, either you or the landlord must apply for the HMO License
Do further research, identify credible courses (if needed) and find reputable agents that can connect you to like-minded landlords