Rent-to-Rent Property Tutorial

The term rent-to-rent has been coined in recent years to refer to taking control of the management of a property completely using various forms of agreement. This gives the landlord or owner the opportunity to step back and take a much more passive role. The rent-to-rent operator will often rent it out as an HMO (house in multiple occupation).

Some property management companies have been effectively doing this for years by offering a guaranteed rent service to landlords.

This strategy is often adopted by property sourcers as it is an effective add-on to looking for deals to pass on to investors: you can keep any that are suitable and agreeable for rent-to-rent. It enables you to grow your income without the need to find the funds required for deposits to purchase. On an average property value of £275,000 this would mean finding a 25% deposit of £68,750 per property. That is a lot of money to find. The stamp duty and other purchase costs such as solicitors’ fees could easily bring that figure up to around £80,000.

Rent-to-rent operators often give the landlord the normal rent they would get for a single let, then rent the property out as an HMO or even as serviced accommodation if the area proves suitable, keeping the difference of the uplift in rents received (less expenses of course).

Let’s consider some of the most frequently asked questions about this strategy - and the answers!

How Much Profit Can You Make With Rent‑to‑Rent?

The basic premise of rent-to-rent is that you pay the property owner a set amount per calendar month (PCM) and then rent the property to tenants, often on a room-by-room basis as a multi-let or HMO (house in multiple occupation) for higher returns, keeping the difference.

Single lets versus Multi lets

Figure 1: Example rent per calendar month (PCM) for single let versus multi let

For example, a landlord may be renting out a 3 bedroom house as a single let generating £1,000 per month. The rent-to-renter could let out the property as an HMO with four lettable rooms (assuming a self-contained lounge is used in addition to the 3 bedrooms at £500 per month each) giving total returns of £2,000 PCM, as shown in Figure 1. If there is a second reception such as a separate dining room, then potentially five rooms could be let, giving a total rent of £2,500 PCM.

The landlord may be happy to receive £1,000 per month, or less if you can guarantee the rent. You will have some expenses, taking responsibility for the utility bills and council tax, which could be £350 per month, and keep the rest. So your net profit per property could be between £650 - £1,150 per month.

Types of Rent-to-Rent Contract

There are various forms of rent-to-rent agreement, depending on the circumstances of all parties. These include:

  1. Guaranteed Rent – Management Agreement

    This may be preferable where the property owner has a mortgage as it is effectively no different from a letting agent’s guaranteed rent agreement.

  2. Commercial Lease Option Agreement

    If there is a mortgage lender, check if this is allowed. Otherwise a commercial lease agreement could offer the best type of contract, as the clauses and terms can be very flexible.

  3. Assured Shorthold Tenancy (AST) Agreement

    This is NOT normally advisable, as it means that your rent-to-rent arrangements would amount to sub-letting, which may be contrary to the owner’s mortgage conditions.

Why Would Landlords Agree to Rent‑to‑Rent?

There can be many reasons why a landlord might agree to such an arrangement, including:

  • Guaranteed rent is perhaps the biggest attraction for landlords, as they know they will receive a reliable, fixed sum each month.
  • Rent-to-rent agreements are often for 3 to 5 years and this can suit landlords who want to own their assets for the long term without having to give it more thought. The longer the agreement, the greater the peace of mind.
  • The landlord may put a high value on the fact that rent-to-rent allows them a passive income, without the usual landlord concerns.
  • The landlord may have experienced problems renting out their property in the past, which they are keen to avoid in future.
  • They may be physically or mentally tired of the strain of being a landlord.
  • The property may be in a poor state, which they may not have the funds or energy to repair.

As a landlord, it’s important to consider all of your options carefully and whether rent-to-rent would be right for you. There is a huge level of trust involved with handing over control of your properties and it is important to know that you are dealing with a professional individual or company.

As a rent-to-rent operator, you absolutely must let the owner know of your intentions when you agree to manage the property. The landlord needs to ensure the property is covered by suitable insurance and that they are not in breach of their mortgage if the property is to be let as an HMO (house in multiple occupation). Some properties (particularly flats) may have covenants stating that they must only be occupied by single family units and must not be sub-let.

Scaling-Up Your Rent‑to‑Rent Business

Although this strategy can be started with very little money when compared with buy-to-let for example, be aware that you will need to budget for any necessary adaptations to the property – such as fire doors for HMOs, furnishing and so on; as well as paying rent to the landlord – so you will need some funds to get started. Read The Complete Guide to Property Strategies to find out more about the costs and the Top Ten Things That Can Go Wrong for rent-to-rent operators!