Rent to rent is one of the hottest strategies of the moment, (potentially) one of the most profitable and also one of the most controversial.
In this article, we'll take a look at the rent to rent strategy—aka lease to let, aka rent 2 rent—from soup to nuts. And hopefully when we're done, you'll have the knowledge you need to decide whether it's for you or not. Ready?
OK, let's take a step back for a moment...
The HMO (house in multiple occupation) strategy can turn ‘ordinary’ buy-to-lets into extremely high-yielding investment properties, by letting out each room on an individual basis.
You can build a portfolio of these by buying below market value and / or adding value then refinancing and repeating.
There’s a problem with this though:
Imagine you could control an unlimited number of these super-profitable multi-lets with no mortgage, no deposit, and no credit checks.
Well, this can be a reality and this awesome Property Investment Hack is called ‘Rent to Rent.’
For the landlord, HMOs have always been a great, high-yielding strategy. However, traditionally, HMOs have high setup costs—you could expect to pay £100,000 plus for a big enough property to do it with. Then consider the refurb and other setup costs. And that’s if you can even get a mortgage!
The timeframe is waaay too slow. It can be anything up to six months before you’ve bought the place and got it ready for the market.
But what if we could get rid of the downsides of this otherwise great strategy—the big time and money investment?
Well, that’s what Rent to Rent does. It completely removes the need to purchase property in the first place. What’s more, you will normally have little to do in terms of refurbishment and furnishing.
Put simply, you can achieve a much higher rent for a given property than you would otherwise be able to by renting the property as a whole to a single family unit.
For example, a 3-bedroom house might have a market rent of £750 when let to a single family. But, when let as a multi-let for £400 per room, the potential rent could be £1,200—an increase of almost 50%!
Then consider if you changed the living room into a bedroom. You’ve now added an extra £400 onto your monthly cash flow and boosted it a full 100% from where you started.
You can see that you wouldn’t need many of these in your portfolio to become financially free.
The strategy is to approach landlords—either directly or through their agent—and offer them guaranteed rent for their property. This can be very attractive to these types of landlords:
It is not uncommon for investors using this strategy to find a tired landlord who has more than one property that they want to get rid of.
You are offering a landlord something quite compelling:
In exchange for receiving a constant, guaranteed rent in addition to the benefits above, you can negotiate a lower monthly rate. This increases your cash flow even more.
You will want to negotiate a good, long lease so that you get a good return on your initial setup efforts and costs. Two to five years is ideal.
Before letting, you may need to carry out a small refurb to freshen the place up. Or, even better, you can negotiate with the landlord to assist you on this or do it for you. Installing a big TV in each bedroom and fast Wi-Fi internet make the rooms much more lettable.
Your profit obviously comes from the difference between the rent that you are paying the landlord and the rent that you charge the tenants that you will find for the property.
Another nice advantage for you is that you are insulated from any interest fluctuations as the rent is set at a fixed rate.
Apart from the common comment that this strategy sounds too good to be true, another is: ‘Is it legal?’
It’s true that Rent to Rent can be something of a legal minefield, as it’s still not commonplace in the U.K. market. Indeed, most lenders don’t like subletting, but if you structure your deal as a management agreement, whereby you are managing the property for the landlord, then you should be just fine.
Get a solicitor to draw up a contract or management agreement for you, then you can ensure that you and the landlord are adequately covered.
Okay, let’s take a look at an example of a multi-let let as compared to a normal let.
If we had a traditional buy-to-let purchase, we might spend over £25,000 before the place had been bought and was even ready to let. As a strategy, it was good in its day but it’s about time this old-timer threw in the towel!
Now, let’s look at some typical setup costs for a Rent to Rent property. Let’s assume we’ve negotiated a rent of £700 per calendar month with the landlord.
Remember, we should be able to negotiate the normal rent down as the landlord is receiving guaranteed rent with no voids, and we’re doing most of the repairs, regular cleaning, and gardening.
Rent in advance £700
Light refurb £1,000
TV for each room £2,000
Additional furniture £1,000
(Okay, strictly speaking, this strategy does require some money to be invested, but combine it with the JV strategy and BOOM—none of your own money is required!)
So, now let's consider that this house has three bedrooms and a living room, each of which we are going to rent out for £400. Our monthly cash flow will now be £1,600 - £700 = £900.
This means we've spent almost £20,000 less than the traditional example to set up, and we're still earning more than we would if let as a regular buy-to-let, and we don’t even own the property!
Now, just imagine we'd spent all of our initial pot of cash from the first example using the Rent to Rent strategy. We could have set up a full five of these with that money! And that could now be generating a staggering £4,500 monthly cash flow (before costs).
Now that's what I call an investment strategy!
What’s more, with Rent to Rent, you could have had many of those five units set up before the purchase of the traditional one was even completed!
Now, which strategy do you prefer?
Although the cash flow potential is definitely higher with HMOs, the costs are much higher too.
When renting individual rooms, much like the Serviced Accommodation strategy, you’ll find that your tenants prefer it if bills are included. You’ll also find that it is much less hassle to have everything in your name. You may find that tenants are a little less economical with your utilities when you do it this way, but you’ll find that the benefits generally outweigh the disadvantages.
Don’t forget to factor in things like:
Before diving in with this strategy, be sure to do some due diligence on your target area. You need to establish that there is going to be sufficient demand for room rentals. Remember, if there is a low demand and you have one or two rooms unlet for a significant period, then this will knock out your entire profit.
Look for areas with a high proportion of students and / or young professionals. Speaking to letting agents will give you a good guide to your market.
Spareroom.co.uk is a great place to start with your due diligence research.
Here are a few tips to remember when you’re finding and setting up your Rent to Rent properties:
If you have a professional web presence using a specialist Rent to Rent website—like the ones that we provide with Guerrilla Property Websites—you may find that it’s easier to convince landlords to work with you.
By having a section on your site specifically for landlords that answers their questions and perhaps includes testimonials and case studies from other landlords, you’ll find that deals will go through much more smoothly.
You can also use your website to showcase your rooms to potential tenants and answer any questions they may have about your service.
Well, it’s almost all upside, but it’s worth pointing out a couple of things.
You obviously need to follow all the laws about licensing that you would for HMOs—doubly so as you’re doing this using someone else’s property.
Rent to Rent can be a very time intensive strategy, so it is best suited to someone who is cash poor and time rich.
Altaf Patel came to the UK from India in 1997 and built up a letting agency business from scratch. He later branched out to investing and then began experimenting with more creative investing strategies, and as we’ll see, creative marketing strategies.
One of Altaf’s favourite promotion methods is networking on WhatsApp (a messaging app for smart phones, if you weren’t aware). He shares his expertise and what he’s looking for into groups that he’s a member of.
This paid off one time when someone he knew who lived in the street behind him in Forest Gate in London where he lives, contacted him with a referral. They said they knew someone who was struggling with their property and thought Altaf might be able to help. The owner had no money to fix it up and so it had been lying empty for a long time.
The property was a large five-bedroom house with a kitchen / diner. The only problem was that it was rather run down and the previous occupant had been a hoarder and every room was packed to bursting with junk!
This didn’t deter Altaf though: he saw the potential and struck a deal whereby if he could get a five year lease on the property, he’d refurbish the place and pay the owner £1,300 every month.
In all, Altaf spent £15,000 putting in a new kitchen, fitting an upstairs bathroom, roof repairs and a few double glazing units. They filled five whole skips with the junk from the house and Altaf recounts that the garden was so overgrown that when they cleared it, the neighbours on both sides came out and cheered!
Altaf’s original plan was to apply for an HMO license and rent it as a six bedroom property (having converted the living room into an extra bedroom). But Forest Gate is already fairly saturated with HMOs so Altaf knew that getting a license might be an issue so instead of submitting an application and the associated fee, he phoned the licensing department of the local council. They advised him not to waste his money by applying as it wouldn’t be approved at that point in time.
Altaf has instead let the property to a single family for £2,600 per month but intends to re-apply at a later date as the council may change their tune. Still, a gross £1,300 cash flow for a property he doesn’t own and didn’t need to get a mortgage for isn’t too shabby.
£15,000 sounds like a lot of money to spend doing up someone else’s property but when you consider that this investment will be paid off in just under one year, it doesn’t sound so bad! If the property remains rented to this same family for the rest of the term, Altaf stands to make a gross profit of £63,000. This would represent a return on investment (ROI) of 420% over five years!
But if his HMO re-application is successful, Altaf could end up making much more. He estimates each room could be let individually for an average of £550, resulting in a total of £3,300 and a gross monthly cash flow of £2,000.
With the Rent to Rent property strategy, you can take advantage of the superb cash flow potential of the HMO / multi-let strategy but without actually buying the property. You can get set up much faster than you could if you were buying the property and for about a fifth of the cost.
We recorded an excellent interview with a Rent to Rent strategy expert who gives some amazing tips, including some great advice on getting started in property, if you've yet to take the plunge! We’ve loaded the video into the Property Investment Hacking Vault for you here:
For more on rent to rent / lease to let / rent 2 rent, including a worked example of how it works, download my free eBook.
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