Strategy Two: Rent To Rent
Rent to rent has become more popular as a property investment strategy in recent years. With rent to rent – sometimes known as R2R for short – you rent a property from an owner then rent (or rather let) it out to tenants. Here we will look at how rent to rent works and how to operate it effectively and professionally.
The advantages of rent to rent
Rent to rent can earn you a regular rental income, just as with buy to let. The big difference is that you do not have to buy any property, so you do not need a mortgage, a mortgage deposit nor to pay Stamp Duty. Rent to rent is a ‘control without ownership’ business model.
Rent to rent does not involve you in any long term ownership commitment. Nor are you exposed to the risk that property values will fail to rise over time, or even fall.
As there is no ownership there may be tax advantages with rent to rent, ie. there are no Section 24 issues nor Capital Gains Tax.
The disadvantages of rent to rent
With rent to rent you do not benefit from any rise in property prices, ie. capital appreciation. (Although in an uncertain market this might be an advantage.)
With rent to rent you will be taking on a commitment to pay rent/overheads without any guarantee that you will receive rental income in return.
Generally a rent to rent will take more time and effort to set up, and to manage, than a standard buy to let.
Different types of rent to rent strategy
Simple R2R. You rent a property from an owner and then let it out to one tenant, eg. one person, a couple or family. Your profit is the difference between the rent you pay and the rent you charge.
Rent to HMO – or R2HMO. You rent a property from an owner and then let it out as a house in multiple occupation, ie. to several unrelated tenants, room by room. This might be an existing HMO, or a property which you convert into one. Your profit is the difference between the rent you pay and the room rents you receive.
Rent to serviced accommodation – or R2SA. You rent a property from an owner and then let it out as serviced accommodation on a nightly or weekly basis, ie. a hotel style operation. This might be to business travellers or tourists for example. Your profit is the difference between the rent you pay and the total of the nightly room charges each month.
To get started in rent to rent you will need:
- To do initial research to find an area with good demand for rented accommodation, HMOs or serviced accommodation.
- To find a suitable property to rent.
- To negotiate a R2R arrangement with the owner.
- To find suitable tenants.
- To set up an ongoing system to manage your rent to rent.
Key rent to rent skill: Research
It is important to research each area and each property you are interested in thoroughly. Check what demand there is for the type of R2R you are thinking of. Check the rent, room rents or per night rates you will be able to charge and the likely expenses involved. Check out the area, the local planning situation and any licences that may be needed.
Key rent to rent skill: Negotiating
With R2R you’ll need to negotiate a deal with a property owner that is attractive to them but also profitable to you. As well as the rent you’ll need to decide issues such as length of the tenancy and who pays for maintenance.
Property owners who agree to R2R arrangements are generally attracted by the opportunity to earn a guaranteed rent for an agreed period and not having to manage their property themselves. In return for a guaranteed rent they will need to let to you at a discount on the market rent.
Key rent to rent skill: Adding value
Adding value to a property and maximising its potential so that the rent you are able to charge is much more than the rent you pay is perhaps the most important skill with R2R.
Example: You find a four bedroom house where the owner does not want the responsibilities of being a ‘hands on’ landlord. The asking rent is £1,000 pcm but the owner is willing to accept £700 pcm on a guaranteed rent basis. You improve the presentation of the house, and market and manage it more professionally. You find a tenant willing to rent it for £1,200 pcm. Your gross profit before expenses is £500 a month.
Example: You rent a four bedroomed, two reception room house for £700 pcm. You convert it into a six room HMO (subject to it being suitable and the necessary consents) and rent it for £110 per room per week including bills. If fully let your gross profit before expenses is £110 x 6 x 4 = £2,640 - £700 = £1,940 a month.
Information and resources you will need for rent to rent
Letting agents can provide information about rents and demand in local letting markets, whether for single family accommodation or HMOs.
Hotel booking sites can provide information about likely nightly rates, for R2SA.
Lawyers can provide advice about rent to rent agreements with property owners, and about tenancy agreements with your tenants.
Online tools and resources: There are online tools and resources which can help you research properties, areas, estimate likely profits and manage your rent to rent properties.
PaTMa Property Prospector can help you find properties in your chosen area. It can help you to estimate likely rents, and show where the highest rents and best rental returns are to be had across the country. It can compare several possible properties back-to-back. It can help you manage and track your shortlist of possible projects.
Property Prospector works across a range of scenarios including buy to let, R2R, flip and renovation projects.
PaTMa Property Manager can help you create and manage tenancies, manage repairs and maintenance, manage rents and expenses and help ensure that your property (or even an entire portfolio) remains profitable.
Rent to rent investment – step by step summary
Decide what type of rent to rent opportunity is likely to suit you, eg. simple R2R (lower time commitment) or more advanced (more time commitment).
Identify which areas you could operate in. Research those areas.
Identify properties you could rent to rent. Create a shortlist.
Check and compare the likely rents, room rents or nightly rates you could charge and other expenses to find the most profitable rent to rent opportunities.