Rent-to-rent is the newest buzzword in property – with many claiming it to be the answer to making quick money. While there is a raging debate on rent-to-rent being a great way to make a profit, others allege that the instant income claims are grossly exaggerated.
So, is this hottest topic in the real estate industry even legal, or is the promise of quick profits blown out of proportion. Let’s find out in this definitive guide to rent-to-rent.
What is Rent-to-Rent?
As the name suggests, rent-to-rent is renting a property from a landlord and then renting it out to tenants. Although you don’t actually own the property, you profit by giving a lower guaranteed income to the landlord and collecting a higher rent from the tenants. The landlord gets a hassle-free steady income, and you will gain a reward in the form of profits for putting in the effort and risk of up-keeping the property.
The Benefits of Rent-to-Rent
So far, it sounds like a win-win situation for both the parties involved, right? Continuing in the same vein, let us look at some other benefits of rent-to-rent.
No Stamp Duty:
Since you are not buying the property, you don’t have to worry about Stamp Duty. Although you might engage a solicitor’s services to put up an air-tight agreement, it is not going to cost you as much as buying a property would. Moreover, it might take you only a few days to draw up an agreement for rent-to-rent, while a full-on deal will leave you in property legal for months on end.
As mentioned already, you are only renting the property to tenants and are not purchasing the property. So the question of mortgages and deposits doesn’t arise. Yet, mortgages can be a great leveraging factor in real estate. But everyone is not qualified to get a mortgage. In case you don’t own a property, or you are new to the country, or your credit history is not sound, or your earnings are shaky, you won’t be able to secure a mortgage. That’s why rent-to-rent helps you generate passive income despite these shortcomings.
If you are buying a property with a mortgage, you will be expected to put at least 20% as a deposit. Since you aren’t buying the property in rent-to-rent, you don’t have to worry about putting in a deposit. This is where rent-to-rent is advantageous for people with limited savings. For instance, as a bachelor, you only have about £5000 or £10,000 in the form of savings. This amount won’t be enough as a property deposit. However, you could still be able to fund a few rent-to-rents easily.
The Drawbacks of Rent-to-Rent
While most of this sounds great, there are, of course, some drawbacks you should be aware of.
If your landlord failed to pay their mortgage or changed their mind regarding rent-to-rent. you will find yourself in a desperate situation. At best, you might be out of money, or at worst, you will be in a tricky spot with your tenants. Either way, you will have way less control over the situation.
Risk of Property Ownership
While your landlord has a guaranteed monthly income with little or no effort, you cannot afford to have gaps in tenancies as a property renter. Regardless of the gaps in occupancy, you have promised the landlord a steady rent from your end. Again, even if the tenants aren’t paying their rent on time, you would still have to pay your landlord promptly. All these become your responsibility, and at times, you won’t have much control over some of these situations.
One of the perks of owning a property is enjoying its capital growth. Since you don’t own the property, you don’t gain from the rise in property value. For example, imagine you are making a solid £400 per month on a rent-to-rent agreement. Over 5 years, you can make £24,000. Sounds impressive, right? Now let’s consider another situation, you own a property worth £25 00,000, which grows at 5% in value per year. At the same 5 year time period, as a landlord, you will see a value increase of £690,703.
Capital growth is one of the main benefits of owning a property, and the overall gains far outshine any rent you might get. So, if you have the capital funds to buy a property, it is always a sensible thing to do. However, if you are dealing with a cash crunch, then rent-to-rent can help you generate a passive income.
Making Money from Rent-to-Rent
The first point in making money from rent-to-rent is renting out the property to a higher rent than the amount you are renting it for. And you also can’t rent it out for far higher than the market rate. Well, you should maintain a delicate balance between the two if you want to make a profit.
Single let will only work if you can strike a hard bargain with the landlord to accept a rent lower than the market value. Since the landlord is not dealing with the usual risks and trouble of renting, you can get a good bargain. If the market rent is about £500, and you get the landlord to accept £400 per month, then you can make a quick £100 profit on the property.
Convert the property into an HMO
You will make more money if you rent the property to multiple sharers instead of letting the entire property to a single-family. You will pay the landlord the rent from a single let and profit from the other sharers. Of course, you will be incurring higher upkeep and set-up costs than you would in a single let set-up. You’ll need to be aware of any mortgage violations and licensing issues too.
Rent the property as a serviced apartment
If you rent the property as a serviced apartment, you can earn weekly or daily income. Of course, you would have to provide cleaning, furniture, and linen too. Depending on the property’s location, you can think of renting it out on a short or long-term basis. You can make a profit if you keep your overall costs under control and ensure the property is occupied for enough nights to cover the expenses.
Factors to Consider in a Rent-to-Rent Deal
Points you’ll have to consider before signing the rent-to-rent deal.
- Establish demand for the property before you venture with the rent-to-rent agreement.
- Find out about the current market rent.
- Assess the property to determine how much you might have to spend on maintenance, set-up costs, repairs, and other bills.
- Take the decision only after calculating your net income after deducting the maintenance expenses.
- Work out your break-even or payback period. It would help if you had a good idea about your payback period. That is the time when you have recovered your initial set-up costs and have started earning a profit.
Finally, rent-to-rent is a reasonably easy way to make a quick profit with little investment. Of course, you’ll have to invest time and effort in this, and yet you don’t benefit from capital growth – since you don’t own the property. However, once you set the system up, you can generate passive income – and build your portfolio. If you have any query please call us on 020 3500 2646.