Why rent-to-rent is no substitute for a good letting agent
Rent-to-rent is a controversial approach to letting a property. While years of consistent rent might be appealing to some landlords, it's not without its problems. Find out why rent-to-rent is no substitute for a good letting agent in this post.
Property investing used to be the preserve of the well-to-do. Cash-rich investors would buy a home, rent it out, and sit back as its capital value rose higher than a penthouse apartment on Park Lane. Then we had the buy-to-let boom of the late 1990s and noughties. All investors needed were fat deposits and Robert’s your father’s brother.
However, there was (and still is) a way to make money from property even if you don’t have two pennies to rub together: rent-to-rent. It’s made some people very rich indeed. But it’s also left a lot of honest landlords, not to mention tenants, out of pocket and wondering what on earth happened.
What is rent-to-rent?
It’s controversial. That’s what it is. Whereas letting agents let and manage a home on a landlord’s behalf in return for a proportion of the rental income, ‘rent-to-renters’ sign a tenancy agreement with the landlord and then sublet the property to a third party. It’s not illegal, as long as the rent-to-renter has the superior landlord’s permission, but it’s not exactly ideal, either. The number of YouTube videos promoting ‘get rich quick’ rent-to-rent schemes is probably the giveaway.
What’s in it for the rent-to-renter?
It’s all about money, pure and simple. They’ll scour the market looking for undervalued properties, pay the landlord a slightly below-average rent in exchange for a longer tenancy (usually 3 to 5 years), and then let the home at a higher rent whilst pocketing the difference. It’s basic economics: the intermediary pays the superior landlord, say, £800 per month, but then sublets the home for £1,000 per month to make a £200 per month profit.
Even more lucrative opportunities arise if the intermediary applies for a Houses in Multiple Occupancy (HMO) licence and lets the home to multiple third parties. Suddenly, that three-bedroom family home with two reception rooms in Penny Lane becomes a pound-for-pound more lucrative 5-bedroom moneymaking machine.
None of this is great news for the tenants, of course. They’re crammed inside a home built for a small family with their own individual tenancy agreement. The rent-to-renter, meanwhile, laughs all the way to the bank. And they sometimes make even more money if they let the home on short-term let platforms like Airbnb.
Why landlords are tempted
Landlords are lured in by the promise of consistent rent for 3-5 years without the hassle of finding tenants, the risk of void periods, or the need to manage the maintenance of the property (rent-to-renters normally handle wear, tear, and small repairs themselves). And then, at the end of the agreement, their home will be returned to them in the same condition - although, thanks to capital growth, it could be worth about 20% more than it was at the start. Yippee.
Although the superior landlord accepts a slightly lower rent - well, you can’t have everything - this is more than offset by the security of guaranteed rent for a good period of time and ostensibly lower risk: if the occupier falls into arrears, or the property is empty for an extended period of time, then it’s the intermediary’s problem.
Rent-to-rent therefore allows superior landlords to put their feet up while the money rolls in. They don’t even have to give up a proportion of the rent to a letting agent. All they have to worry about are major structural problems - although the exact terms depend on the precise agreement reached with the intermediary.
What can go wrong?
Sadly, if something looks too good to be true then it probably is. Although local authorities often sublet homes to families and homeless people struggling to find accommodation in the private rented sector, intermediary property management companies and private individuals aren’t so reliable. In fact, evidence suggests that there are at least as many unreliable rent-to-renters as reliable ones.
There’s another big problem, too. Once a landlord signs their property over to a rent-to-renter, they have very little control, and very little idea, over what’s actually happening in the home. And this can lead to legal troubles. Rent-to-rent agreements can be extremely complex, and although the intermediary has the responsibility to comply with the Housing Act, serve all the necessary statutory information and carry out due diligence checks and referencing, there’s no guarantee that they’ll actually do this.
HMOs can be problematic as well. Rent-to-renters wishing to maximise their income this way require an official HMO licence. But can superior landlords rely on the intermediaries to comply with the law? Recent news headlines suggest not. Finally, insurance can be more complicated when a rent-to-rent agreement is in place. Most landlord policies, including that all-important buildings cover, require the occupier to be a direct tenant of the policyholder; therefore it’s wise for superior landlords to explore professional indemnity options. It’s better to be safe than sorry.
Who is liable for problems?
Now, this one is very controversial indeed. In fact, it’s just been the subject of a high-profile court battle. Seven years ago, landlord Martin Rakusen rented his London flat to a rent-to-rent company called the Kensington Property Investment Group, which then let it to multiple tenants. However, the intermediary never obtained the correct licence; therefore the unhappy tenants applied for a Rent Repayment Order (RPO) against Rakusen, the superior landlord.
Although the courts initially ruled against Rakusen, the Supreme Court has just ruled in his favour; therefore, only the direct landlords - in this case, the rent-to-rent company - will be responsible when problems like this arise. This means superior landlords are off the hook for problems they might know nothing about. Phew. However, tenant groups are less than impressed. After all, unscrupulous rent-to-renters often disappear when the troubles arise, leaving tenants with no recourse.
Although it’s just one case, and responsibilities are often determined by individual rent-to-rent agreements, the Supreme Court’s decision should set a powerful precedent. It’s worth remembering, however, that although Rakusen eventually got the decision he wanted, the legal wrangling and hassle make the whole episode incredibly stressful.
Be careful
Basically, rent-to-rent is a trade-off that landlords can make: a slightly lower rent in exchange for less hassle, less responsibility, and a lower risk of void periods. And sometimes it even works out - if you’re lucky enough to find a responsible intermediary.
However - and it’s a big ‘however’ - the chances of getting into bed with a rogue are relatively high. In fact, figures issued by the Property Redress Scheme show that the rising level of rent-to-rent arrangements coincides with an increasing number of complaints they’ve received.
Consequently, our advice to landlords is this: stick with a traditional letting agent. After all, a letting agent is on the landlord’s side rather than just trying to make a quick buck. Agents also, by law, offer a high duty of care to landlords and act in landlords’ interests at all times.
However, if landlords do find the attraction of rent-to-rent too much to resist, advise them to be careful: get everything in writing and agree precisely who’s responsible for what. Tell them to consult a solicitor, too, and consider adding a break clause into the contract.
Doing due diligence is also all-important. Look up the rent-to-renter on Companies House if they’re a limited company, and credit check private individuals on TrustOnline. If it looks like a rat, walks like a rat, and you smell a rat, then you’ve probably got a rodent on your hands. And pest control won’t be particularly helpful if the rent-to-renter’s done a runner.