Rent to rent is when a tenant rents out a property and then sublets it for a higher rate than they’re paying creating a small profit margin.
Rent to rent is a term used to describe a particular get rich quick scheme that involves leveraging someone else’s property to create profit. However, rent to rent has high risks, and implementing it may well be illegal. In this article, we take a look at exactly what it is, and why landlords and budding property investors need to be careful.
Rent to rent is essentially when a tenant rents out a property and then sublets it for a higher rate than they’re paying, thus creating a small profit margin.
Often these tenants believe they are operating legally, and see themselves as releasing the maximum potential of a property.
The truth is not so simple. Rent to rent can quickly go wrong and leave the unsuspecting landlord out of pocket, the renter in arrears or with an eviction on their record, and may even violate mortgage terms and invalidate landlord insurance.
Rent to rent can work in a couple of ways, however, ultimately, the strategy employed has to allow the tenant to charge a premium on the rent amount, and often the actual landlord involved isn’t even aware of what is happening. One common method used is for the tenant to rent out an HMO then sublet each of the rooms individually at a premium. A second is renting a fixed-term residential let as a holiday let thus securing the premium rates that come with holiday rentals.
However, there are several things that can and often do go wrong with these strategies. If the tenant misjudges the rates they can charge they’ll have higher vacancy rates, if they undercharge or if they misjudge demand in the area for holiday properties, their margin may not cover their costs. With high overheads, any small miscalculation could see the tenant losing money or even end up unable to pay the actual landlord who may then need to go through an eviction process. A process that could be even more complicated than normal because the landlord doesn’t actually have any contact or a contract with the tenants currently living in the property.
More often than not, rent to rent is in fact illegal. Most Assured Shorthold Tenancy Agreements (AST) specifically exclude sub-letting without express consent with a clause such as:
“The Tenant hereby agrees with the Landlord not to sublet or part with possession of the property.”
By subletting rooms and not themselves occupying the property they are in breach of a legally binding contract.
It is vital that landlord insurance also represents the risk. HMOs are generally not covered on a standard landlord policy which would more than likely lead to any claims being declined. Many insurance companies will also insist on an AST between the landlord and tenants/occupants and the insurance will also specify that there is no subletting.
The long and the short of it is anything outside of the “normal” process of letting a property could invalidate your insurance, now imagine you have a claim for fire and your insurance is invalid, maybe that guaranteed rent wasn’t such a good idea.
HMOs are subject to a different regulatory regime where the landlord is required to obtain a licence from the Local Authority. There will be greater demands on facilities such as toilets, showers, kitchens. The property may require a significant amount of capital expenditure to make the buildings suitable for multiple occupations.
This is not withstanding the fact that the fire safety requirements for an HMO are far greater than for a single let in the same property. If the subletting tenant decides to rent out individual rooms in a property, not only are they opening themselves up to higher costs around marketing and management as well as increased wear and tear and vacancies, they will likely be in breach of HMO regulations.
In addition, it is ultimately likely to be against the conditions of a landlord’s buy-to-let mortgage, which means in theory the buy-to-let lender could call in the loan resulting in the forced sale of the landlord’s property.
Some properties are more appealing to rent to rent tenants than others. For example, larger properties in metropolitan areas are perfect for subletting to multiple tenants.
The best way to safeguard from having this happen to your property is to first ensure you have a thorough application and referencing process. If they’ve done this before previous landlords should be able to inform you. You should also be able to look at their individual employment and income history.
Secondly, make sure to have a high-quality and legally binding tenancy agreement with a clause stipulating that subletting is not allowed.
Thirdly, you need to run regular routine property inspections of the rental property. This should allow you to see how many people are really living in the property. This is always a good practice, whatever property you are letting out.
Rent to rent isn’t particularly profitable, has high risks for both the tenant and the actual landlord, and could see the tenant on the wrong side of the law. Landlords need to be wary of anyone looking to sublet for this reason and should always go through a rigorous tenant referencing process to ensure they secure the best tenants for their property.
Finally, landlords should use a property management tool like Landlord Studio to track leases, schedule reminders for important dates such as routine inspections and gas and electrical safety checks, and of course, stay on top of their finances with our award-winning income and expense tracking tool.