Rent to rent property investment guide

For us and through our experience a rent-to-rent property investment strategy isn’t really a path anyone should stick to as eventually your goal is to own the properties you invest in. It is like sub-letting but with full agreements and management contract agreements with the owner.

However, it is a great way to learn lots of basics to finding and running a property investment deal. For this purpose, we can see a small amount of value in it for someone who really wants to learn the ropes of buy-to-let but has no or little money to get started.

Eventually you will want to take everything you learn from this strategy and use it on property that you purchase yourself.

 

What is a rent to rent

Rent to rent is a strategy where you rent someone’s property to just rent it out to someone else for more, skimming the extra rental income for yourself.  This can leave margins very tight, however there are scenarios where you can make this margin far more profitable with plenty of profit. This in most cases in done in 2 simple ways…

 

• You guarantee the owner a rent that you will be them no matter what. This guaranteed rent is an easy option for a property owner as they will make the money without needing to do anything. By doing this you can offer below the market value for the rent.

 

• Run as a Serviced accommodation or HMO – These 2 strategies, for example, can offer much higher rental income than a standard residential letting, leaving even more money in the rental income for yourself.

 

As a Rent to renter, you will sign a contract with the property owner to give them a guaranteed rent and likely on an FRI lease. This will mean you are responsible for everything. FRI lease…

 

How to invest in a rent to rent

Below are the basic steps in starting a rent-to-rent strategy…

 

1. Research the market

The key to a successful investment is research. You will need to find the right area that needs a certain type of property. This could be a student location with undersupply of HMOs, or it could be a holiday location popular short-term-lets.

There are lots of ways of conducting research…

• Search local listing for rental properties
• Go and ask estate agents on demand
• If it’s a short term let your looking at, walk into a hotel and ask their seasonal availability
• Work out what kind of market the local area has, is it a student town, is it a staycation location or is it neither of these.

2. Find landlords / estate agents open to rent to rent

Not all property owners may be open to a rent-to-rent strategy, mainly due to the fact that it is like sub-letting which has had a bad name for a number of years, with only the worst stories being told.

Learn how to ask the question and make it clear that you are willing to take all the work from the owner. The area may not be used to rent-to rent properties and therefore the owner may have never considered it.

Maybe even state your case as to the value you can add to the property. Maybe you will carry out some minor work such as painting and repairs yourself, to increase its rental value, benefiting yourself and the owner.

3. Make offers

Start making offers but make a lot of low offers. Although you may get rejected with low offers if you play a numbers game you may eventually come to a very good agreement. Make sure the offers are on certain conditions and not set in stone, as once you have some form of agreement in principle you will need to carry out a lot more research before signing the dotted line.

4. Final due diligence

Once you have come to an agreement on a property you will want to carry out further due diligence before making the deal official. As this is likely to be on an FRI lease you will be responsible for property repairs, for this reason may even have surveys of the property conducted, to make sure there are no major hidden issues that you need to fix.

Although you are not buying the property you essentially want to make all your due diligence on the property as in-depth as you would when buying a property. This doe s 2 things…

1. Provides you greater peace of mind that you can make this deal work.

 

2. Gives you experience on how to do this for future properties that you will invest in yourself when you reach that stage.

Now that you know the property, you can also research the rental values on the exact type of property you have, and can make direct comparisons, getting to know your competition and possible occupancy rates. At this point you will know with greater accuracy the potential rental values to be made per annum.

Tips:

• Put In a break clause to break contract after say 3 months in case it doesn’t work. As long as you’re upfront with the owner and make this part of the agreement then there shouldn’t be any issues in abandoning the deal.

 

• Know the value you can add. Make sure you can add value beyond the rental payment you are paying. If you can’t, then it just wont work. This value can come in the form of running it as a short term let, or maybe making some improvements.

 

• Look at the worst-case scenarios. Make sure you can handle the worst-case scenario, which will likely be you can’t get a tenant and have to pay rent to the owner for several months. This is not a devastating financial loss but could be a few thousand pounds. So have this money as extra cash that you are willing to risk.

 

• Special contract agreement to manage the property. If the owner does not know you are renting the property to someone else, then they can take legal action. Make sure everything is in the open and the owner knows your intentions, with everything clearly stated in the contracts.

 

Pros and Cons

Pros

• Teaches you property management
• Can start with little money

 

Cons

• An active investment strategy meaning you will need to spend time on this
• Less money to made than if you owned a property as you and the owner are taking a cut.