Are you wanting to get into property letting, but simply don’t have the funds buy a property or get a mortgage?
The Rent-to-Rent strategy could be for you.
In this article, we’ll be talking about the rental investment model – rent-to-rent and the pros and cons behind it so that you can make the best decision for your new property venture.
What is Rent-to-Rent?
Essentially, rent-to-rent, or R2R, is where you pay rent for a property to an existing landlord, then rent it out further to another tenant, in order to make a profit.
To put it another way, you’re taking control of the property and acting like the landlord yourself – as if you are the owner.
With R2R, the landlord (owner of the property) is happy that they are being paid guaranteed and hassle-free rent from you, while you take on the greater risk of managing the property for profit.
How does it work?
Usually when you rent a residential property for yourself, you can expect to be contracted for a 6, 12, or 24-month period of time. However, with the R2R investment strategy, you’ll be expected to commit to the rental for longer-term, around 2-5 years, as it benefits your landlord better.
When you have secured your new rental property, it’s up to you whether you decide to rent it out on a short-term or long-term basis.
Both rental options have great advantages over each other, however, if you’re wanting to maximise your profits, we’d recommend listing your rental short-term on letting sites such as, Airbnb, Booking.com or other booking platforms.
If all goes well, it’s a win-win situation!
The Landlord’s benefits of R2R:
You might be thinking, why would a landlord rent out their property to you if you’re going to rent it out and get extra profit on top? Surely, they could do that themselves!
Well, truth is, there’s many reasons why a landlord would benefit off of the R2R strategy. Although, you’ll need to know them in case they could do with some convincing.
By renting their property to you, they won’t have to worry about:
- Gaps between tenancies; you’ll be legally bounded (contracted) to paying the rent regardless of your occupancy rate.
- Bills and other costs of ownership (council tax, buildings and contents insurance etc)
- Maintenance and repairs (to a certain degree)
- Multiple tenants not paying (unless you don’t pay!)
For the landlord, allowing you to manage and take over their property, allows them to sit back, relax and allow their income to flow passively because you’re agreeing to take on full responsibility.
This differs from the landlord handing over the property to a rental company to manage because they are solely responsible to cover the costs listed above, even if the management company haven’t secured the property’s occupancy yet.
The Benefits of Rent-to-Rent
The obvious benefit about the R2R approach into property is that it’s renowned for its low startup costs.
So, we’ve dived deep into what costs you’ll be saving on with this particular investment strategy below:
- No Mortgage
Normally, to get on the property ladder and buy a house, people opt for the mortgage route (unless they have the money to buy the house outright).
A mortgage is a loan from a lender, a bank in most cases, used to purchase a domestic property. In turn, an agreement will have been formed that you (the borrower) are required to pay back the loan over time plus any additional interest. If you fail to meet the agreed repayment, the lender is given the right to possess your property from you.
Often to receive a mortgage loan, you’ll be assessed on attributes like your initial deposit, income stability and credit history. You could also find that you have the money to afford a mortgage but could struggle to find a lender willing to help you out if you haven’t passed the assessment.
R2R allows you to generate an income within the property industry without having to undergo assessment and ask for financial help.
- No huge deposits
Following on from mortgages, in order to be accepted for a mortgage loan from a bank, you’ll need to be able to provide an initial down payment or deposit.
Generally, your deposit will be around 20% of the property’s price that you want to purchase in the UK. For example, if you are looking at a specific property with the asking price of £200,000, then your deposit will be £40,000 in order to prove to the bank you are eligible for a mortgage loan.
This is turn, making R2R an attractive strategy for low startup costs for people with limited funds.
- No legal costs
As you’re not buying the property, you’re only renting – you won’t have to pay heavy legal costs like stamp duty.
However, it would be in your best interest to hire a solicitor to draw up an agreement or contract between you and the original landlord to avoid any issues that could arise later on.
As a side note, you’ll find that the process of getting on board with renting to be a lot faster than if you were to buy your own property to let out. This way, you’re looking at starting your R2R venture within a matter of days rather than months.
The Downside to Rent-to-Rent:
So far, using a R2R strategy sounds pretty promising, but let’s take a look at the downside of it.
- Zero Capital Growth
We’re fairly sure you’ve already heard the term, “rent money is dead money”, because you’re paying a big sum of your earnings to someone else for temporary accommodation.
This particular saying doesn’t exactly adhere to R2R, based on the fact that if done correctly, you’ll be walking away with the profit. However, because you don’t own the house, you won’t be able to cash in on any of its future capital gain (the value of the property over time).
You may be fine with this negative aspect of R2R because It will allow you to progress within the property realm with minimal set up costs and in turn, you’ll be able to achieve profitable financial results, quickly.
Yet, you should be aware of the hypothetical facts and figures we’ve shown below:
If you were profiting off of your R2R rentals at a consistent rate of £500 a month, within 5 years, you’ll have made a profit of £30,000 in exchange for looking after the property and taking on all ownership responsibility – a huge bonus!
On the other hand, if the property’s capital value currently stands at £250,000 and the capital value increases by 5% every year for the next 5 years, the landlord would have accumulated £62,500 on top of their original £250,000 buy (capital value after 5 years = £312,500), without having to do anything at all.
Capital growth is one of the many benefits to owning a property in comparison to renting, as it’s highly likely that the property’s value with inflate over time – hence why most people desire to be on the property ladder sooner, rather than later.
In other words, you could be making more money, should you own the property yourself and decide to hold on to it for a few years to resell.
On the upside, it is possible for a property’s capital value to dip, which is a risk you won’t have to endure when renting.
- High risk
Like we briefly mentioned earlier, you will take the responsibility of the property owner when it comes to bills, maintenance and occupancy (gap between tenancies).
It also means that even if you find yourself with no bookings and lots of maintenance work to do, you’re still legally required to pay the rent to your landlord.
- No control
Unfortunately, you don’t have the last say on what happens with the property, as you aren’t the lawful owner.
You may well have invested your money into setting up, managing and maintaining your rental using the R2R strategy, but you are subject to losing control if problems arise from the landlord.
For example, if your landlord has a mortgage and stops repaying their mortgage loan, it can become detrimental to your R2R business. It would potentially mean that the property is repossessed by the mortgage lender (I.e., the bank) and you’re no longer in business – that’s a hard one to tell your guests!
Or, your landlord could decide to take legal action to remove you from the rental agreement for property sales purposes, or simply because they have reason to believe you are not cooperating with any legalities currently in place.
It’s unlikely for any issues with your landlord to come up, especially if you take our advice to seek professional legal advice from a solicitor to help draw up any arrangements and agreements.
Our final say
It’s apparent that the R2R strategy is a great and useful investment tool for a quicker path into the property realm which allows you to generate some fast cash, if that’s your goal.
Although, like we mentioned above, if you’re hoping to make a big capital return on a long-term prospective, then it would be more beneficial to own the property yourself to accumulate any capital gain over time. Not to mention, its risky financially if you don’t succeed.
A lot of time and effort will be spent when you’re renting out your property for letting. Whether or not you own the property, or if you’re using the R2R strategy. If you’re willing to put in the work and it’s one of your only options into property, then it can be a great business tactic to use, if you do it right.
Hopefully by now you’re more informed on the pros and cons to the R2R strategy and you can make the best decision for you.
If you need more help and assistance on how to manage or benefit from the rent-to-rent marketing strategy, get in touch with one of our experienced professionals over at Keey.