Are Rent to Rent Schemes a Good Idea for Landlords?

Rent to Rent, also known as ‘guaranteed rent’ or ‘rent to serviced accommodation’ (R2SA), involves renting a property at one price and then subletting it at a higher price.

A person or a company (i.e., an ‘operator’) rents a large property from a landlord, often offering to pay above market price, and then divides it into multiple rooms to rent individually.

This method allows the operator to maximise occupancy and profit by renting out each room separately.

1. What are the benefits for the landlord?
2. What are the risks?
3. 10 signs you’re being approached for a Rent to Rent deal
4. If you want to get involved anyway…

What are the benefits for the landlord?

Operators use several seemingly attractive benefits to draw landlords into Rent to Rent schemes.

They promise guaranteed rental income, regardless of whether the property is occupied or if tenants pay. It’s quite common for operators to offer long contracts, ranging from one to five years.

Operators also assure landlords they will handle any property damage and return it to its original condition, providing peace of mind.

Additionally, landlords are enticed by the potential savings on advertising, management and renewal fees, as operators promise to take on all legal and compliance responsibilities.

Sadly, Rent to Rent usually isn’t the ideal arrangement it seems, as it carries substantial risks.

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What are the risks?

In many cases, Rent to Rent arrangements are illegal as they violate the AST, which often prohibits subletting without explicit consent.

When operators sublet rooms without residing in the property themselves, they breach the terms of the agreement.

Moreover, HMOs are generally not covered by standard landlord insurance policies, which can lead to rejected claims.

Insurance providers often require an Assured Shorthold Tenancy (AST) directly between landlords and tenants, explicitly forbidding subletting.

HMOs are also subject to stricter regulations, mandating landlords to obtain licenses from Local Authorities and meet specific requirements for facilities like toilets, showers, and kitchens, among other things.

Last but certainly not least, it can violate buy-to-let mortgage conditions, potentially leading to the lender calling in the loan and forcing the sale of the property.

10 signs you’re being approached for a Rent to Rent deal

Now that you’re familiar with Rent to Rent, let’s delve into how you can quickly determine if you’re being approached for such an arrangement.

Vanessa Warwick, an experienced portfolio landlord and co-founder of Property Tribes, has shared this handy checklist to help you identify potential Rent to Rent pitches and avoid illegitimate or fraudulent offers.

1. Be cautious if contacted by someone claiming to be a letting agent or middleman for corporate clients, offering guaranteed rent and a long-term contract.
2. Be wary of rent offers significantly above market rates, which are common in such schemes.
3. Watch for signs of rehearsed communication and vague responses regarding contract specifics, as an AST may not be suitable. Be wary of promises like “We’ll handle everything” or “You’ll see consistent monthly rent.”
4. Consider it a red flag if they mention a corporate let where sub-tenants (company employees) will be frequently coming and going. This could signal that the property might be used for serviced accommodation like Airbnb, raising concerns about increased wear and tear.
5. Beware of claims by ‘Rent to Rent investors’ regarding government contracts for social housing or supported living, as such contracts are often misrepresented. Verify the legitimacy of any presented contract online.
6. Ask for their company registration number, years in operation, deposit protection scheme, and number of managed properties. Hesitation or inability to provide these details may indicate potential risks.
7. Ask about personal guarantees from company directors who are homeowners; reluctance or refusal to provide such guarantees should raise concerns.
8. Check their trading history, account filing timeliness, and net assets through Companies House. Newly established companies or those less than two years old may pose higher risks.
9. Ensure they are members of an independent redress scheme like the Property Ombudsman or The Property Redress Scheme. Non-membership could leave you without recourse if issues arise.
10. Ask about any training or qualifications related to Rent to Rent operations, including credentials of those who trained them.

If you want to get involved anyway…

By now, it should be clear that Rent to Rent deals carry multiple risks. As the landlord, you’re still on the hook for adhering to a range of regulations, despite not managing the property actively.

On top of that, the middleman operator could vanish at any moment, leaving you to handle a potentially illegal tenancy that might cost thousands to resolve.

But if you’re determined to proceed with a Rent to Rent deal, there are ways to minimise the risk.

In such an arrangement, the property owner leases directly to the rent operator, rather than simply authorising them to manage the property, as an agent would.

This tenancy won’t be an AST, so a standard tenancy agreement isn’t suitable. You should insist on using a contract tailored specifically for this type of arrangement.

When landlords sign up with a guaranteed rent provider, they’re entering into a commercial contract, not an AST.

It’s crucial to have an independent legal professional review the contract, as some terms may be deemed unfair.

The contract should state that the guaranteed rent provider can sublet the property with your consent. Make sure there’s a break clause in the agreement so you can end it early if you’re not satisfied.

Also, ensure the property is returned in the same condition as when it was provided.

Remember, for a legally sound tenancy with all your landlord duties taken care of, OpenRent is the best tool landlords have at hand.

We can find you excellent tenants, draft your tenancy agreement, secure the deposit, and collect the rent – all following industry best practices, helping you maintain a consistent rental income from your property.

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