Sometimes landlords will get a mysterious message from a prospective tenant. They claim they can rent the property for a much higher price – and even guarantee that the rent is paid on time every month. Even better, they can sign a contract tomorrow.
It sounds too good to be true. But is it? The odds are, this message is coming from a rent to rent operator. But what is rent to rent and should landlords consider it?
This guide will explain everything, with expert contributions from Channel 5’s Paul Shamplina and Robin Stewart of Anthony Gold solicitors.
What Is Rent to Rent and How Does it Work?
The term “rent to rent” can cover a range of different arrangements. It is also sometimes called a “guaranteed rent scheme” or “rent to serviced accommodation” (R2SA). They all share the same basic idea: rent a property for one price, then let it out again at a higher price.
First, a person or company (that this article will call an ‘operator’) will approach a landlord who is advertising a (usually large) property. They offer to pay a bit more than the market price and will be ready to proceed immediately. This can be quite tempting to landlords hoping to reduce the time their property spends empty.
The operator can afford to pay extra because they will then split your property up into as many bedrooms as possible, and then sublet each room on an individual basis. They may even take large rooms and split them into two rooms.
Let go through a worked example to illustrate.
Example of Rent to Rent Deal
A landlord advertises a three-bed house with two downstairs living areas for the market rate: £900. The rent to rent operator calculates they can let each of the three rooms individually for £300 each. They can also turn the downstairs reception rooms into bedrooms, making five rooms in total. Five times £300 per room makes £1,500 a month for the rent to rent operator
The operator can now offer to pay the landlord £1,000 per month to rent the property and still be up £500 per month. That’s £6,000 per year. The operator will have to advertise for tenants themselves but can do this for free via Facebook groups or Gumtree. Since the tenants will be five strangers, this spreads the risk that several of them will stop paying rent at the same time. If they advertise the rooms as short-term lets, they can charge much higher rates and ‘evict’ the tenants if they don’t pay.
The operator offers the landlord £1000 per month, guarantees the rent will always be on time, and offers to manage the property, too. The landlord is excited to achieve £100 per month more than they thought was possible. They also like not having to manage the property day-to-day and so they agree.
What’s the Big Deal?
Rent to rent has a bad reputation. But why? Couldn’t it be an easy way for landlords to maximise their rent without having to manage the property? Sadly not. Many see it as a get-rich-quick scheme. Indeed, there are dozens of ‘property influencers’ out there sharing videos of how they earn thousands every month through rent to rent.
Then there are the horror stories that circulate the landlord forums, of landlords who signed up for a rent to rent offer, only for the operator to pocket all the rent and disappear. This is an inherent risk of rent to rent, as Robin Steward explains.
Landlords Remain Responsible for Criminal Management
“Rent to rent is a risky business model for property owners. The commercial risks are greater than they would be for a standard letting in many ways, because it is very difficult to recover unpaid rent from a rent to rent operator.”
And the risks don’t end there – aside from being plain scammed, landlords who are tempted by these schemes often don’t realise they still shoulder most of the regulatory burdens, even though they are not directly managing their property.
“There are also substantial regulatory risks,” Robin explains. “Despite what any of the paperwork might say, the landlord can never fully hand over responsibility for compliance with the law to the rent to rent operator.”
In practice that means that if one of these operators divides your master bedroom into two smaller rooms without you realising, you could still be on the hook if the new rooms don’t meet minimum space requirements.
Courts Have Little Sympathy for Landlords Tempted by Rent to Rent
In the past, landlords who have gone for rent to rent schemes – and then landed in hot water – have tried to argue that it is the operator who was managing the tenancy, not themselves, who should be prosecuted. But this defence might not hold up according to Robin.
“Where the ‘rent to rent operator’ breaks the law in the way they manage the property, this will often amount to a criminal offence committed by both the landlord and the rent to rent business.
“For most of the criminal offences relating to the management of Houses in Multiple Occupancy (HMOs), the landlord will not be guilty if they can show that they had a ‘reasonable excuse’ for the breach of the law, but the courts have often found that landlords who had passed responsibility for licensing and management to rent to rent operators did not have a ‘reasonable excuse’.”
That should ring warning bells for landlords. Rent to rent properties are the most likely to fall under the strictest HMO licensing schemes. These schemes have tough conditions on overcrowding, facility provision and space requirements; all the things that rent to rent operators like to cut corners on.
Secret – and Illegal – Rent to Rent
We have covered cases where landlords are approached by rent to rent operators who are upfront about their desire to sublet the property. But sadly, sometimes landlords can be a victim of an unlawful rent to rent scam.
The worst case scenario for landlords is a rent to rent operator posing as a normal tenant and signing an assured shorthold tenancy agreement. They then sublet each room of your property and collect rent, without living at the property and without telling their subtenants that it is yours. They may issue dodgy ‘licenses’ to the subtenants which appear to give them very few rights.
There are steps you can take to reduce the risk of this happening to you. If you have a large property and a single tenant is applying to let it, this could be a sign they intend to sublet. Make sure you perform tenant referencing on all tenants, as this will give you information on their credit history and any CCJs. It will also give a previous landlord and employer reference. If they are self employed, find out what their line of work is. If put under scrutiny, chancers may decide to try their luck elsewhere.
If You’re Determined to Get Involved in Rent to Rent Anyway…
By now, it should be clear that rent to rent has multiple risks. You, the landlord, remain liable for a whole host of regulations, despite not actively managing the property. And the middleman operator could disappear at any moment, leaving you to manage a tenancy which could be illegal and cost thousands to fix.
But if you are determined to sign up to a rent to rent deal, there are a few things you can do to minimise the risk, as Robin explains.
“In a rent to rent arrangement the property owner grants a tenancy to the rent operator, rather than simply giving them authority to manage the property on their behalf as an agent. This tenancy will not be an ‘assured shorthold tenancy’ and it is not appropriate to use a standard tenancy agreement. Landlords should insist on using a tenancy agreement which has been specifically prepared for this purpose.”
Right to rent operators have a habit of being very persistent and pushy. They may call you every day they see your property is still being advertised saying things like “I notice you’ve still not found a tenant – I can take the property today”.
Don’t be pushed around. Creating a false sense of time pressure is a classic sales tactic and there’s no need to fall for it when deciding who to let live in your most valuable asset.
Paul Shamplina of Landlord Action and Channel 5’s Nightmare Tenants, Slum Landlords has also offered advice to landlords looking to take advantage of these offers of guaranteed rent.
“When a landlord signs up with guaranteed rent provider, they should be signing a commercial contract, not an assured shorthold tenancy agreement. The landlord should make sure the contract is looked at by an independent legal professional. Sometimes the terms in the contract can be deemed unfair.
“The contract will state the guaranteed rent provider can sublet the property with your consent; make sure there is a break clause in the agreement so you can end it early if you are not satisfied. Also make sure the property should be returned in the same condition as when it was provided.”
Example of a rent to rent sales message
We have seen a few rent to rent operators in our time, and know how they work. Here is a typical example of an ‘outreach’ message form a rent to rent operator trying to persuade a landlord to give them their property.
“I know how frustrating it is to deal with estate agents, and it is why I always meet my tenants, to build a relationship with the tenants and trust. If you are a busy landlord and would like guaranteed rent paid for 3 to 5 years with no fees then read below.
“Please find below a photo of one of my properties that has been let out since 2015. The property was an empty new build and we dressed it to a show home standard and have had excellent professional tenants from the BBC, Nike and the current tenant works at The Bank of England, we have had no void periods.
“To give a little more information: I would normally spend a few thousand pounds decorating and furnishing your property as well as other upgrades and improvements at my own cost. I also cover all the maintenance on the property (excluding structural and boilers) and of course there are no fees as there are with a letting agent so you get the full market rent each month with it being a hands off investment for you. At the end of the agreement, you receive your property back in a better condition than when you started to then do with as you choose.”
The Safest Way to Let Your Property Is through OpenRent
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 great tenants, create your tenancy agreement, secure the deposit and collect the rent – all following industry best practices and helping you keep a regular rental income from your rental property.
Just by way of a practical example of what can happen when such arrangements go wrong: Against my advice, my brother-in-law rented his property to a rent-to-rent company that already had around 10-15 similar properties on its books. The guy was very professional in his approach and claimed to have HMO licenses in his name from several of these properties and a good relationship with the HMO team at the Council. He guaranteed a particular rent and put 4 tenants in there.
Things started to go wrong when the Council introduced an Additional licensing scheme that would capture 4-bed HMOs. The rent to rent company wasn’t aware of this and the property was now in default. A neighbour complained that it was over-crowded and the Council wrote to my brother-in-law threatening prosecution. His insurance was then due for renewal and he was unable to get insurance for the house as it didn’t have a licence. On inspection it was found that there were actually 10 people living there as it wasn’t being effectively managed as the rent to rent company had over-extended itself. Then some of the tenants stopped paying rent and the so-called guaranteed payments to my brother-in-law also stopped. Then came Covid19 and the tenants effectively can’t be removed. The rent to rent company offered to end the contract with my brother-in-law but all that would happen then is that the occupants would become his direct tenants and he would inherit all the problems and liabilities. This issue is still not fully resolved.
Don’t touch it with a barge pole