Property Strategies (Part 7)
Next on my list of principal property strategies that we can use in today’s market is Rent to Rent.
Very simply put, rent to rent is essentially sub-letting. Now, when you usually mention the term “sub-letting”, this tends to throw up images of some form of illegal or dodgy activity – but rent to rent is far from that. So, let’s think about what it is.
A stereotypical example of a rent to rent could be where you “sub-let” (or rent) a property from a tired landlord. Perhaps they have been in the property game for a long time and want to take more of a back seat, so you agree to take over the management of their properties. You negotiate a long-term tenancy with them – and it’s quid pro quo.
The big plus of taking on a long-term tenancy is that you may be able to agree a lower rent than the current market value. You can then rent the property out on a short-term basis but at the real market rate – and pocket the difference.
Back in the day when rent to rent started to become popular, most people began with single let units. They would negotiate a low enough rent with an owner to be able to make the strategy work, and would then let the property out on a short-term tenancy. Since this time, things have progressed somewhat and many investors are now “rent to renting” properties and converting them into, for example, HMOs.
Hype in the press has led to many believe that sub-letting is illegal – and under some circumstances it can be. So, if you are thinking about following a model within this strategy, then you do need to give some consideration to some aspects.
For example, you need to make sure that this would be acceptable under the terms of the property owner’s mortgage; because sub-letting might be against the terms of a buy to let mortgage. With this in mind, do make sure that you’re not making the landlord go in violation of their terms.
If this is the case, then there still might be a way around it. Quite often, it’s possible to change the terms of a mortgage with just a simple phone call, so it can be worth the owner getting in touch with the lender to see if this is possible. The other thing you need to think about, of course, is that you won’t be invalidating anybody’s insurance. But, if it’s all okay, then rent to rent is a very simple strategy which many, many people can use. (Be warned, this isn’t possible with a council-owned property – this is a big no-no).
One of the main benefits of rent to rent is that you can start with very little capital and you don’t actually have to buy a property. You just head out and rent a property, which you then rent out again.
The big disadvantage with doing rent to rents is that you won’t be able to benefit from the capital growth over the years – remember, you will not actually own the property as you are only renting it. But, if you’re stuck for cash and you want to get started in property, then this strategy can allow you to build an income which can then be saved and used as a deposit on an investment property. All in all, rent to rent is great to get you started.
A final thought on this strategy: if you’re going to do rent to rent then one thing which I would suggest, (which I mentioned in a previous blog post) is that you consider negotiating an option deal to run alongside the rent to rent agreement.
Options as well as instalment contracts, delayed completions and all the other creative strategies that we’ve been thinking about lately can work really well with a rent to rent agreement. So, why not propose to the current owner/landlord to rent the property at £X per month for the next five years, and if it works out, to perhaps buy the property in five years’ time for a price that you both pre-agree now?
In other words, why not agree an option to work alongside your rent to rent. This can be a great way to get you started and to help you build your property portfolio for the future.
Here’s to successful property investing.
Peter Jones B.Sc FRICS
Chartered Surveyor, author and property investor
By the way, I’ve rewritten and updated my best-selling e-book, The Successful Property Investor’s Strategy Workshop, which is an account of how I put together my multi-property portfolio, starting from scratch and with no money of my own, and how you can do the same. For more details please go to: www.ThePropertyTeacher.co.uk/the-successful-property-investors-strategy-workshop