Estate Agents (Part 11)
We’re thinking about where to find our property deals and this week, we’re going to give some thought to rent to rents. Now, just to make sure I’m being completely transparent, this is not a strategy which I entertain myself. However, I do know many people who undertake rent to rents and who are very successful – and having listened to their experiences, I hope to pass on some knowledge.
To start, let’s dispel the big misconception or misunderstanding that surrounds what a rent to rent actually is. The best way of describing a rent to rent is a sub-let. Now, I don’t mean illegal subletting in which you might, for example, rent a council property and then sub-let it out. Rent to rent or subletting in its purest form is perfectly ethical and legal – just so long as the landlord or owner that you’re renting from knows exactly what you’re doing.
In essence, with rent to rent you find a property, negotiate terms with an owner to rent the property from them and in turn, you then agree terms with a tenant or tenants who will then go on to rent the property from you.
Now, you may wonder why anybody would want to rent you a property just so that you can then rent it on again. Well, with rent to rent it’s all about the terms. So, for example, if you come across somebody who is an existing landlord and who is perhaps a little fed up with being a landlord, then maybe you can take away the stress and hassle of the property and yet still offer them an attractive guaranteed income. To do this, you agree a rental figure which is lower than the open market value maybe over a three or five-year period. The current landlord would be prepared to agree to this lower rental figure because you would be offering them security.
By this, I mean a guaranteed rental income and certainty over exactly what is going to happen. During the actual period of the lease itself, you may even agree to take on more responsibility for the repairs and insurance, which might be an attractive proposition. All in all, there are plenty of reasons why people will want to rent a property to you, but it all comes down to the terms.
Interestingly, there are a few different ways in which you can do a rent to rent. For example, it can be done as a single let (I know people who just rent a single property and then let it out to a single tenant on a short hold tenancy in the normal way), and this can work just fine. Then there are investors who find property which is either configured as an HMO (house in multiple occupation) or who will take a property on and with an owner’s consent, make it into an HMO.
However, if you’re going to do this and if you’re going to undertake works which are extensive in order to turn a property into an HMO, then you’re obviously going to want to have the property on a longer lease to make it more worthwhile and viable.
So, where are we actually going to find our deals?
Firstly, most of our rent to rent deals are probably going to look exactly like a standard vanilla buy to let or HMO. However, in this instance, we’re probably not going to find these properties with an estate agent.
Instead, we’ll typically be looking for motivated or distressed owners of properties. These could be people who, for example, are moving away or who need to relocate for work. Or, they could be individuals who are experiencing some form of financial difficulty and need to get out of their property. Whatever the reason may be, they may wish to rent their property on because they might not be in a position to sell.
For example, it could be a property which they’ve taken on themselves. Maybe they’ve bought a property with a mortgage, but it’s in negative equity and therefore they can’t sell it on so instead they might look to rent it out on a long-term basis.
On the other hand, it might be that you have a stereotypically tired landlord who’s fed up with being a landlord. Perhaps they’re getting a bit older and want take a back seat without selling their assets. Perhaps they simply wish to enjoy a secure regular income.
Now, where we’re probably NOT going to find our deals is among landlords who are selling up because of Section 24. These landlords are selling up because they need to get rid of their tax liability. It’s probable that if they have a mortgage on the property, renting the property to you long term won’t get them out of the predicament of not being able to offset their mortgage interest against the rent when calculating tax. As such, it’s probably not going to be a distressed landlord who’s selling up because of Section 24.
More than likely, you’ll be looking for a tired landlord or an owner who is looking to retire, or an individual who wants to be in property but who wants to take on a more hands-free approach. You could step in as an intermediary so that they don’t have to deal with tenants or the management issues and hassles that come with being a landlord.
How are we actually going to find these deals? Well, if I was going to look for rent to rents, there’s two places I would start. Firstly, I would speak to letting agents – admittedly, some have mixed successes with this as not all agents understand this model. And secondly, I would attend landlord meetings rather than investor meetings. At these types of meetings, you’ll stumble upon a different type of a property owner.
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