There are well-established rent to rent companies that have been trading for years. Generally they offer landlords a substantially below market rent (but guaranteed) and then let the property themselves at the market rent. This article is not about them but is about companies (or individuals) that offer the landlord a market rent and then intend to relet the property at an above market rent (either by making extra 'bedrooms' out of reception rooms to take a larger family, or more likely by renting it as an HMO [House in Multiple Occupation]), and pocketing the difference as their profit.
A lot of these second types of rent to rent are doomed to fail even if the person proposing the scheme to you is pure in mind and heart. The following pressures apply:
- Narrow margins means no money to cover voids and problems - the rent to renter is almost invariably working with a lower margin that you would be if you were doing the exact same setup yourself, as he has to pay you (hopefully) more than you are paying to your mortgage company.
- Standards - HMOs often require a lot of money spending to meet standards and licensing criteria where applicable. Where's this money coming from?
- Refurb costs: letting to students or people on the margins of society (i.e. most room renters) is likely to have higher maintenance costs than letting to a family.
- Non-payment - how will your tenant pay you if his tenants don't pay him? It's all very well them telling you rent is 'guaranteed', but how is it?
- Tenancy agreements - whatever the rent to rent agent tells you, you do not have a normal AST (Assured Shorthold Tenancy) with them, but instead you have a commercial tenancy, as you are engaging in a business to business transaction (landlords are businesses, whether they know it or not).
- Redress - you have little or none. A rent to rent business can shut down or stop paying you but you can't evict the tenants that live in the property for non payment of rent as you don't have a tenancy agreement with them.
- If they do a bunk and you find yourself suddenly made the landlord of an unlicensed HMO it could all get very expensive!
So, as you see, there are many reasons to give rent to rent offers a miss and just let the property yourself, but if you are determined to do it then please, please do the following:
- Carry out full credit and reference checks on the company directors and get at least one of them to stand as a guarantor and sign a deed to this effect. If they don't pass the checks, don't accept them. If they are a limited company and decide to wind up you have nobody to chase without a guarantor.
- Read their contract very carefully and refer it to a solicitor if you're not sure of anything - if their contract is an AST they are either fools or knaves so steer well clear.
- Never sign any contract until you have cleared funds for at the very least the first month's rent and the deposit.
- Ask to visit one of their existing properties rented this way. If it looks good then get the owner's details from the land registry (it only costs a couple of pounds) and check that he is happy with them.
- Get in writing details of any changes they intend to make to the property and their commitment to return it to normal once they are done.
- Google them to see if they already have people griping about them.
- Contact the local authority's private sector housing division to see if they have had any trouble with them.
If you do the above then you've got a good chance of not getting your fingers burnt. However an equal amount of problems can come from someone who rents as a normal tenant from you and then sublets the property. In this case you can at least proceed using the normal notice and court channels against the tenant to get a court order for repossession, but by then there could be extensive (and expensive) damage to your property and the bailiffs could be faced with half a dozen people who know nothing about the situation and don't want to leave.
This is why you should always properly reference prospective tenants and get rent guarantee - for the small amount of money it costs (around £10 a month) it's well worth it. Never be fooled by sob stories and never be encouraged to skip the referencing process because the tenant offers more money upfront.