Many businesses invest in the rental market.
Buying property through a ‘buy to let’ is arguably the most common way to do this.
But there are other methods, too.
One of these is the ‘rent to rent’ model.
But what is rent to rent? What are the advantages and drawbacks for companies? And how much profit can be made?
Keep reading to find out.
What is rent to rent?
Rent to rent is when a private company agrees to rent a property from a landlord.
This involves a guarantee that all rental payments will be met, regardless of whether someone lives there or not.
The company then sublets the property out at a higher rate than they are currently paying.
This is done to make a profit. The company will also commit to returning the property at the end of the period in the same condition they received it.
This is all usually agreed upon in a commercial rent-to-rent lease agreement. This agreement will also outline who does the repairs and how much deposit (if any) needs to be made.
Any company doing rent to rent should take out insurance. This should be professional indemnity insurance and possibly public liability insurance. Speak to an insurance expert for more guidance.
Different types of rent to rent
As you would expect, rent to rent can be carried out in several different ways. It depends on the property in question.
House of Multiple Occupation
One of the most common ways is using a House of Multiple Occupation (HMO).
This is seen as a smart business investment because the private company receives more income per property. This enables a more significant profit to be made. You may see this in university towns.
Serviced accommodation
Serviced accommodation in a large block of flats is another way. A major up-front investment enables a company to rent out lots of rooms in one go.
Providing an ‘exclusive experience’ through serviced accommodation enables them to rise their subletting prices even further. Adding value in this way can create a larger profit.
Single-let properties
You will still see rent to rent with single-let properties. These carry less potential for profit at first, but the company may be smaller with limited funds.
They could also be generating a relationship with a specific landlord or see great potential in the flat long-term.
Is rent to rent legal?
Yes, rent to rent is completely legal. You need to get the landlord’s permission, and this involves signing a commercial rent to rent agreement.
Some people argue that it is immoral, but it depends on your perspective. Subletting tenants are often treated with enormous respect.
It also ensures that the property remains on the market because the landlord can afford to keep it.
This applies if the commercial rent to rent company has greater financial resources, which is often true.
They receive excellent service in the case of serviced accommodation. The landlord signs a contract that protects their rights, too.
What are the rights of a rent to rent tenant?
When a business sublets a rent to rent property, they will usually sign a tenancy agreement with the new renter.
This outlines their rights and responsibilities. It is often the same as any other tenancy agreement.
What are the costs of rent to rent?
Rent to rent comes with several up-front costs for the business. Making a deposit and paying for a full year of rent up-front can cost tens of thousands of pounds.
This figure can rise even higher in large serviced accommodation blocks of flats.
The goal is to maximise your profit on subletting the room. Giving it a touch-up is worth considering as long as it’s within the boundaries of your agreement.
Extra touches such as serviced accommodation is another excellent way to add value.
What are the profits of rent to rent?
Some companies have reported profits of tens of thousands per year on just a few properties. This can rise even higher for larger buildings.
But it can also go in the other direction.
Finding a tenant is not always straightforward, and taking too long may create a loss for the business.
You’ll need total clarity on your margins and feel confident that you can get a renter that pays on time quickly.
Why does a landlord agree to rent to rent?
Rent to rent guarantees an income for the landlord. The commercial agreement will usually be for a set period.
The landlord can thus guarantee that they will receive their money for this period. This isn’t always the case with solo tenants.
Finding trustworthy tenants can be challenging. But there are rent to rent checks a landlord can carry out, or they can outsource finding tenants to a specialist business. This saves stress, hassle and time for the landlord.
The commercial business agrees to keep the property in excellent condition.
They will fix any problems, which is not often the case when letting to solo tenants.
Advantages of rent to rent for businesses
Rent to rent involves relatively small up-front costs compared to some other business ventures.
In many cases, subletting a single property can be achieved with less than £10,000.
You could also negotiate with the landlord for a more favourable price because of the guaranteed income you provide.
This is doable because there are several advantages to the landlord of letting you sublet.
It is even possible to become profitable within the first six months.
Rent to rent also provides consistent recurring cash flow when it goes well. This is rare for businesses in other sectors.
Disadvantages of rent to rent for businesses
You need to put in the effort to find and background check reliable tenants to sublet to. This is not always straightforward.
During quiet periods in the market, the property may be empty, and this can eat into your profit.
You are also the entity that will be contacted when your subletting tenant has issues. In many cases (depending on your arrangement), you will need to make repairs.
Lots of people consider rent to rent as unethical. This is often because the subletting tenant does not often know they are overpaying compared to what the property might have previously been let out for.
This can sometimes give your company a bad reputation.