What is Rent 2 Rent? A Comprehensive Guide
002 - The Basics of Rent to Rent and Why People Get It Wrong
The professionals at Rent 2 Rent Success offer a comprehensive guide on how to get a guaranteed income from property without buying it and how to avoid the common risks.
How you can make money from property without buying it – the ethical property strategy you’ve probably never heard of
For entrepreneurial minds looking for a way to create consistent cash flow from property and achieve freedom from the 9 - 5, rent to rent is a fantastic business model. The trouble is, it is easy to get overwhelmed and confused by the information available.
Often, people starting out only have part of the picture, piecing together the rent to rent strategy from YouTube videos, podcast episodes and social media posts. It is no secret that rent to rent is a business model with a lot of moving parts, and by trying to gather all the information piecemeal, it can be difficult to get a clear step by step process of the route to success.
And if you’re reading this, I know that working ethically is important to you too. This is why we started teaching what we knew because so many property ‘trainers’ have a sleazy approach and we wanted to show that there is an ethical way to make money out of properties you don’t own and provide value for landlords, for housemates and for you and your business.
At Rent 2 Rent Success we’re here to help you get started. We are sisters Stephanie Taylor and Nicky Taylor we’re here to guide you on your journey to finding success and profit with the rent to rent method. We’ll clear up the mysteries of rent to rent so you can get started the right way.
Fortunately, rent to rent can be simple if you have all the right information. In this article, we present a comprehensive guide on rent to rent, from what it is in a nutshell, to some major considerations to think about before you begin.
How does “Rent to Rent” work in the UK?
The rent 2 rent model is a simple concept. Here’s how it works in a nutshell.
You rent a property, usually for 3-5 years.
You pay the owner or letting agent a guaranteed rent. Typically, you take on any bills.
You rent the property to tenants for a higher rent than you’re paying the owner.
The difference between the rent you receive from your tenants and the rent you pay the owner or letting agent after property costs is the profit for you and your business.
There are three main ways to do rent to rent on residential property which I’ll come to in a moment.
Rent 2 Rent is an incredibly efficient business model
Little money is required to start
You can become profitable within a few months (most businesses are not profitable in the first year)
You have consistent recurring cashflow (most startups do not have recurring revenue )
You have the names and addresses of your perfect customers (most businesses have to find their customers)
And I love the fact that at it’s very simplest you are renting a property. Something thousands of people do every day.
The best news is that you don’t have to buy property to make money from it. You don’t need huge deposits and you don’t need a mortgage to get started! We’re all familiar with the idea of big corporations controlling assets rather than owning them and creating wildly profitable businesses.
Uber, the world’s largest taxi firm, owns no cars.
Facebook, the world’s most popular media company, creates no content.
Airbnb, the world’s largest accommodation provider, owns no property.
And that is the how this strategy works too - control rather than ownership.
This means you don’t need a huge financial investment to get started. What you do need is a guide to help you through the process of ensuring that you take the shortest and simplest route to success while remaining legal and compliant.
R2R changed my life when I started HMO Heaven with my sister in 2016. Since then, we’ve attracted contracts worth over £2m, escaped our jobs and built a team. And we’ve shown hundred of professionals how to do it too.
There are three main ways you can do rent to rent, and each one has its pros and cons. I’ll cover them here so you can decide which is best for you.
1. Rent to Rent HMO - Houses of Multiple Occupation also known as house shares
A House of Multiple Occupation or HMO is one of the most effective ways to do rent to rent. This is where you let out each bedroom in a property individually. It’s what many people know as a student house share where each person has their own bedroom and then shares a kitchen and bathroom. Though HMOs may have en suites or individual kitchenettes.
The rent to rent method works whether you are transforming a single-family let into an HMO, or renting a pre-existing HMO. Let’s take a look at how the HMO cost structure breaks down when you’re turning a single let into an HMO.
Let’s take a 4-bedroom, 2 reception family home renting for £1,000. The same property converted to a 5-bedroom HMO at £600 per room earns a total of £3,000. Most HMO landlords pay the utility bills, but even after these bills, most properties would earn about £1,500 after bills, rather than the original £900.
Existing HMOs work well for rent to rent too. In fact, we work almost exclusively with existing HMOs. This way we don’t need to make all the changes required to change a family home into an HMO which can be both time-consuming and costly. And it really works from a business perspective too.
We can take on under-performing properties and by completing a light refurbishment of the property, dressing the rooms attractively, and provide a good service we can achieve more income from the same property without overcharging tenants or shortchanging landlords. This creates a win-win-win for landlords, for housemates and for us.
The great thing about HMOs is that when you match the right ‘product’ to the right customers, there is always demand. Even in a market downturn people always need somewhere to live. And especially in a market downturn people love that house shares provide an easy ‘all bills included’ option. Even in our post-coronavirus world the desire to house share has actually increased. We’re experiencing higher demand than before the coronavirus pandemic.
HMOs produce consistent recurring revenue. Each housemate commits to staying with you for at least 6 months and many stay for much longer. And the cashflow is much higher than a single family let too. So you need fewer properties.
With the much higher cashflow HMOs are hugely attractive from a business perspective but what puts people off is that they’re more time-consuming to run than a single family let. And that is true. What’s also true though is that with a few simple systems in place you can run an HMO business in a few hours a month. As you’ll see later, even as few as 3 - 5 HMOs can easily produce enough profit to replace an average UK salary.
2. Rent to Rent Serviced Accommodation
The second way you can do rent to rent is serviced accommodation. This method focuses on nightly rentals of the whole unit, rather than dividing the property into individual rooms. For example, a 2-bedroom flat may rent for £800 per month, or it can rent for £50 per night, equivalent to £1,520 for the month.
The potential income from serviced accommodation can be very exciting. However, the costs are also high though you’d have the same you’d have running an HMO (gas, electricity and water) plus other costs like of laundry and cleaning, and online booking portals which are around 15%. Then there’s the VAT of 20% which decreases profit (there is no VAT on rent, so rent to rent HMO and single lets are not affected by VAT).
At first glance serviced accommodation looks hugely attractive with its higher revenue. But as I mentioned above the costs are much higher too. Serviced accommodation is a hospitality business with guests. It’s more time intensive, more costly to run, has more marketing requirements as you’re constantly looking for new guests. And it can be high stress as having 5 star ratings is very important in attracting guests.
Not only that, occupancy can be unpredictable. To make higher cashflow you need to have guests for most of the month. And this is difficult to forecast with any certainty especially when you’re new to it, and some areas have planning restrictions, like the “90 Day Rule”. For example since 2015 you are only allowed to provide short term lets in London for up to 90 days in a calendar year.
So many people find that they actually lose money with serviced accommodation, in spite of the fantastic income.
3. Rent to Rent Single Let
Mostly you’ll be using one of the strategies above for renttorent – either HMO or serviced accommodation.
Once you get started in rent to rent though, you may sometimes be asked to manage single let properties. When I say single let I mean a property rented to a single household such as a couple or a family. Typically single lets require less management. Also the potential for cashflow will be lower. I’ve included this so you know that it’s an option, it’s not something that we choose to seek out but it’s an extra we can offer to our HMO landlords who have single lets they’d like us to manage.
Single lets are straightforward but usually the cashflow is much lower so it’ll take much longer to reach your business goals.
Is rent to rent legal?
But isn’t rent to rent sub-letting? And isn’t sub-letting illegal?
Most people just can’t believe that rent to rent is a legitimate business model. Let’s get this one sorted straight away.
Yes, rent to rent is legal.
Perhaps your forehead is still furrowed so I’m going to explain a little more. Rent to rent has been used in commercial property since the pyramids were built. Oh, OK maybe not that far back. But almost. Commercial leases are long-term leases which give a commercial property tenant (usually a business) the right to sub-let a property. Typically, these are ‘full repairing and insuring’ leases, where the tenant takes on all the costs of repairing and insuring the property. This is what the rent to rent model is based on.
This model came over into residential property and has been adapted to give residential landlords similar guarantees as commercial landlords enjoy. Northwood is the biggest guaranteed rent letting agent in the UK with over 85 offices, it started as a single office in 1995. The reason why some people think rent to rent might be illegal is that sub-letting has a bad name.
Sub-letting simply means… “to lease to a tenant”.
Sub-letting usually comes to public attention when it’s in the news because someone has done it illegally without the knowledge of the property owner. That is absolutely not what we advocate.
Rent to rent is legal when it’s done with the full knowledge and consent of the owner and when the correct contracts are in place.
If you still have an eyebrow raised and are thinking ‘well she would say that wouldn’t she?’ you might be swayed by the fact that rent to rent is recognised by the UK government’s Property Ombudsman, the Property Redress Scheme (PRS).
The Property Redress Scheme’s definition of Rent to Rent
Rent to Rent is where an individual or company, known as the agent, rents a property from a landlord for a specified period of time during which the landlord receives a fixed guaranteed rent from the agent. This can be attractive to landlords who want a hands-off investment with guaranteed income. The agent then lets the property, generally on a room by room basis and manages the property.
If you’re getting started in rent to rent, you’ll need to know about rent to rent contracts too. I have a full video and blog post on this called Rent 2 Rent Contracts – What Should You Use?
The fact that so many people dismiss this strategy out of hand means there’s more opportunity for you. What you know and act upon will change your income and your impact.
How much does it cost to start a rent to rent business?
Businesses often take tens of thousands of pounds to get started. But as we talked about earlier, rent to rent is an efficient business model which allows you to get started for less than you might think and become profitable before you might think.
In How much does it cost to start a rent to rent business, I walk you step by step through everything you need to set up your rent to rent business legally, ethically, inexpensively and quickly. And I think you’ll be surprised how little it costs to get set up.
Of course, the fact that there is no need for mortgages, deposits or stamp duty makes rent2rent a real winner for people wanting to get started without £50k in the bank.
How much time does rent to rent take?
Isn’t rent to rent very time consuming? I don’t want another job!
It depends what you compare it to. If you compare rent to rent to a full-time job working 40 hours a wee, 40 weeks a year for 40 plus years. No, it’s not very time consuming. In the beginning it’s going to take you a few hours a week but once you get set up it’s going to take you a few hours a month.
I see many people taking much much longer to manage their properties because they haven’t set things up with the end in mind with simple systems and processes that make life easy. Setting up your systems according to a proven system will save your time, money and sanity! So many people struggle when the unnecessary stress can be eliminated by implementing the simple systems we teach.
Now let’s compare. Say you’ve got 5 rent to rent properties. Even with an average profit of £500 per month cashflow per property after bills and running costs, you’ve got a profit of £2,500 per month for a few hours work each month. Compare that with an average UK salary £24,500 in February 2020, where if you’re lucky you work 40 hours, maybe a lot more. Maybe your role is very stressful. Maybe you have to ask for holidays. Maybe you have a rough commute. Maybe you have a sinking feeling every Sunday evening.
Yes, you do have to put time into rent to rent to make it work. It’s a few hours a month and freedom to live life on your terms. You do invest time and the payoff is lifechanging.
Rent to Rent Examples
Want to see how it can work in practice?
If you’d like to see some real life examples download the Free Rent 2 Rent Success Guide & Masterclass.
What you’ll see in the Rent to Rent Success Guide or if you watch the Masterclass is that our first few properties cashflow between £408 for a 4 bed up to £1,222 for an 8 bed.
And that’s after all the running costs.
And it gets even better, let me explain why 5 is the magic number
Because as every parent knows, 5 years goes very quickly,
and a lot changes.
It feels like a blink of an eye between your tiny babe in arms and your grown up five year stands before you ready for their first day at school.
And it's the same in property.
Take the steps and within a short time, your life will change a bit
And within five years it will have changed a lot.
And that is where the magic happens.
Let me show you…
Let’s take cashflow after all costs on a very average property
in one month it’s £500
in a year it’s £6,000
In 5 years it’s £30,000
And let’s take one of our more profitable properties
in one month it’s £1,222
in a year it’s £14,664
In 5 years it’s over £73,000
That’s amazing isn’t it?
So the question is,
Can you imagine how amazing it would feel to have your first property?
Imagine telling your family, friends, and colleagues and all the doubters that it really does work.
How would it change your life if you had just one average property and an extra £30,000 of income over the next five years?
So let's just stop for a second
With just the 2 properties above
That is over £20,000 pounds per year, for some people that’s close to a full time UK salary.
Which is over £100,000 over 5 years.
How many properties would it take to replace your salary?
So what’s your number?
To replace an average UK salary it’s 3-5 properties
That's the power of rent to rent
To buy an HMO in the UK, a deposit can range anywhere from £15,000 to £50,000+ depending on the area you are looking to purchase in. Now you can get started without that investment and have a great business
And there's more…!
Rent to rent helps you buy properties with ‘no money down’
Rent to rent can help you build your own property portfolio using lease options and other creative strategies. You can buy properties with little money to start. It’s something we’ve done and our students have done and which still blows my mind. You can find out more about it here in How to buy property with no money down.
I hope you found that useful today.
Until next week, have a great rest of the week
And remember Believe Bigger, Be Bolder and Be a Gamechanger!
See you next week!
Stephanie & Nicky
xx
To find out more about rent2rent
Get the Free Rent 2 Rent Success Guide & Masterclass to find out the simple 6 step system to rent to rent success and life on your terms
Watch some real life Rent 2 Rent Rockstars explain how they got started in rent2rent
Visit the government property ombudsman for the Property Reress Scheme definition of rent to rent
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