Rent to rent: do the benefits outweigh the potential pitfalls?
Rent to rent is ‘a contractually agreed form of sub-letting, where a landlord authorises another party to let a property on his behalf’ (Landlord Action). The person sub-letting your property makes their money by charging the tenants more than they’re paying you each month.
This market has boomed as people rush to make money by taking on a large property as a single unit and then letting the rooms on an individual basis, operating the property as a House in Multiple Occupation (HMO). Although they’re likely to be contractually responsible for redecoration and furnishings, they don’t incur any costs for major works, as those fall to the landlord. That means their outgoings are easy to budget for and, provided they vet their tenants properly and manage the sub-let well, it’s possible to see good profits rolling in each month.
For busy investors, assuming all goes to plan, it may be seen as a great idea. You don’t need to worry about voids, managing tenants or ongoing minor maintenance and will usually agree a term of several years – three is common – giving you long-term guaranteed rental income.
However, its vital you remember that, as the owner and landlord, you are ultimately responsible for the let. That means you’re the one who will be pursued for any violations of lettings regulations, so you’ve got to do your homework and make sure that any rent to rent agreement is watertight from your perspective.
You must check with your mortgage lender whether the terms of your loan agreement permit sub-letting and, if the person sub-letting your property is intending to do so by the room, it’s doubly important you establish whether that’s allowed. Most lenders have HMO-specific products with certain conditions so if you simply have a ‘standard’ Buy to Let mortgage, it’s unlikely the lender will allow the property to be operated as an HMO.
You also need to check with your local authority whether there are any restrictions on how the property can be let. For example, in many areas, HMOs are not permitted or have to be licensed, in which case, that has to be addressed in the sub-letting agreement.
The other important thing to remember is that the tenants have the right to remain in the property as long as they are complying with the terms of the tenancy agreement they’ve signed. That means, even if your ‘tenant’ stops paying you rent, you won’t be able to simply take your property back if the people living there are paying their rent every month. And this is the biggest problem that there’s been to date: people sub-letting properties and taking rent from tenants but defaulting on payments to the landlord. That leaves the landlord in the position of still having to make mortgage payments, while also incurring the costs of not only pursuing the company or individual who’s letting the property – and who may simply vanish without a trace and with your money - but also sorting out the potential issues with the sub-tenants.
Five key things to consider and check before you sign any rent to rent agreement:
- Have you checked with your mortgage lender whether what you’re intending to do is permitted?
- Are there any local authority restrictions in terms of what type of tenancy is allowed?
- Does the company or individual letting your property belong to a regulated redress scheme, such as The Property Ombudsman?
- Do you have a back-up plan for paying the mortgage in case the rent stops coming in?
- Has your own legal representative checked the agreement thoroughly?
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