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I am increasingly seeing people on facebook talking about Rent to Rent and how they are looking to rent big houses and create R2R HMOs.Rent to Rent is touted as a "no money down" strategy and students are recommended to find a "tired" landlord and rent the property from him/her on a guaranteed rent basis, and then rent out the individual rooms and pocket the difference.We already know that this activity can only legitimately be undertaken on freehold houses, but I constantly read of leasehold flats being set up as R2R or R2R serviced accommodation, but that's another story ...Of course there are costs to take into consideration - legal agreements, compliance, furniture, insurance, HMO licence, paying the landlord the rent if the rooms are not filled etc. Someone who undertakes rent to rent recently commented on PT that he spends around £6.5K per property to get it up and running - so hardly "no money down"!But that's if someone with no cash reserves and potentially in a poor financial position gets their hands on a property in the first place.The thing is - if they are being transparent about their intentions - many won't.This will be down to "affordability". The landlord or agent needs to know that the R2R tenant can afford the rent on the property. If they are already paying the rent or mortgage on another property where they live, then its possible that they will fall at the first hurdle because they cannot pass affordability criteria and/or they may have a poor credit rating.But let's say that they do. How can you scale a business in a transparent manner by admitting to each new landlord that you are renting four other flats? The affordability will fail.Therefore, those that are doing this on any scale, I can only assume that that they are not being transparent about how many properties they have. They are certainly very unlikely to be able to cover the rent on multiple properties if the rooms are not let out, so I don't believe they are in a position to offer "guaranteed" rent.If they are doing it through a limited company, only a naive landlord and agent will take them on without doing any checks.I'd be interested to hear from successful Rent to Renters on how they passed affordability to take on a big house and I'd also like to hear from potential Rent to Renters who failed at the first hurdle because they could not prove affordability.I suspect that, of the hundreds of people being churned out of courses, only a handful actually get control of a property to do that, and if so, a significant proportion of them may not have been transparent to the landlord or agent about their intentions, or may not have admitted they have the expense of another property where they live.If you are thinking of paying for a Rent to Rent course, I suggest you contact local lettings agents first to ask if you will meet affordability criteria for the type of property you are thinking of using for this activity.You should also consider that the days of this strategy are numbered as Rent 2 Rent and deal sourcing to be regulated and that means spending money on the same levels of compliance that estate and lettings agents have to adhere to.Interested to hear the tribes thoughts on this, and I hope this serves as a warning to "tired" landlords who are approached by a Rent to Renter!What other flaws do you see in the Rent to Rent model? It's low risk to the Rent to Renter, but high risk to the landlord that is for sure!Read about Rent to Rent poster boy Daniel Burton in the link below. He claimed to be earning £30K per month but it all ended in tears for his landlords and his tenants.SEE ALSO - The Icarus Syndrome (Daniel Burton and Unida Place)UP NEXT - R2R Air BnB/serviced accommodation - reality?DON'T MISS - Illegal HMO created by Rent to Renter - HELP!NOW WATCH:
Vanessa Warwick Landlord and Co-Founder of PropertyTribes.com **If you have got value from Property Tribes, find out how you can support it in remaining a free to use community resource**
"PT that he spends around £6.5K per property to get it up and running - so hardly "no money down"!"
Thats where JV comes in
"Someone who undertakes rent to rent recently commented on PT that he spends around £6.5K per property to get it up and running"
It is a shame that the poster, unless I missed it, didn't return to say how he/she was clearing £750 monthly net of costs on one R2R property; maybe he/she meant annually
I do know of at least one company - London Shared - doing it on a professional and high spec. level and making it work, but they told me that each property runs at a loss for the first year, and that they typically spend around £12K to get a property ready and compliant. So not no money down and not profitable for the first year, but then becomes very profitable. This is fine for people with large cash reserves but perhaps not for a lone person living in rented accommodation, or covering the cost of their own mortgage themselves?
You can gaurantee at least 1 or 2 letters a week from prospective R2R'S asking to meet to rent out my houses - they get the info from the council HMO records.
When u start grilling them on the phone about the basics of HMO legislation / insurances / market dynamics etc - they truly haven't got a clue,
and these people have paid £000's to attend R2R courses and most haven't got a pot to piss in, they hope to wing it with a clueless LL who is desperate and wants shot of the hassle in HMO lettings, but these LL's are what are exiting the market anyway, cause they don't / wont invest as is needed to meet the stringent demands of any / all HMO properties.With the reduced tenant demand from professionals / students especially, there is going to be a lot of void periods, let's see how they cover these when the shit hits the fanwith Brexit and the increased student villages going up in every city / co-living units for professionals.
Just like Purchase Lease Options / LOAs they fail to tell you by default they are Unmortgageable and can only be bought via Bridging Finance or Cash and then refinanced at a later stage.
With most newbie investors not having any assets to bridge against or significant available cash to purchase outright, this strategy where you get control of a property with option to buy, isn't really the holygrail way of building a property portfolio they lead you to believe......
But the whole point of lease options (over straight R2R) is that the optionholder could benefit from a rise in property value over say 5-7 years by selling on immediately. Or possibly becoming mortgageable during that time.
This statement - "We already know that this activity can only legitimately be undertaken on freehold houses, but I constantly read of leasehold flats being set up as R2R or R2R serviced accommodation, but that's another story ..." is not (other than in the case of SA where the lease states only use as a "private residence" is permitted) correct, I believe. Why do you think so Vanessa?
Because most leases have a clause prohibiting sub-letting or sub-letting for business activities or multiple persons rather than one household.At the very least, the landlord will have to apply for permission to sub-let the property and pay a sub-letting fee. If the freeholder finds out it is multiple persons or short term guests, then they will likely decline imho.
If "most leases have a clause prohibiting sub-letting" then normal BTL of flats would also be prohibited. I don't know of any landlord of a flat that asks the freeholder's permission to rent it out as a BTL (though in some of the stricter leases - but by no means common - they probably should be doing that).
Most landlords don't, but if the freeholder or management company find out, they get a letter asking them to apply to sub-let the flat and this usually involves a fee.