How rent to rent works in London

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a-landlord-rent-to-rent-person-and-a-tenant-talking

In the dynamic world of property management, the concept of ‘rent to rent’ has gained significant traction among landlords seeking alternative arrangements for their properties.

This model offers a unique approach to property investment, where a third-party company takes on the responsibility of managing and subletting a property for a pre-agreed period, typically at a discounted rate.

But what does this mean for you as a landlord? To the world of property investment, understanding the intricacies of rent to rent can be invaluable as you may find the model is perfect for you but you may also find the opposite.

What is rent to rent?

The term “rent to rent” typically refers to a property rental strategy where an individual or company rents a property from a landlord with the intention of subletting it to tenants for a profit.

In this arrangement, the tenant becomes a sub-landlord, managing the property and renting out individual rooms or units to tenants, usually at a higher price than the original rent paid to the landlord so they can make some profit in between.

a landlord and a tenant and a rent to rent company talking

You may have also heard of the term ‘guaranteed rent’ which is sometimes used in the same way as rent to rent. Rent to rent is the business model that facilitates the landlord to receive guaranteed rent which is what the rent to renter will promise to the landlord to make the model appealing.

What rent to rent models are there?

There are several rent-to-rent models that landlords can choose from but the most popular ones are:

  • Accepting a discounted rent
  • Turning a property into a holiday let
  • Converting a property into a House of Multiple Occupancy (HMO)

Accepting a discount on the rent

In this model, the landlord agrees to allow a rent to rent company to manage their property and receive a discounted rent as a result, typically around 70-80% of the market rent.

The rent to rent company then takes responsibility for finding tenants, managing the property, and covering maintenance costs for a 20 – 30% commission.

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They keep the difference between the discounted rent they pay the landlord and the full market rent they collect from the tenants as their profit. This model is widely used in the UK and is generally legal, provided that both parties adhere to the terms of the tenancy agreement and relevant housing laws.

Turning a property into a holiday let

Under this model, the rent to rent company takes on the landlord’s property and converts it into a short-term holiday let or serviced accommodation. 

They handle all bookings, cleaning, maintenance, and guest management. The landlord receives a guaranteed monthly rent, while the rent to rent firm keeps any additional profits from the higher nightly rates holiday lets can command. 

This model is legal in the UK, but the property must comply with relevant regulations and safety standards for holiday lets, such as obtaining necessary licences and consents, providing gas safety certificates, and adhering to fire safety regulations.

Turning a property into a HMO

With this model, the rent to rent company leases the landlord’s property and obtains the necessary licences and consents to convert it into a House of Multiple Occupancy (HMO). 

This involves creating individual rooms for multiple, unrelated tenants to rent with shared facilities. The rent to rent firm often creates extra rooms in the house to create the HMO, manages the HMO, finds tenants, collects rents, and maintains the property, providing the landlord with a guaranteed monthly income. 

making renovations to turn a property into a HMO

This model is legal in the UK, but both the landlord and the rent to rent company must comply with HMO regulations, such as obtaining an HMO licence, adhering to occupancy limits, providing adequate facilities, and ensuring fire safety standards are met.

Why do landlords use rent to rent companies rather than a traditional letting agent?

Landlords often opt for guaranteed rent agreements with rent-to-rent companies instead of using traditional letting agents for two main reasons.

First, the rent-to-rent company assumes responsibility for repairs and maintenance, reducing the landlord’s workload and financial risk. Second, guaranteed rent arrangements eliminate the risk of void periods, ensuring a consistent stream of income for the landlord.

Rent to renter becomes responsible for repairs and maintenance

One of the primary reasons landlords choose to use a guaranteed rent arrangement with a rent to rent company is that it transfers the responsibility for repairs and maintenance to the rent to rent firm.

Under a traditional letting agent model, the landlord is typically responsible for arranging and funding any necessary repairs or maintenance work on their property.

By shifting this responsibility to the rent to rent company, landlords can enjoy a more hands-off approach to property management, reducing their workload and financial risk associated with unexpected maintenance costs.

A house with damage that a arent to renter is reponsible for repairing

The exact responsibility always depends on the information that is signed between the rent to rent company and the landlord but in general, with a guaranteed rent agreement, the rent to rent company effectively becomes the tenant and takes on the obligation to maintain the property in a suitable condition.

Removes the risk of running into void periods

Another significant advantage of using a guaranteed rent arrangement is that it eliminates the risk of void periods for the landlord. Void periods refer to times when a property is unoccupied and not generating any rental income, which can be a significant financial burden for landlords.

Under a traditional letting agent model, landlords may face periods where their property is vacant between tenancies, leading to a loss of rental income until a new tenant is found and moves in. This can be especially challenging if the property remains empty for an extended period, resulting in substantial financial losses.

With a guaranteed rent agreement, the rent to rent company commits to paying the agreed monthly rent to the landlord, regardless of whether the property is occupied or not.

This means that even if the rent to rent firm experiences a void period, the landlord’s rental income remains unaffected. The rent to rent company takes on the risk of finding and retaining tenants, ensuring a consistent stream of income for the landlord throughout the duration of the agreement.

By removing the risk of void periods, guaranteed rent arrangements provide landlords with a reliable and predictable source of income, allowing for better financial planning and stability.

Are there other ways to stop void periods?

Cozee’s tenants pay up to 12 months up front – guaranteeing rent

How to determine if you’re getting a good deal from your rent to renter

Assessing whether you’re receiving a fair deal from your rent to rent arrangement is crucial to ensure your property investment remains profitable. There are several factors to consider when evaluating the terms of your agreement with a rent to rent company.

Work out how much profit a rent to rent company typically should take

When assessing a rent-to-rent arrangement, landlords must consider several factors to ensure they are getting a fair deal. These include the typical profit margin taken by the rent-to-rent company, comparing rental yields and market rates between London and other regions, and determining the appropriate length of the contract. 

Landlords should also evaluate alternative options, such as property management companies or managing the property themselves, and thoroughly vet the rent-to-rent company’s reputation, insurance, and compliance with regulations.

Rent to rent in London vs the rest of the UK

A typical rent to rent company will aim to make a profit margin of around 20 – 30% on the rental income from your property. This means they will pay you a discounted rent, usually around 70 – 80% of the market rent, and keep the remaining 20 – 30% as their profit after covering their expenses.

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Regardless of the rates of rental yield, It’s essential to research the average rental rates in your area to determine if the discounted rent offered by the rent to rent company is reasonable. 

How long should your rent to rent contract be?

The length of your rent to rent contract is also a critical factor in evaluating the fairness of the deal. Generally, shorter contracts of 1-2 years may be more favourable for landlords, as it allows for periodic renegotiation of terms based on market conditions. 

For instance, a landlord may be stuck on the same fixed rent for years. Meanwhile, the rent to rent company has increased the rent in that time and increased their margins. A rental contract is often a lor shorter than 1-2 years, allowing the landlord to negotiate the fixed rent they have in place with the rent to renter. In the business model of rent to rent, this is not always the case.

a rent to rent contract

Compare rent to rent fees to fees with alternative services

When assessing whether a rent to rent arrangement is a good deal, it’s essential to compare the costs and fees involved with other property management options. Understanding how the pricing structure of rent to rent services compares and consider your options with alternatives as well.

Property management companies

Traditional property management companies typically charge a percentage of the monthly rental income as their fee, usually around 10-15% (Cozee are just 10%). By comparing this percentage fee with the discount offered by a rent to rent company (often 20-30% below market rent), you can evaluate which option provides a better financial return.

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Find longer term tenants

If you choose to manage the property yourself and find longer-term tenants, you’ll be able to keep the full rental income and perhaps not have to worry about void periods anyway, allowing you to feel more secure in with your property’s income while still keeping a lot more profit. 

You may have to reach out to an estate agent like Cozee with tenants that are students or international tenants as they often charge tenants for 6 to 12 months rent up front.

Use rent guarantee insurance

Rent guarantee insurance can offer landlords the same peace of mind for guaranteed rental income as using a rent-to-rent company. With rent guarantee insurance, the policy covers the risk of rent arrears – if the tenant misses payments, the insurance provider will pay the missing rent based on the policy terms.

This is something that a good letting agent will be able to set up as they onboard a tenant into a property.

Investigate if your rent to rent company has a good reputation

Ensuring that the rent to rent company you work with has a solid reputation and operates legitimately is crucial in determining if you’re getting a good deal. A reputable company is more likely to offer fair terms and comply with relevant regulations. Here are some ways to put your mind at rest:

Professional Scheme Why This is Beneficial Link to Read More
Using the right HMO licences • Ensures compliance with regulations
• Provides legal protection
• Maintains safety standards
Check if a rent-to-rent company is using the right licences here
Following the “How to Rent” guide • Protects landlord and tenant rights
• Ensures transparency and fairness
• Promotes responsible practices
Check if a rent-to-rent company is following the “How to Rent” guide here
Signed up to the Property Redress Scheme • Provides a dispute resolution mechanism
• Promotes fair practices
• Indicates commitment to professionalism
Check if a rent-to-rent company is signed up to the Property Redress Scheme here
Has indemnity insurance • Mitigates risks
• Offers protection against legal disputes
• Provides financial security
Check if a rent-to-rent company has indemnity insurance here
Registered with Companies House • Verifies legal status
• Provides basic company information
• Ensures transparency
Check if a rent-to-rent company is registered with Companies House here

Find the rent to rent company on companies house

In the UK, all limited companies must be registered with Companies House. As a first step, you can search for the rent to rent company on the Companies House website to verify their registration status. 

This will provide you with basic information about the company, such as the date of incorporation, registered address, and details of the company directors.

See if the rent to rent company has indemnity insurance

Reputable rent to rent companies should have professional indemnity insurance in place to protect both themselves and their landlord clients. Ask the company to provide proof of their indemnity insurance coverage, including the policy details and expiration date. 

This insurance helps to mitigate risks and offers protection in case of any legal disputes or claims arising from their actions. To read more about why rent to rent companies need indemnity insurance click here

a man holding his indemnity insurance

See if they are signed up to the property redress scheme

The UK government requires all property agents and managers to be members of a government-approved redress scheme. This scheme provides a mechanism for resolving disputes between agents and consumers. Click here to read more.

Checking if the rent to rent company is a member of the Property Ombudsman or the Property Redress Scheme is a good indicator of a company’s commitment to fair practices.

Make sure they are following how to rent government advice

The UK government publishes a “How to Rent” guide that outlines the rights and responsibilities of landlords and tenants. 

Ensure that the rent to rent company is familiar with this guide and follows its guidelines, such as providing tenants with the necessary documentation, respecting notice periods, and adhering to deposit protection rules.

A woman who is holding her right to rent

Make sure the rent to rent company you’re using use the right licences

Depending on the type of property and the arrangement, rent to rent companies may need to obtain specific licences or permissions. For example, if they plan to convert a property into a House in Multiple Occupation (HMO), they will need to secure an HMO licence from the local council. 

As well as this, you may want to check if anyone has anything to say about the rent to rent company you’re interested in by looking at the National Residential Landlords Association by clicking here.

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