In this blog I’m going to share my thoughts about Rent to Rent. I'm also going to share with you a step by step process which you can use to start finding potential rent-to-rent opportunities today. Now Rent to Rent is a great strategy for both new investors and also experienced ones. It's great for generating cash quickly, within a couple of weeks of finding a suitable opportunity. It doesn't require much capital, which means you can get a very high return on investment. It’s generally a great way to test out new strategies before buying a property for that purpose.
Equity in the Property the Day You Buy
I want to be open here and say this is not a strategy which I personally do. In fact, it's the only strategy I teach that I haven't personally done yet. I'll explain why later in this blog. Many of my students have been very successful in what I've taught them, even though I don't do this myself.
So what is rent-to-rent? Basically, you rent a property from an owner and give them a guaranteed rental income. Then you rent the property out at a higher rental income, either by just doing a better job than them or by using the property in a slightly different way. For example, it might already be set up as a licenced HMO, but for some reason, it's only half full.
Maybe it's a distant landlord who's not managing it very well or a letting agent that's not doing a great job. So the landlord is not receiving the full market rent and it's a very unreliable income. It goes up and down. That's not good for them, it's a lot of uncertainty. They just love the fact that you can give them a regular guaranteed income.
You make money by the difference between what you collect in rent, taking off what you pay the owner, and all the bills. On a bigger HMO, this could be a £1,000 or £2,000 profit per month. A minimum amount you want to make on a Rent to Rent is probably £500 a month.
"Now, let me give you a step by step process of how you can actually find some of these opportunities today."
The property might be a single let which obviously rents out in a different way to a HMO, subject to putting the required safety things in place, or it could be short term lets such as serviced accommodation. Often when people hear about Rent to Rent, they think it sounds like subletting, which is where you rent a property from a landlord and rent it out to other people normally without them knowing.
Of course, you shouldn't do that and this is not subletting. You either have a management agreement in place with a landlord, where you're putting people into the property on their behalf, but with a guaranteed rent. This is not what most letting agents do.
You've got to do these things in the correct way. It should be done with the landlord's full knowledge and permission. We're not trying to do anything sneaky here. We're very open on what we're doing and they can see the benefits for them and also the benefits for us. Now, typically, you take on a property for three to five years and you are going to pay all the bills as well.
Earlier I said that I don't do this strategy personally, and you might be wondering why not? Well, there are a couple of downsides.
Some Things to Be Aware Of With Rent to Rent
Firstly, this is not a passive income. You are actively managing the property which takes time and effort from you. That's the value you are bringing to this landlord. As you get more and more of these properties, you can absolutely bring in systems and people to help you. Otherwise, it's going to become a job as a full-time property manager. That's why I don't really do it because I've got much better ways of using my time. The other downside to this is that you don't benefit from the capital growth of the property, because you're going to give it back to the owner, in a certain time period.
You could potentially convert the Rent to Rent agreement into a Purchase Lease Option, which is where you have the right to buy. PLO’s and Rent to Rent Property are very similar in many ways. In fact, I think Purchase Options are more powerful than Rent to Rent.
However, many landlords won't agree to a Purchase Option because they want the capital growth themselves. So they are happy to get guaranteed rent from a Rent to Rent deal. So I teach all of my students to aim for a Purchase Option. But if the landlord doesn't want that, see if they will do a Rent to Rent deal instead as you could still get a very good cash flow from that property.
"You could potentially convert the Rent to Rent agreement into a Purchase Lease Option, which is where you have the right to buy. PLO’s and Rent to Rent Property are very similar in many ways."
I don't do Rent to Rent because it's not passive. However, I do have a plan, a goal, that in the winter 2022, ski season, I plan to hire a chalet probably in the French Alps and I'm going to run ski property mentoring holidays. We'll put in a team to cook, clean and look after all the guests. But I'm just putting this out there because you might know someone who's got a chalet we can hire, or maybe you know people who might want to come and work in that chalet. You might even be interested in coming as a customer and guest at the chalet.
This is exactly Rent to Rent. I will be renting from the owner of the property then selling weeks of coaching and mentoring along with skiing holidays, obviously, for a higher rent. So, obviously that will make money, but actually I'm doing it because skiing is my favourite hobby and what an amazing thing to combine it with. Keep your eyes peeled.
Now, let me give you a step by step process of how you can actually find some of these opportunities today. Remember, we are looking for landlords who are struggling to rent out their properties. They're not bringing the full rental income in.
You could take a single let and turn it into an HMO, or a single let and turn it into serviced accommodation. But I think the easiest people to work with are people who already have a property set up as a HMO, fully licenced, but they're just struggling to rent it out. Maybe they're a distant landlord. Maybe they've got a letting agent who's not doing a good job. Maybe they haven't got good descriptions or pictures of the properties. They're not getting many inquiries. For some reason, people are not coming through to their property. So, here's how you find them. Step one, go to a property listing website like www.spareroom.co.uk. That's the main website in the UK where landlords will advertise their properties for rent. Tenants can also advertise saying they're looking for properties.
Pin your postcode and look for properties where landlords are advertising. If they're advertising, it suggests that they've got empty rooms that they want to fill.
Here's a big tip. Don't look at the adverts that look amazing. You want to look at the adverts where it's not very good. There's a poor description, there's bad photos, the room is not being dressed at all. These are the ones that probably won't get many inquiries and so may remain unlet. After all, there is an oversupply of HMOs in most areas. You might be thinking, "Well, why do I want to take on an HMO if there's an oversupply?" Well, here's the point. It's an oversupply of very average HMOs. If you have a great HMO in good condition, at a reasonable rent, you will fill it much quicker than all the average bog standard HMOs out there.
You want to find someone who's got a very average HMO, they're not marketing it very well, and you can improve it for a very small investment, so it looks amazing. Then all you do is contact those landlords. You can send them an email through the system. You can send a text message saying you are interested in renting their room. You don't even have to do this yourself. You could get a virtual assistant, tell them what you want to do, and they could do it for you to save you time. Any responses which come back, they come direct to you so you can deal with the landlords. Something important to note, do not say in the email or the text that you're going to offer them a guaranteed rent. Wait till you actually speak to them and then you can share that information.
The reason is being, SpareRoom has got a little algorithm, a little bot, that works out if you are trying to say, "Hey, we'll give you a guaranteed rent." They think you might be a letting agent trying to steal business from them and so they will close your accounts. So just say, "I'm looking to rent a property." When you actually speak to the owner, step three, you could then explain that, "I'm a bit like you. I'm an investor and I have a whole load of professional tenants. We're looking for accommodation. I'd be interested in renting your entire property. Would you be interested in a three to five year guaranteed rent?".
Now you've got to understand, what's the problem? Why are they struggling to rent it? If it's because it's a terrible location and people don't want to live there. Well, you don't want to take that property on because you would have the same problem. If there is something wrong with the property that maybe needs fixing, maybe you can get the landlord to do it, or you might even pay for that, and get a rent free period to make sure you get your money back.
So it needs to be something you can fix. Very often it's just because the landlord's not very good at marketing and advertising their rooms and you can do a much better job once you know what you're doing.
Now, remember it is a numbers game. You're going to speak to lots of landlords. Many of them will not be interested. But I always say that the money is in the follow up. When you first speak to people, they may not be interested. If their property remains on the market and unlet, they will become more motivated because they're losing money. So all the landlords you speak to, keep in touch with them, reach out to them and see if they manage to rent their property out. Often landlords will also have more than one property.
So if they're not interested in doing a deal on this one, I'd ask them if they've got any other properties that they're struggling to rent out. The more landlords you speak to the better you will get at doing this. It is a numbers game, so why not give this a try in your area today?
"When you know what you are doing, it is very easy and quick, to check what the market rent would be for a property"
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