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Does Rent to Rent really offer “guaranteed income” for landlords?

rent to rent agreement

What does Rent to Rent mean?

This is a strategy beloved of many property trainers whereby someone rents / leases a property from a landlord and then uses the property to provide serviced accommodation, or an HMO. The rent to renter then sublets the property at a higher amount than they pay to the landlord owner. They make make a profit in return for the risk taken and the service they provide. 

As the property will be used as a business, it’s not possible to use an assured shorthold tenancy agreement. Instead, a specialist commercial lease is necessary.

A useful summary of rent to rent is in the witness statement of Ben Beadle of the NRLA in the case Rakusen v Jepsen about rent repayment orders in the Supreme Court. Click here to download Ben Beadle’s witness statement.

Key factors for success for the rent-to-renter

For this strategy to be profitable from a financial point of view for the rent-to-renter, there must be enough of a margin between the outgoings and the income. It’s a way to earn additional income without the same capital investment required for a buy to let investment.

For serviced accommodation, it works best in areas where guests pay a highly nightly rate, and the landlord receives a low monthly rent. With HMOs, there needs to be a significant difference money the tenants pay on a room by room basis, and the amount the landlord receives. However, there are considerable set up costs for both serviced accommodation and HMOs. There are also licensing considerations and compliance with the HMO Management Regulations for HMOs.

Finally, the location of the property is key for both strategies. It needs to be popular for short-term lets if for serviced accommodation and itcan be risky due to void periods, because the outgoings for the rent-to-renter nevertheless continue. Likewise, for HMOs, it must be an area popular with sharers for there to be sufficient demand from tenants.

>> Related Post: What landlords need to know about HMOs

>> Related Post: Landlord guide to serviced accommodation

Pros and cons of Rent to Rent for landlords

The strategy can potentially benefit the landlord, if they indeed receive the promised “guaranteed income without the responsibility”, regardless of whether the property is occupied. The landlord would also still benefit from the property’s capital growth.

However, and this is a big caveat, the guarantee is only as good as the company offering the guarantee. The landlord needs to be sure the rent-to-renter will look after the property properly, and comply with all the regulations. Consequently, the landlord will need to do extensive due diligence to make sure that the rent-to-renter has sufficient financial standing to be able to afford to keep the property in good repair, is an accredited landlord with relevant training and experience on the management of HMOs (if it’s going to be an HMO) and can demonstrate that the property and tenants will be a safe pair of hands.

Landlords should also check up on the performance of the rent to renters once the contract is signed, especially whether they get an HMO licence. I would also advise that landlords inspect the property at least once a year, if not twice, to make sure it’s in good condition and that the rent-to-renter is complying with their obligations in the lease. There is also more wear and tear on the property with short-term lets and sharers, and rent-to-renters might not keep on top of repairs and maintenance.

There are some good rent-to-renters around, but landlords should view approaches from individuals promising “guaranteed rent” with scepticism.

>> Related Post: The truth about “passive income” for landlords

Rent Repayment Orders

Rakusen v Jepsen judgment from Supreme Court on ipad about rent to rent and rent repayment orders

Rent repayment orders (RROs) of up to one year’s rent can be made against landlords who have committed certain housing-related offences. For instance, operating an HMO without the correct licence. If an RRO is made against a landlord, they have to repay a certain amount of the rent paid by or on behalf of a tenant.

A case went all the way to the Supreme Court on whether RROs can only be made against a tenant’s immediate landlord (the rent-to-renter). The tenant was arguing that RROs could be made against a superior landlord.

The Supreme Court decided in March 2023 that the rent-to-renter, and not the superior landlord, is responsible for paying RROs.

This was partly because the court decided that ‘repay’ in section 40(2) Housing and Planning Act 2016 ‘naturally refers to a landlord repaying rent that it has received directly from the tenant’. The court believed it would ‘strain the language to say that a superior landlord is “repaying” rent to a tenant from whom it had never received any rent’. 

Here are links to the official summary of the Rakusen v Jepsen and the full judgment from the Supreme Court.

However, this is about to change, and will make rent to rent considerably riskier for the superior landlord.

How Renters Reform Bill will change Rent Repayment Orders for Rent to Rent

The Renters Reform Bill includes a provision which allows Rent Repayment Orders (RROs) to be made against superior landlords, reversing the Supreme Court decision in Rakusen v Jepsen.

The Bill will amend Chapter 4 of the Housing and Planning Act 2016 to enable the First-tier Tribunal to make an RRO against both the immediate landlord (the rent to renter) and any “superior” landlord. The Tribunal will also have the power to apportion liability between the immediate and superior landlord for the amount due under the RRO, or hold them jointly and severally liable.

Finally, this new wording doubles the rent repayment period from 12 months to 2 years.

Once the Renters Reform Bill comes into effect, superior landlords will remain liable for the actions of rent to renters. This means all superior landlords must supervise rent to renters closely, and ask for evidence of an HMO licence or compliance with the registration scheme for short term lets.

>> Related Post: The new Rent Repayment Order rules

>> Related Post: What landlords need to know about short-term lets and serviced accommodation

Final thoughts

The marketing of rent to rent makes it sounds like the holy grail of “passive income” or “guaranteed rent without responsibility” for the superior landlord. However, it comes with considerable risk to the superior landlord, who needs to trust that the rent to renter will look after the property properly. Entering into a rent to rent contract does not give a superior landlord truly passive income. They still need to supervise the rent to renter.

Whilst leasing a property to an established supported living provider or a local authority is at the lower end of risk for the superior landlord, leasing a property to a rent to renter who has little experience or assets is foolhardy. I personally would never lease one of my properties to a third party to sublet to others. They are valuable assets and I want to look after the property and the tenants myself. That way, I know they’ll be in safe hands. Mine.

Cartoon of overcrowded hose, and Rent to Rent superimposed on top, described as the latest get rich quick scheme
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