Definition of Rent to Rent
This is a strategy 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 makes 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 strategy to be profitable, there must be enough of a margin between the outgoings and the income.
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. i.
Finally, the location of the property is key for both strategies. It needs to be popular for short-term lets if for serviced accommodation. Likewise, for HMOs, it must be an area popular with sharers for there to be sufficient demand from tenants.
Pros and cons for both parties
The strategy can benefit the landlord, who receives a guaranteed income without the responsibility, regardless of whether the property is occupied. The landlord will also benefit from the property’s capital growth. However, there is more wear and tear on the property with short-term lets and sharers. Also, the landlord needs to be able to trust that the service provider will look after the property.
For the rent-to-renter, it’s a way to earn additional income without the same capital investment required for a buy to let investment. However, they need to pay set up costs for both serviced accommodation and HMOs. There are also licensing considerations for HMOs.
It can be risky due to void periods, because the outgoings nevertheless continue.
Rent Repayment Orders
Rent repayment orders (RROs) 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 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 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.
