Many hail rent-to-rent as a great way to build wealth from a property business with no money down and an instant cash flow.
But this dream of quick riches for property managers is often a nightmare for the landlords who turn over their properties in return for a guaranteed income.
Rent-to-rent is fraught with problems unless a watertight contract is in place — and even then, financial and legal risks riddle the deal.
Some landlords find they are thousands of pounds out of pocket when unscrupulous property managers disappear, while tenants are never sure who is responsible for repairs and maintenance.
What is rent-to-rent?
Rent-to-rent goes by several names, including rent2rent and guaranteed rent.
Whatever the name, the structure of the deal is the same.
The superior landlord is the owner of the property
The immediate landlord leases the property on a full repairing lease for a fixed term, which is generally between three and five years
The tenant has a contract with the immediate landlord, who collects the rent and maintains the property
In theory, the immediate landlord finds tenants, collects the rent, takes a slice as a management fee and pays an agreed balance to the superior landlord. The payment is due even if the property is empty.
The immediate landlord also pays for repairs and maintenance and must return the property in the same condition as at the contract’s start.
Many landlords eye rent-to-rent as a hassle-free way to make money from an investment property without taking a hands-on approach without realising the myriad of things that can go wrong.
What could go wrong with rent-to-rent?
Rent-to-rent is a no-hassle way of renting out a home for the superior landlord — until something goes wrong.
To turn a profit each month, the immediate landlord must seek homes for rent at below-market value or persuade a landlord to turn over a property for a discounted rent. There’s simply no margin for profit otherwise.
The immediate landlord takes a risk with the condition of a property. The monthly slice of the rent carved out of the deal soon vanishes if the property needs upgrading.
A looming financial hurdle is bringing a home ranking D on an Energy Performance Certificate (EPC) to grade C for new tenancies by April 2025 and all tenancies by April 2028. Government estimates suggest this could cost up to £7,000 for each property.
Some rogue middlemen have sub-let a rent-to-rent home multiple times, with each believing they have contractual rights over the property.
Sub-letting without permission can trigger problems with mortgage lenders and the building’s insurers.
If a rented home is empty for two or three months, the property manager must pay the superior landlord the guaranteed amount.
Rent-to-rent managers inevitably trade as companies with no assets as a shield for this risk. Bumping the company safeguards the property manager, but leaves the superior landlord out of pocket.
Rent Repayment Orders
In two separate cases before property tribunals, judges had ordered the superior landlords to refund rents to tenants for offences committed by the immediate landlords.
However, in Rakusen v Jepson & Ors, Safer Renting Intervenor (2021) EWCA Civ 1150, these were overturned. The Court of Appeal held that where the immediate landlord is at fault, they will be ordered to repay rent and not the superior landlord.
Please see the Nearly Legal post for more details on the Court of Appeal case.