Rent to Rent: Are you putting your assets at risk?
Now, rent to rent might sound like a dream come true for many landlords, but is it really as great for you as it sounds? What’s the catch?
Landlords have plenty of other things on their plate and with rent to rent, your property is taken over by a managing agent or company and they guarantee the rent for you. Plus, they sort out finding the tenants and managing the property and everything.
In this episode:
- We quiz property litigation solicitor and head of dispute resolution Adrian McClinton on rent to rent schemes, and whether they’re too good to be true…
- He explains the few pros, many cons and spectacular pitfalls of this ever more popular landlord loophole
- Face of Channel 5’s hit documentary ‘Nightmare Tenant, Slum Landlord’ and head of Landlord Action Paul Shamplina joins us to answer your questions
- Mashroom’s very own mortgage queen Sunny Dirmaite explains why mortgage advice is so essential
What exactly is rent to rent?
‘Rent to rent is a type of model that’s gained a bit more popularity in the market,’ explains Adrian. ‘The property owner normally rents their property as a buy-to-let to an individual, or individuals, that use the property as their only or principal home. That’s the pretty much bog standard buy-to-let. A rent to rent scheme is where the property owner instead rents the property to an individual or limited company, that company would call themselves ‘operators’, for the purposes of this conversation’.
The operator then sublets the rooms in the property individually to tenants on assured shorthold tenancies, and you can really start to see where the margin is. If the operator is getting the property on a normal tenancy, they’re making the margin on each individual.
‘That’s typically how they’re presented by the operator,’ warns Adrian. ‘The reality is different’.
Why is rent to rent so tempting?
So what’s the reality of rent to rent? Does it really offer the best of both worlds?
‘There are many things to think about,’ said Adrian. ‘First of all, if you look at it from a political perspective. If a landlord is looking at how they own their property, they need to first consider what are the mortgage conditions that they have if they’ve got borrowing on that? property? The likelihood is that the mortgage will stipulate what type of agreement the property owner can enter into. It’s likely to read that if they’re going to let the property, they must let it as an assured shorthold tenancy. So that’s the first consideration.’
‘The second consideration follows on from that and concerns the insurance that they have. The likelihood is that the insurance stipulates the type of tenancy that the property owner can enter into.’
‘Finally, the agreement that they would enter into with the operator. I’ve acted for property owners that have wanted to terminate a rent to rent agreement, and a lot of these agreements are very badly drafted. They tend to be weighted very much in the favour of operators, perhaps deliberately so, but it makes it very difficult to terminate them.
Can you find yourself in hot water with rent to rent?
If you fit the bill with mortgage, insurance and the agreement is watertight, are you home and dry legally?
‘Local authorities want to know if the property is an HMO, a house of multiple occupation. If you are renting your property to somebody who then turns it into an HMO without letting the local authority know, that can cause serious problems’, warned Adrian.
‘More often than not, the operator will need to turn a property into an HMO, which requires licensing within certain parameters. And it is then the operators, or what you hope is the operator’s obligation, to obtain the right licensing to carry out the right works to the property to ensure that it’s safe to use as an HMO’.
‘It may or may not be clear from the agreement between the property owner and the operator as to whose obligation that is, whether it’s even an obligation of the agreement itself. We touched on this on a previous Mashroom Show, where a particular individual in central London ended up being fined £11,000 by the local authority when his operator hadn’t fully informed him. At the Tribunal, the local authority said ‘No, it’s your responsibility. You’re the landlord’’.
It’s very concerning because the property owner no longer has control of the property, and yet they’re being lumbered with the obligations and the requirements to comply with the regulations in place.
Does freehold vs. leasehold affect rent to rent?
Clearly having a mortgage on a property makes a difference when it comes to planning this route, but is it important to consider whether you own the freehold of the property, or are a leaseholder?
‘As well as the mortgage consideration, a lot of leases will stipulate the type of sub-tenancy that a property owner can enter into, explains Adrian. ‘A lot of those leases will state that a property is not to be used as a house of multiple occupation, and any agreement that’s entered into is only with one joint party, for residential purposes and uses an assured shorthold tenancy. This means that a property owner could be in breach of their lease conditions, as well as the mortgage conditions. I’ve acted for freeholders that have had to take action against leaseholders that I’ve been using the property in this way, which is a breach of the terms of the lease’.
Is rent to rent worth considering?
Are there any circumstances where it can be a good idea?
‘I think that the rent to rent scheme could work for a property owner, but in very limited circumstances,’ admits Adrian. These circumstances include:
- Where the property owner owns the property outright
- The property itself is within an area that doesn’t require HMO licencing or it’s clear within the agreement whose obligation is to obtain those licences
- There is no lending on the property
Despite ending on a slightly positive note, Adrian has one final warning…
It’s very important that if anyone is considering handing over the most prized asset that they have to another individual or limited company, it is vital that they carry out due diligence on that individual and they ensure that they get the right legal documentation in place, so it’s absolutely clear whose obligation it is to do what.
Community questions answered
When it comes to getting landlord legal rights in place, there is nobody that understands the importance more than Landlord Action’s Paul Shamplina.
Paul has joined us again to tackle some of the questions you have been asking via our private landlord Facebook community, Mashroom Landlord Community Facebook. There are over 7,000 landlords in the community, and we are regularly joined on the page by industry experts and Mashroom team members, to answer questions live, so it’s a great place to air your thoughts and get some advice.
Inspections and access
One of our landlords has a tenant who is not allowing them access to carry out an annual inspection. What are the rules around this, as they want to make sure they can gain access and check their property?
‘As a landlord, you have to carry out an annual inspection’, stressed Paul. ‘You really have to do inspections, and the whole point of an annual inspection normally is to see that the property is in a good state, and that the tenant is looking after it.’
It should also be used with regards to lines of communication with the tenant – are they happy? The name of the game is that you want your tenant, who’s your customer and is paying more rent than ever before, to feel comfortable in their home. The more they see it as their home, the longer they’re going to stay there.
‘So, inspections and gaining access can be difficult. Make sure it’s very clear, whether it’s an email or WhatsApp, to say that I want to come and do my annual inspection. Give at least 24 hours’ notice and say ‘I’ll be coming here at six o’clock on Thursday, the 27th for blah blah blah. Can you confirm that you’ll be here?’ Because as a landlord, you should not be letting yourself into a property without the tenant’s consent, or the tenant not being there because they can make lots of accusations. So once the tenant consents, ideally put something in writing.’
The market is getting very tight for tenants as landlords leave the sector and rental stock decreases. Putting ourselves in our tenant’s shoes for a moment, it is easy to understand why they have the heebie-jeebies about their landlord rocking up, seemingly out of the blue – is there anything you can say to them to allay their fears?
‘It’s very easy for people to make money out of a property, explained Paul. ‘Make sure your rent’s paid on time, the property has been looked after, and there’s no complaints.’
‘I have a famous saying that ‘no news is good news’ as a landlord. If your rent’s being paid, but the tenants are not giving you access and you’ve been asking and making loads of requests, then that is a red flag. Why would they not let you go to the property if everything is okay; you’re their landlord? You, as a landlord, need to make sure everything is up to speed, but you can’t find out if you can’t go to the property. Maybe they might have done some damage, or you know, they are renting out a spare room. I think most genuine tenants will let you come in and do an inspection, but of course, you’ve also got to look at the tenant’s point of view’.
‘The tenant wants to stay in the property as long as possible. They like that property, rent is going up elsewhere, landlords are leaving the sector and unfortunately, the tenant chooses the property, they don’t choose the landlord. If a landlord for whatever reason is looking to exit the market, then unfortunately, the good tenant is served notice and they must leave, so I think also it’s important for the tenant to build a rapport up and a trust a working relationship with the landlord because of course, happy landlord should be happy tenant’.
Manage tenant damage!
Inspections are also key, of course, to check for any unreported damage. One of our community landlords has raised a question around just that.
They have recently had a situation where a tenant has failed to inform them of a water leak in an upstairs bedroom, which has caused subsequent damage to the walls and skirting boards downstairs. Who is responsible for rectifying this damage?
‘If there’s damage to the property, it depends – is it malicious damage, or is it obviously genuinely accidental damage?’ questioned Paul. ‘The problem is, the landlord can’t assess the damage unless you’ve been told about the damage, they’re not going to know there’s a leak unless the tenant tells him!
‘Undoubtedly the landlord will have landlord insurance and home insurance that will cover for floods, burst pipes and leakages, but the tenant has an obligation to tell the landlord and tell them sooner rather than later, because if this issue festers, then it becomes a bigger flood’.
The duty of care is the landlord to carry out the repairs, but the tenant should be telling the landlord of the leak and telling him early.
‘If that was my tenant, and I found out the leak was six weeks ago, and they’ve only just told me about it, I’d be fuming because why haven’t you told me?! It’s getting worse, you’re causing damage to my property! It may not have been your fault, but because you haven’t told me for six weeks, it is now!’
Do you think people have a fear of reporting issues like this for fear of being issued with a Section 21 notice even when the leak wasn’t initially their fault?
‘It could potentially become so bad that you might have to move that tenant out of the flat, and that would potentially be grounds for actually evicting somebody,’ mused Paul. ‘It is going to be weak grounds, but is it so bad that you need to get vacant possession? This is down to common sense of communication, in educating the tenant realising that you’ve got to work on business relationships, and that’s what it is, this is a business’.
It’s possible that people may feel a little more comfortable in reporting maintenance issues when Section 21 has been abolished. As you say, it’s a weak ground for eviction under Section 8, so with Section 21 gone, there would be little risk of eviction for reporting something like this.
‘We know that Section 21 is going to be changing at some point this year, the reforms are coming in and the grounds of Section 8 have to be updated,’ explained Paul. ‘The 17 grounds will be increased and made much stronger, with more mandatory grounds’.
I think Section 21 will be banned and abolished within a couple of years. You’ve got to put a bill together and then you’ve got to get it through parliament, and you know how busy politicians are, but it’s on the roadmap, it is going to be abolished, but I think it’ll be a couple of years
We’ve had a few nervous moments today, talking mortgages with Adrian, and the perilous ways in which you can put your property at risk by entering into a seemingly innocent scheme.
We’re joined by Mashroom’s very own business development manager for Mashroom Mortgages Sunny Dirmaite, who’s going to talk us through some of the safer ways to protect your asset, whilst ensuring your mortgage is kept rock solid.
‘We’ve been hearing some of the issues that can potentially arise around rent to rent,’ said Sunny. ‘Of course, at the moment, rent is at a record high, so I would recommend Rent Guarantee Insurance, although it’s not going to guarantee your rent in the same way a rent to rent scheme does, if your tenant does stop paying for whatever reason, you know that your income is protected.’
The essential issue here is the fact that rents are high. That makes it a lot more difficult for some tenants to pay – if you increase your rent by 5%, but your tenants wages haven’t gone up by 5%, of course there’s a greater risk.
‘Rent Guarantee Insurance just gives you that peace of mind and security if the tenant can’t pay for whatever reason, you know that your rental income is protected. If you can’t afford your mortgage repayments, that’s an expensive thing to have to deal with! With Mashroom, our policy is £299 for the year, or you can have it part of our Let & Protect plan, which is 5% of your rental income – but that includes a whole bunch of other necessities, that as a landlord you need anyway’!
What else is included?
‘So, you have your Home Emergency Insurance, your eviction and legal expenses. Your tenant find service is also included if you do need to find a tenant. There’s a whole bunch of stuff, it’s really useful!’
What are some other top tips to ensure that you are as on top of things as possible?
‘If your insurance is due for renewal, reach out to a broker. The earlier the better,’ stressed Sunny. ‘They can search the whole pool of insurers to make sure you’re getting the best price for the same level of cover’.
Good advice indeed!
The next episode of the Mashroom Show is airing on Friday the 2nd June, and we’ll be joined by Lisa Williamson, senior partner at Independent Adjudication Services, who’s going to be looking at what happens when it all comes to an end… yep, end of tenancy disputes (I’m sure we’ve all been there), how to handle them or even better, how to avoid them in the first place!
In the meantime, why not head on over to Facebook and join the Mashroom Landlord Community Facebook page. There are over 7,000 landlords regularly chatting, sharing queries and questions and engaging with industry experts, so it’s a great place to have a chat about what’s on your mind, and get some great advice.