Rent to Rent Schemes: Too Good to be True?
Rent to Rent: What You Need to Know to Protect Your Property
Admit it: at some time or other you’ve seen an amazing new product, imagined it solving all your problems and bought it straight away. Then three months later it’s gathering dust and you realise you’ve thrown away a few quid with no benefit.
That’s all well and good when it’s a £10 neck pillow, but what if the stakes were higher?
Well, there are plenty of scams and schemes out there which aim to make money from landlords. We all like to think we can spot one from 100 miles away, but sadly that’s not always what happens.
We’ve seen up close via the Mashroom Landlord Community how destructive some of the schemes can be. Ordinary, sensible, careful landlords have fallen foul of unscrupulous deals, and it’s a cause for concern in the sector, especially at such high-pressure times.
Someone who shares our concerns is Vanessa Warwick, a long-time landlord and the co-founder of Property Tribes, which is one of the UK’s leading property forums. Vanessa can often be found on Mashroom’s community too and has done her best to help those who are picking up the pieces after a property scam.
We had a chat with Vanessa about how to avoid being stung by a bad deal.
Is all Rent to Rent a scam?
Before we go any further, it’s important to point out that we’re not painting all people offering such a scheme with the ‘scammer’ brush. There are legitimate schemes and companies out there. However:
- So-called ‘property gurus’ promote Rent to Rent as a ‘no money down’ way to get started in property
- They sell courses on how to use this supposedly golden-ticket passive income strategy with no risk
- Intoxicated with the idea of an easy route to magnificent wealth, people finish the course and then go out into the world to make their fortune – only to find it’s not as easy as promised
How does Rent to Rent work?
It usually starts when you advertise, Vanessa tells us. ‘Someone approaches you and says they want to rent your property for an extended period of time, usually three to five years.’
‘They won’t pay you market rent, but they will take over the complete management of the property.’
‘This sounds appealing on the surface, but the reality is that person or operation doesn’t have the finance to guarantee payments, and what they intend to do is sublet the rooms on an individual basis.’
Some will guarantee rent for the duration of the agreement, but not all businesses do this, she adds.
It can seem an attractive proposition, because:
- The property gets a guaranteed tenant and rent for 3-5 years
- That tenant will manage the property, perhaps even improve it
- That tenant will collect the subtenants’ rent
- The owner can be hands-off while still getting the mortgage etc. paid
And meanwhile, the tenant makes their margin by charging subtenants market rent. Everyone’s a winner – in theory!
Rent to Rent operators often focus on:
- So-called ‘reluctant landlords’, who may have inherited a property rather than choosing the landlord life
- Seemingly hard-up owners who can’t afford to invest in a property to get the full potential out of it. And right now, there are more in that group than a few years ago.
Rent to Rent is riddled with risks
For starters, you’re trusting that the tenant will pay you a reliable income. That’s part of the appeal. But there’s a good chance that the person who approaches you is pretty broke. That’s why they’re working on a ‘no money down’ strategy rather than investing in their own property.
Vanessa explains what this means for landlords entering these deals: ‘Often the only way these operations have of paying you is if the subtenants pay you,’ Vanessa says. ‘But they often just keep the rent, and if any issues come up, the operator just disappears. The landlord is left with a house full of tenants they know nothing about.’
Even if the subletting agreement is itself perfectly legal, the act of subletting can:
- Invalidate your insurance
- Breach your mortgage conditions
- … And even break the law.
A further risk lies in a go-to method of Rent to Rent schemes: find a three- or four- bed house and rent it out as a house in multiple occupation, or HMO. This can bring in up to twice as much rent, but there are stringent laws on HMOs, including where they can exist.
‘This may sound appealing on the surface, particularly if you’re going to be away for a while,’ Vanessa continues, ‘but the reality is that they don’t have the finances to guarantee rent to you. They sublet the rooms and create a margin from that. There’s now a whole mass of what I call ‘property guru’ courses teaching people to do this, to create a margin out of someone else’s property.’
Even if all of the above risks are dealt with, ultimately you won’t have control over the property for the duration of the agreement, which in itself is a risk. A lot can happen in three years (or even three months) and no matter what – you, as the owner, are still liable.
How can landlords protect themselves from Rent to Rent?
Vanessa is keen to share her top tips to keep as many landlords safe as she can.
- If someone approaches you, especially on platforms advertising rooms to let, like Gumtree, offering to take the property for a few years, be on your guard. A legitimate and established company is very very unlikely to approach you
- If you’re considering using an arrangement like this – for instance, if you’re going abroad for a few years – go to a well-established property management company
- Do intensive due diligence on any company you’re considering. See how long the company has been in operation. Look them up on Companies House. You’d want to see they’d been in operation for at least two years to have any confidence
- The company should be a member of an independent redress scheme – either the Property Ombudsman or the Property Redress Scheme.
Vanessa’s bottom line? ‘Be sceptical. If in doubt, come to the Mashroom Landlord Community and ask. I’m a member and I try to answer as many questions as I can every day.’