What is Rent to Rent Property Investment?
Rent to Rent as a property investment strategy has existed in the UK for a number of years. It has been utilised by both experienced and first time investors as a way to build a property portfolio, without actual ownership, to generate a monthly cash flow.
So here’s how it works.
As an investor, you agree to take over the running of a property from the owner for a fixed period of usually three to five years, and pay them an agreed monthly rental for the duration of the lease period. You also pay the utility bills and Council Tax during the lease. Generally, the properties that work best for this strategy are HMO’s (Houses in Multiple Occupation), or properties that have potential to work as an HMO. Five bedroom, or larger, houses, preferably with existing HMO licences in place, are ideal ones to consider for rent to rent. The benefit for the landlord is that they have a ‘hands-off’ investment property for several years, with guaranteed rent every month. The benefit for the property investor is that they can have control of a property that gives them a monthly cash-flow, with very little cash down up front. Both landlord and investor make money. It’s a simple win-win. At the end of the lease period the investor either hands the property back in a newly decorated condition, or negotiates a further lease period with the landlord.
So, let’s look at an example of how the numbers might work on a typical rent to rent eight bedroom HMO in a large town or city.
Property ‘A’ has previously been rented out as a licenced 8 bedroom HMO, generating £450 per calendar month (pcm), including bills, per room. The owner would like to take a step back from their involvement with the property and let someone else manage their asset. The property has generated £3,600pcm including bills (£450 x 8) over the last couple of years. However, the landlord is prepared to accept a rental on a long lease from an investor of £2,700pcm, including bills. This leaves a £900pcm margin, or cash flow, for the investor. Both landlord and investor are happy! As an investor you may sensibly want to factor in other costs such as minor maintenance and occasional voids (when a room is vacant between tenants). Every investor has their own formula for this. However, between 10 and 15% of your monthly rental income is a good guideline. So, you might deduct £135 each month to cover these contingencies. That would leave you with £765 ‘profit’ each month or £9,180 per year if you are self-managing the property. Or £45,900 over a five year lease period.
To get started with a rent to rent property like Property ‘A’ you may need as little as £2,500 to £5,000, depending on the sourcing fee for the individual property. Remember, you will not need a mortgage or hefty deposit. Just a minimal initial financial outlay and the desire to generate a new income stream for yourself. Once you’ve started with your first Rent to Rent HMO, you can build a property portfolio relatively quickly – and certainly much quicker and more easily than if you were buying the same properties. Six to eight months into your first Rent to Rent lease you could ‘re-cycle’ the money you’ve already made from it into starting up your next Rent to Rent property. If you are adding just two similar properties per year in this way you can see how easy it is to build a healthy monthly income stream from your property portfolio, without having to own a single property. If that sounds like an approach you would like to follow, then Property Assist is here to help, to guide you through the process of acquiring your first Rent to Rent Investment Opportunity, and start building your portfolio. We’ll hold your hand and assist you step by step to make it a success. Simply contact Richard today to discuss the first steps.