Rags to Riches or a Road to Ruin?
(1) Lease: The investor takes a tenancy from a property owner, commonly for 3-5 years, and then lets individual rooms to sub-tenants. (The properties are commonly large houses with at least 5 rooms; investors will often add to these by converting reception rooms into bedrooms to maximise income.) The investor then makes their profit from the difference between the monthly rent to the owner and the total rent collected from their sub-tenants.
(2) Agency: This involves the investor taking on the role of the traditional Estate Agent. These arrangements are less common, however, as the owner bears of the risk of rooms being left empty. They must also approve and grant the tenancies in order for it to be an agency relationship, which involves being 'hands on'.
Contrary to many articles , there is nothing new or revolutionary about Rent2Rent: the strategy simply boils down to the investor being able to rent individual rooms in a property for a cumulative sum which is greater than the monthly rent to the owner. It is no different from renting a block of flats from a freehold owner and aiming to make a profit by sub-letting the flats at a higher total amount. The only real difference is that Rent2Rent deals with individual rooms, rather than flats, as investors attempt to squeeze every last drop of profit from the market.
For the owner of the property, the attraction is obvious: they gain a tenant with a guaranteed income for a long period; their tenant will manage the property, collect the income, take care of certain works of repair, find sub-tenants and manage the various relationships. The owner can elect to have no contact with the tenants and remain almost completely 'hands off'.
By contrast, the investor takes more of the risk by taking on a lease for a long period. They can, however, make respectable profits provided they have sufficient capital to pay for obtain the lease, pay for repairs, find prospective sub-tenants and carry out the referencing checks.
But while many property investors see Rent2Rent schemes as a legitimate way to invest, the course of investment can be fraught with difficulty and risk. Investors are often seduced by self-appointed 'gurus' who make bold claims of huge profits, while at the same time hiding behind pages of disclaimers. Properties can require regular and expensive maintenance; sub-tenants can themselves prove to be problematic. All it takes is for one tenant to be delinquent on their rent, and a profitable investment can become a money pit.
At Jamieson Alexander, we have encountered the following when advising both owners, investors and tenants involved in Rent2Rent Schemes:
Leases without proper forfeiture clauses, meaning that owners cannot forfeit in the event of breach by their investor tenant.
Agency agreements which are, in fact, likely to be leases: clients do not appreciate that if they have exclusive possession of the premises, they may well be deemed to be a tenant, rather than an agent of the owner – regardless of whether they may have agreed that the agreement is not to create a relationship of landlord and tenant.
Agents signing ASTs on behalf of the owner: Estate Agents are agents of limited authority. They are not normally authorised to enter into contracts to buy or rent on the owner's behalf, merely to find them the buyer or tenant, as appropriate. Some agents have unwittingly become personally liable under tenancy agreements by failing to identify themselves as agents.
Failure to provide the correct address for the landlord.
Failure to register leases over 3 years' duration with H.M. Land Registry.
Failure to properly register tenancy deposits, leading to claims against owners and investors. This can lead to issues regarding
In many cases, properties let under a Rent2Rent scheme are subject to the provisions of the Housing Act 2004 regarding Houses in Multiple Occupation (HMO). If the framework for the scheme is not clear and unambiguous, complicated points on liability can arise.
If you are considering entering into a Rent2Rent transaction, it is vital that you understand the legal implications and the legal framework that will work best for you.
At Jamieson Alexander, we can assist with the full range of issues arising out of Rent2Rent arrangements including:
Drafting or reviewing Leases and Agreements;
Tenancy Deposit disputes for Landlords, Agents and Tenants.