The Property investor's Coaching Academy
This article, written by myself, appeared in the August 2017 edition of YPN. (Your Property Network magazine.)
Rent to Rent: For and Against
It’s not new: the concept has been around for a long time, but the name ‘Rent to Rent’ (or Rent2Rent) burst onto the property investment scene some years ago, and has been touted as the new way to maximise cashflow for very little outlay, but is it all it’s cracked up to be? Here we look at the pros and cons.
The idea is simple enough. You source and rent a suitable property and convert it into an HMO (House in Multiple Occupancy.) This ‘adds value’ to the deal: you rent from the owner/landlord a single let property, and let out each room on an HMO basis, therefore maximising your rental income.
From the owner’s point of view it’s ideal: a long term let (five years or more) no voids and no maintenance takes all the pressure off being a landlord. OK, he might have to reduce the rent to the investor, but the offset of no expenses and voids more than makes up for that. There is no real reason to use a letting agency either, unless he wants them to collect the rent for him, so he saves on agency fees.
From the investor’s perspective it can be a way into the property business without having to buy a property.
Let’s face it. Starting out in property investment is a big deal, and the early days are a dizzy whirl of trying to make sense of all the different strategies, laws, rules and potential problems that is an everyday part of the business.
Buying a property is a big deal when you’re new. It’s not that easy even if you’re experienced. There are many things to consider, some of which you might realise and some which you won’t, and only become evident later on down the line. (such as, will my interest-only BTL mortgage come to an end in the depths of a recession, and how do I get out of that?) Things such as: is this the right property? Is this the right area? What about planning, building, tax laws? Who do I use for a mortgage? What kind of mortgage do I apply for? What about solicitors, surveyors? How do I find the right builders/tradespeople? How do I find the right tenants?
It makes sense for a lot of people, then, to go down the Rent to Rent road. No problems with finding the deposit for a mortgage, surveys, credit etc. Simply rent a property, convert to an HMO, and sit back and watch the cash roll in, right?
Well, it’s not quite as simple as that. Let’s consider a couple of things. First of all, where is the profit in a Rent to Rent deal? It’s in the rent you receive for each room in your new HMO. In other words, any HMO will bring you increased rental income (assuming you run it correctly etc.) Where the profit isn’t is in the intial ‘Rent to-‘ part of the deal.
In fact, although some will have you believe that Rent to Rent is low-cost, cheap, free, or anything else, it is far from that. You will have to pay a deposit of course, fees for credit rating checks, inventory checks, etc. etc. Then you have to convert the property into an HMO which means fitting fire doors, alarms, furniture, possible decoration, white goods, broadband etc. There’s other things to consider, too, like will there be enough hot water available when everyone comes home from work and wants a shower. Is one bathroom/shower/toilet enough? Does the cold water storage tank have enough capacity for the extra load? If you need to install a larger one will the wooden joists take the extra weight? (I got caught with that one in an HMO I had in Reading.) What about cleaning for the communal area, maintaining the garden, if there is one?
Yes, the start-up costs can be substantial and a big surprise if you’re not ready for them, but no reason not to utilise HMO’s as a strategy, of course: the increase in rental over a single let is substantial, and will more than pay off in time.
The problem is, is that you are paying to uprate someone else’s property! The money you spend on the conversion is dead money – you can’t get it back. Also, bear in mind that you might have to return the property to it’s original condition at the end of your tenancy, so more expense. You will also be limited as to the works you can do – usually these will only be minor, and related to the conversion itself. You couldn’t, for example, build an extension, or convert the loft. You don’t gain from any equity increase, either, and of course, you have nothing to sell on. Your profit, then, is limited to your rental income, less all costs.
So, whilst running HMO’s as a business is good, renting the property in the first place isn’t so good. Well, it would be good if that was the only way of acquiring a property without buying it. But it isn’t…
What about Lease Options…
How about this for a scenario: you sign a contract with a property owner and lease for a property for anything up to twenty years. You don’t pay any rent, you just pay the owner’s mortgage for him (much lower than rent, so higher profit from the rental income.) You don’t pay any deposit. You don’t have an inventory or any other bills or fees. (Not even legal fees: you can use my contracts and you don’t need a solicitor.) You have a Power of Attorney over the property, so you can do as you like with it without asking the owner’s permission, like build that extension, convert the loft, or even knock it down and build a block of flats. It’s up to you.
Even better, you have an option to BUY the property at TODAY’S value, any time during the lease period, and the owner cannot refuse to sell it to you. Given that property, on average, doubles in value every ten years or so, you’re sitting on a goldmine, because all that equity is yours… Oh, and if the deal goes belly up, for any reason, you can just hand the property back to the owner without any penalty!
The contract is assignable, too, which means you can sell the contract on to someone else.
This kind of deal is called a Lease Option. If you haven’t heard of them before, now you have. If you’ve heard of them but not using them, you’re missing a huge opportunity.
So which route would you prefer? I’ve done both, and I know which I prefer. I’ve been in property investment for 33 years now, and I’ve used pretty well every strategy going, and Lease Options wins every time. With close to 100 option deals under my belt I reckon I’m well qualified to say that there is no better, cheaper and more profitable way to get into property investment.
How did I first come across Lease Options? From Donald Trump. Yes, President Donald Trump! Not personally of course – I’ve never met him, but in 2010 I was reading one of his books wherein he described these huge, multi-million dollar deals he was doing in Manhattan with very little money. He was using Options. I had one of those Eureka, lightbulb moments! I was blown away. What a fantastic strategy! I started thinking. If it worked over there, surely it could work here, too? I delved into it. I had no idea what was involved, what the contract contained, or how to negotiate them, but I persevered.
I finally found someone who could write a Lease Option contract. It cost me £1250 plus VAT. I am still using that contract today, as are my students, but it has changed and been honed massively since that first one. Crucially, I learned how to negotiate with estate agents and owners to get not only the deal, but the best deal. I learned on the job.
I’ve been using options for about seven years now, and during the first seven months of 2011 (January to July) I acquired 48 properties using options, and the MOST I paid for any property, including the fuel to visit them, was just £55. Yes, you read that right. £55 !!! I’ve done a lot more since then, and I’m still doing them. Well, why wouldn’t I? More to the point, why wouldn’t you?
Rent to Rent? How about: Options to Rent!!!
So, have I piqued your interest? Would you like to know how you can start using options properly?
The good news is that I can teach you. I run a series of Lease Option Masterclasses through my Property Investor’s Coaching Academy that covers everything you need to know, including the oh-so-essential negotiation techniques I use to such effect. You get all the paperwork and contracts too. If you’d like to know more about Options, any of my other property investing courses or my Personal Mentoring Programme, please visit: