Is Rent to Rent A Scam?

At only 25, he was earning £35,000 a month and widely acclaimed as a successful property entrepreneur with a “proven blueprint for cashflow”. He was renting out over 200 rooms in 40 different properties – but didn’t own any of them. But in late 2013, he suddenly disappeared. His agency was closed down and left deserted, and no calls from landlords or tenants were returned.

From property guru to fallen star

Welcome to the world of Daniel Burton, a fallen rent-to-rent star.

His disappearance left tenants and landlords stranded – with the former losing their home and their deposit, and the latter their rental income. On top of that, some landlords suddenly had to deal with tenants they didn’t even know of.

The rent-to-rent phenomenon emerged in the UK as a fad which promised many a better, more lucrative and at the same time more laid back lifestyle. Self styled property gurus would hold seminars and conferences, often for hefty fees, selling rent-to-rent as a “get rich quick scheme” and luring relative property newbies on how to successfully implement it,  and how to become a landlord of multiple properties without the burden or cost of ownership.

So how does rent-to-rent work?

A rent to rent tenant will be targeting tired landlords who are no longer interested in looking for tenants, let alone managing their property. The tenant will be entering a contract with the landlord to rent their property for an extended period of time – generally several years. Whilst the rent may be below market value, the landlord will be happy to accept this, either because of a lack of market knowledge, or because of the security offered by the tenant – steady, guaranteed monthly rent, no void periods and no tenant issues.

Rent-to-rent is not always a scam, and not all landlords or tenants involved in such a scheme will end up like Burton’s victims. The more honest rent-to-rent tenants will enter a contract with the landlord to manage their property, which makes it clear that the property will be let to third party tenants, but that it is not a subletting agreement. Very often though, rent to rent tenants will not mention to the landlord that the property will actually be sublet, with the landlord believing the property is only being used by the tenant they entered the contract with.

The primary tenant will then rent out the landlord’s house on a room by room basis – transforming it into an HMO (House with Multiple Occupiers). Very often, they will also convert the living room into an extra bedroom in order to generate additional income. The sum of the individual room rentals will therefore easily exceed the below market rent paid to the house’s owner, and allow the rent to rent tenant to make a neat profit, even after deducting running costs. £35,000 a month in Burton’s case.

Is rent-to-rent legal at all?

Rent-to-rent can easily turn out to be fraudulent. HMOs need to meet certain standards, and different councils have different rules when it comes to HMO regulation. The contract between the main tenant and the landlord need to be bullet proof and to offer enough protection to the landlord, and to the tenants renting from the main tenant. Also, there needs to be a possibility for tenant eviction in case somebody doesn’t comply.

Landlord licensing,  immigration checks and stricter HMO regulation: what now?

Any landlords or agents who get approached by a tenant offering them a rent-to-rent scheme should therefore be extremely cautious and make sure they have thoroughly background checked the individual they are dealing with. Also, they should make sure they can access the property for regular inspections and stay in control of the tenants using the house. With HMO licensing getting stricter, in addition to recently introduced landlord immigration checks and landlord licensing in selected areas, remaining compliant will only become more difficult. Unfortunately, with local authorities increasingly engaging into a rogue landlord  witch-hunt, there may well be more cases like Daniel Burton’s waiting to come to the fore.

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