Property owners are continuously seeking ways to maximise their income while reducing the risks associated with letting out their properties.
Two popular options that have gained traction in recent years are guaranteed rent and rent-to-rent schemes due to popular property influencers like Samuel Leeds.
But how do they work, and what are the potential benefits and drawbacks for both landlords and tenants?
We asked real estate experts for their insights.
What is guaranteed rent?
Guaranteed rent is a property management scheme where a landlord enters into an agreement with a letting agent or property management company to receive a fixed rent every month, regardless of whether the property is occupied or not.
Jamie Alexander, a mortgage broker from Alexander Southwell Mortgage Services, gave us an overview.“Guaranteed rent is pretty much what it says on the tin. It’s when a landlord hands over their property to someone else, usually a company or letting agent, who promises to pay them a fixed monthly rent no matter what. It’s like having a steady income for your property, even if it’s sitting empty.”
This model removes the stress of dealing with tenant voids and fluctuating rental income, providing the landlord with financial stability.
How guaranteed rent works
- The landlord signs a contract with a letting agent or property management company that offers a fixed rent for a set period, typically one to five years.
- The agent or management company takes over the responsibility of finding tenants, managing the property, and dealing with maintenance issues.
- In return, the landlord receives a guaranteed monthly payment, irrespective of whether the property is rented or not.
Robin Edwards, a buying agent at Curetons Property Finders, says that the guaranteed rent model often appeals to landlords seeking stability, “They appeal because it can provide landlords with a fixed stable rental income and usually with minimal involvement in the management.”
What is rent-to-rent?
Edwards, explains what rent-to-rent is,“Rent-to-rent is when an individual or company rents a property, then aims to sublet it to tenants at a higher price, managing the property in exchange for a profit.”
The tenant or company acts as a middleman, managing the property and potentially making a profit by charging more than they pay to the landlord.
Alexander, also explained the rent-to-rent model,“Here, you’ve got someone renting a property from the owner and then turning around and subletting it at a higher rate. Think of it as a clever way to make some cash without actually owning the bricks and mortar.”
This arrangement is often used in multi-let properties or houses of multiple occupancy (HMOs).
How it rent-to-rent works
- The tenant (or rent-to-rent business) leases a property from a landlord under a standard rental agreement.
- They then sublet the property to multiple tenants, often on a room-by-room basis, while still paying the landlord a fixed rent (agreed in the initial contract).
- The rent-to-rent business manages the property, handles the tenants, and takes care of the maintenance and compliance issues, in exchange for the potential to make a profit from the difference in rent.
Do either of these models still work?
Alexander believes these models still have a place in today’s market, “It 100% does for some people! In the right circumstances, these models can be quite effective. For landlords, it means reliable income without the hassle of managing tenants or dealing with maintenance issues. And for those in the rent-to-rent game, it’s a chance to profit without needing a huge deposit to buy property.”
Whereas, Edwards said there is some diminished interest due to tighter regulations and scrutiny. “There is still a huge interest in these models. For some the appetite has diminished somewhat due to tighter regulations and increased scrutiny. However for many professional landlords they remain a popular and lucrative part of their business.”
Popular areas for these rental models
Both experts note that location and demand are crucial for either of these property rental models to work.
Alexander told us, “In hot rental markets like Southampton & London, these models can really thrive. But in less desirable areas? Not so much.”
“Typically it used to be mainly large urban areas with a high rental demand where this model was most popular,” said Edwards, “However with the current major lack of housing across the UK and soaring rents and demand for properties it would work in most areas of the country now.”
Legal considerations and compliance
Edwards warns, “There are a lot of legal issues with these models which landlords need to be very careful they don’t fall foul of. If it’s an HMO it will need licensing by the local authority and will probably need updating to make sure it is compliant with all the latest rules regarding fire safety and minimum room sizes for tenants.”
Alexander echoes the importance of diligence,“Caution is key, bth landlords and operators are being more careful these days. It’s about making sure everyone knows what they’re getting into with solid agreements. Know the rules. With regulations tightening up in the rental space, staying informed is crucial.”
Pros and cons of guaranteed rent
Alexander explains the appeal for landlords, “Financial peace of mind is huge. Landlords love knowing they’ll get paid every month, even if their place is empty. It takes the pressure off so they don’t have to worry about finding tenants or handling repairs.”
Pros
- Steady income: Landlords are guaranteed a fixed rent each month, regardless of whether the property is occupied or not.
- Reduced risk: The agent or property management company assumes the responsibility for finding tenants, managing the property, and handling maintenance.
- Hassle-free: Landlords don’t need to worry about the daily tasks involved in managing a rental property.
Cons
- Lower rent: The rent paid by the agent or management company is often lower than what the landlord could receive from direct tenants, as the company needs to make a profit.
- Limited control: Landlords may have less control over the property’s tenants and the level of care given to the property.
Pros and cons of rent-to-rent
Pros
- Potential for higher profit: Rent-to-rent businesses can earn a profit by renting out individual rooms or charging higher rents than the landlord’s fixed amount.
- Professional management: Rent-to-rent businesses are often more experienced in property management and tenant relations, ensuring the property is well maintained and compliant with regulations.
- Reduced vacancy risk: Rent-to-rent operators typically strive to keep properties fully occupied, reducing the risk of void periods for landlords.
Cons
- Potential for property mismanagement: If the rent-to-rent business is not well-run, it can lead to property damage or compliance issues.
- Short-term contracts: Rent-to-rent agreements are often short-term, which means landlords may face uncertainty if the agreement ends and the operator finds other opportunities.
Are these schemes right for you?
Both guaranteed rent and rent-to-rent schemes offer distinct benefits to landlords, but they also come with their own set of challenges.
For landlords seeking guaranteed income with minimal hassle, guaranteed rent schemes can provide peace of mind and stability.
However, they may accept lower rent in return for the security of knowing their property is managed by a professional team.
For landlords who want higher returns and are willing to take on more complexity, rent-to-rent could be an option.
Alexander emphasises strategic thinking and financial preparedness, “I think guaranteed rent and rent-to-rent have their place in today’s market, but do your homework, know the rules, and think long term. Sometimes these types of deals can be a headache to mortgage, so go into the whole process with more money than you initially plan for.”