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Rent guarantee schemes, also known as “rent-to-rent”, might sound great to landlords in theory – especially those who want little-to-no involvement in the running of their property portfolios.
These firms effectively “guarantee” a landlord’s rent will be paid each month, regardless of whether a tenant is in situ. They’ll also find the tenants, so a landlord doesn’t have to – and they’ll usually take on the property’s ongoing maintenance needs.
But beware: there is huge scope for these schemes to fall foul of their promises.
For starters, companies don’t need much capital to set themselves up in order to run this type of service. If a business has no backers and tenants suddenly stop paying rent, then the company coffers could quickly run dry, and your contracts stipulating when rent is paid could be reneged on.
If the company goes on to declare itself bankrupt it can then be very hard to get any sort of recourse.
Also, all it is that these firms are doing is subletting – and you can enter into those sorts of contracts quite easily. Landlords and their tenants enter into these kinds of agreements all the time.
Paul Shamplina, who runs the solicitor Landlord Action, said rent-to-rent arrangements “can be good if you’ve got the right company”.
He added: “You have a lot of landlords who have a bad experience with letting agents and begin to loathe paying their management fee. That’s when they enter the rent-to-rent industry.”
Unlike letting agents, rent-to-rent firms don’t charge management fees. Typically, they earn their money from keeping a portion of the rental payments.
Tenants are usually sourced from councils’ social housing waiting lists. Some firms charge councils more than they pay you and pocket the difference to make up their fee. Others may also pay you below market rate in order to take their cut.
But first, the basics – how to find a reputable operator
Elliot Leigh, a rent-to-rent firm in Ilford which has been operating for more than 20 years, currently manages around 1,600 properties. It takes on three and five-year leases and lets landlords’ properties to the council.
Leigh Young, the firm’s director, warned that there are some “rubbish” agents out there who set up and disappear within the year – so taking some time to vet companies before you sign anything is paramount.
He added: “You’re giving them one of your most valuable assets. And yet, many landlords are happy to go round to an agent and hand over the keys without doing any research. You’d do more due diligence [buying] a sofa.”
Mr Young advises that you check out a prospective company’s accounts on Companies House. “We have to be able to sustain your rental income. Look at the age of the company. Get some references from local authorities – do these firms actually work with who they say they work with?”
Better yet, you could go to your local council and ask for recommendations of firms it works with.
Elliot Leigh is currently backed by Barclays Asset Management. Checking for a legitimate backer like this could help allay any fears that the rent won’t get paid.
Another thing to check: are they signed up to a redress scheme? The Property Redress Scheme, which can make awards of up to £25,000, is one.
These schemes mean that if you are unhappy with the condition of the property when it is returned to you, then you can complain and seek compensation.
Check the fine print
When doing business with a rent-to-rent operator, they’ll usually ask you to sign a lease. It’s worth getting this checked by a lawyer, to make sure you’re absolutely clear on the terms.
Often, property owners don’t know what they are entering into, according to Sean Hooker – head of redress at the Property Redress Scheme.
He said: “They like the idea of getting paid every month, but don’t realise they have no control over who the property is rented out to.”
You should also check details on when the rent will be paid, and whether there are any caveats attached to that payment date – for example, what happens if the payment day is a Monday and there’s a bank holiday?
There may be a provision in the lease for an emergency, such as disruptions to the property’s gas or electricity supply. Rent-to-rent firms will need to fix these issues pronto, and if their client – the landlord – isn’t readily available then they may need to spend money without consulting you.
Elliot Leigh, for example, has a provision in its leases which states it will not leave families without heating and hot water. The firm has its own accredited repair staff and sets out a buffer of a couple hundred pounds for these scenarios, which is payable by the landlord.
Some specifications will depend on an individual council’s requirements. Unlike the private rented sector, where “PAT” tests will suffice to make sure the electrics are up to scratch, most councils will require NICEIC-approved tests to be carried out.
Most also require properties to be inspected every eight weeks, so this should be stipulated in the lease. If it’s not, ask why not.
Rather than using assured shorthold tenancies, rent-to-rent firms tend to use licence agreements. In theory, this makes it quicker to evict an anti-social tenant who might have damaged the property.
But remember, you’ve signed a lease. So if you want to take back control of the property before that lease is up and a council tenant is in situ, you simply can’t unless the rent-to-rent firm has stopped passing on the rent.
Make sure you’re not losing out on too much rent
Most rent guarantee operators can take anywhere between 20pc and 40pc of the rent they charge the council on a let, according to Mr Shamplina.
This should include practically everything you’re due to pay. Landlords typically shouldn’t be paying any lettings or management fees, like they would an estate agent, and a lot of rent-to-rent firms will also cover repairs – but check whether this is in the lease, rather than just assuming.
There have been cases submitted to the Property Redress Scheme where rent-to-rent firms were making almost double what the landlord was making.
To avoid this, it could be worth establishing your own relationship with your local council. That way, you can make sure you’re in-the-know as to how much money is actually flowing through your property at any one time.
Ongoing due diligence
Some unscrupulous rent-to-rent firms have been known to cram small properties with as many as 15 tenants – and the landlord is none-the-wiser.
This is why blindly handing over the keys to a company you haven’t checked out could later come to bite you.
The lease you sign will probably prevent you from visiting the property or interacting with tenants, so it might be difficult to make sure everything is being done above board. Therefore, these are more questions you should put to a potential rent-to-rent operator before you sign up: how can they assure you that things are being done by the book, and that tenants are being placed appropriately?
It is also important to check you have a HMO licence. This stands for “House of Multiple Occupancy”. This licence is required in the private rental sector if your house is being let to more than two separate households (i.e. more than two unrelated individuals are living there).
If your property is being let to council tenants, you need the licence regardless of who lives there.
If the rent-to-rent company assures you they’ve sorted this, ask them to prove it with the certification. There have been instances, according to the Property Redress Scheme, where firms haven’t actually secured the licence, despite saying they had. This could then leave the landlord vulnerable to potential legal action.
Know what you could be liable for
The Renters Reform Bill, which is still making its way through parliament, is meant to be looking at a Supreme Court case to clarify whether a property owner or the sub-letter is responsible for securing an HMO licence in a rent-to-rent agreement.
The case, known as ‘Rakusen v Jepsen’, received a judgment in March 2023. It fell in favour of the landlord, assigning responsibility to the rent-to-rent company.
If a landlord doesn’t obtain an HMO licence where it is legally required, they can be fined up to £30,000 by the council and then be ordered to repay a year’s worth of rent back to the tenants.
Mr Hooker, of the Property Redress Scheme, warned that while the judgement of the Rakusen v Jepsen did let landlords off the hook, this could all be overturned.
It is one of a number of amendments that could be added to the Renters Reform Bill.
Mr Hooker said the Government is keen to place this responsibility with the landlords themselves instead, so it’s worth keeping an eye on how the bill evolves.
If the judgment is overturned, landlords without an HMO licence – regardless of whether the rent-to-rent firm said they obtained one – could face criminal prosecution and find an angry council chasing at their heels.