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Rent to Rent....Who do you trust?

With new Government legislation being introduced to the Private Rented Sector (PRS) all the time, some Landlords are struggling to cope and selling up while other Landlords and investors are finding new ways to generate cash flow from property investment. The standard traditional 2-3 bedroom semi-detached family property has been, and still does to a large extent, form the foundation of many property investors portfolio stock. However, the recent tax changes now mean that the returns are diminished for many. Quite how these changes are meant to aid the housing crisis is open for debate another time. Since the announcement in 2015 of the impending changes, that kicked last year, savvy entrepreneurs are finding new ways to benefit from property. This article will look at one way that newbies with little experience are entering the market and some of the pitfalls for the more experienced Landlords when dealing such folk who are offering Rent to Rent (R2R) services.

Guaranteed Rent

What is Rent to Rent?

Rent-to-rent is often referred to as guaranteed rent. An agreement is made between the Landlord and an individual or company, sometimes classed as the “middle tenant” that guarantees rent to the Landlord whether the property is occupied or not. This provides the Landlord with peace of mind that he will have a fixed amount of money coming to him every month.  Guaranteed rent

The agreements are typically between 2 -5 years. The middle agent is usually responsible for any contractual agreement with the occupiers of the property. Many inexperienced “middle tenant” are making common mistakes that can leave the both parties very exposed legally. Here we will look as some of the most consistent errors.

Licenses & Agreements

A popular trend at the moment is to convert a property into an HMO (House of Multiple Occupancy) by turning a living room into an extra bedroom. It should be clear between both parties who is responsible for gaining an HMO license from the local authority. It is possible that if either “assumes” the other is responsible then the council can prosecute both parties.

The license should ideally be gained by the Landlord along with approval from their mortgage company that they can grant an AST for more than a year, failure to do so can invalidate the mortgage agreement and possibly lead to possession sought by the mortgage provider! Furthermore it may be necessary to seek planning permission for the HMO conversion work depending on the number of bedrooms or any local restriction place for a R2R arrangement.

A common pitfall that we hear of is the inexperienced middle tenant uses an Assured Shorthold Agreement AST for their R2R agreement with the Landlord. Not only is this the wrong type of agreement an AST must only be used when one (or joint) tenant/s is actually living at the property. An AST will contain specific terms that relate to the occupier tenant and not the middle agent.

Another trap the middle agent may fall into is assigning the whole of the term of the tenancy to the occupiers. For example if the middle agent has a three year R2R agreement with the Landlord and then issues a three year tenancy to the occupiers, with both agreements ending on the same day then legally the Landlord can claim the rent directly from the tenants effectively cutting out the middle man, hence he loses all his profit. The correct way forward would be to have the tenancy agreement ending the day before the Landlord agreement.

Planning Permission

Many novice property managers get confused between HMO licenses and planning permission. These are two totally separate issues. All HMO’s must have a license from the local authority subject to the property complying with the Amenities Standards as set by the council. This will include regulation regarding fire safety, number of bathrooms / WC’s required dependent on the number of occupants, room sizes and more. Planning permission must be sought if there is a change of use to an existing property i.e. change to Short term letting from a bedsit, if there are more than seven bedrooms or if a property is in an Article 4 area. Article 4 legislation has been imposed by some local authorities to restrict the “studentification” of areas of cities and towns. Both parties should agree who is responsible for each of these as costs are involved and could affect the profit expected.

Right to Rent and Due Diligence

If a Landlord has previously been manging his own property then he would be responsible for carrying out the Right to Rent Checks on future tenants. It would be diligent of the Landlord to also carry out a Right to Rent check on any proposed middle manager (agent) who would be managing the property in future. The middle manager / agent would then normally be responsible for check any future occupiers (tenants) of the property. Failure by Landlords or agents to carry out the Right to Rent check can lead to fines and criminal convictions.

Check em out!

The middle managers have considerable responsibility looking after Landlords property and as with all property strategies the key is to success is to carry out your due diligence. Landlords must make sure their agent has property management experience, insurance and are part of a Redresss Scheme. Likewise the agent should check out the Landlords thoroughly.

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