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Rent-to-Rent: A Scam?

In the few years there have been a number of newspaper stories about a new property scheme known as ‘Rent-to-Rent’ or ‘Multi-Lets’. The scheme involves property entrepreneurs acting as middlemen between tenants and landlords to sublet rooms in family homes and Houses in Multiple Occupation (HMOs). These entrepreneurs contact landlords directly or through property management agencies and offer long term guaranteed rent. They also offer to carry out minor repairs to the property and to find and manage tenants on behalf of the landlord. This means that willing landlords can avoid the day-to-day hassles of managing a property and at the same time enjoy a guaranteed revenue stream. Sounds good: but is it too good to be true?

shutterstock_44043292Many ‘Rent-to-Renters’ claim to make high profits on their property portfolios without having to buy properties or raise large cash sums for renovations or a deposit. Daniel Burton, a property entrepreneur based in London, reported receiving £35,000 per month on 400 properties he sublet in 2013, while Taiwo Orishayomi, author of the book ‘Rent 2 Rent: Massive Cash During a Massive Crash,’ says that she earns £10,000 per month from subletting property. Francis Dolley, founder of the ‘Multi-Let Cashflow System’ (MLCS) has also said that he receives £5000 per month from subletting rooms in HMOs. As well as making money from sub-letting, these high-profile ‘Rent-to-Renters’ are supplementing their income by providing workshops, seminars and ‘How-to’ publications to enable other would-be entrepreneurs to take advantage of their ideas.

The Tricks of the Trade

‘Rent-to-Renters’ focus on the owners of neglected family homes and HMOs, who may have had a difficult time when renting their property. The middlemen find suitable landlords by doing careful research in their local area or by cultivating relationships with property agents. They offer homeowners an end to all the stress and hassle of being a landlord and at the same time promise a guaranteed revenue stream.

Whether a family or multiple tenants occupy a property, they will commonly offer the landlord an Assured Shorthold Tenancy (AST) for a fixed period, such as 2 years. If tenants currently reside at the property they will ask for them to be evicted and then carry out a small refurbishment (sometimes with a contribution from the homeowner), converting communal rooms such as the dining room and lounge into additional bedrooms and leaving a single, shared kitchen for the use of tenants. They will then rent out each available room, charging rent and fees that will make them a profit after they have paid rent to the original landlord.

Homeowner Beware

Entrepreneurs and homeowners who are thinking of taking part in ‘Rent-to-Rent’ will need to check the legal implications carefully with a solicitor. Sub-letting a property using an AST will often breach the terms of a Buy-to-Let mortgage, leaving the owner (and middleman) vulnerable to repossession and sometimes invalidating landlord insurance.

In these situations the ‘Rent-to-Renter’ can offer the landlord a different type of tenancy agreement, such as a commercial or corporate tenancy agreement, a management agreement, lease or guaranteed rent scheme. However, landlords should be aware that a commercial tenancy is subject to different laws than a residential tenancy. Under the terms of an AST the landlord has the right to evict tenants after the fixed period of the tenancy agreement, but in a commercial tenancy the tenant (i.e. the ‘Rent-to-Renter’) has the right to demand a new tenancy. If the homeowner is unlucky, they could lose control of their property to an unscrupulous middleman.

Becoming a LandlordMany high profile ‘Rent-to-Renters’ are open and up-front with landlords when they approach them to sub-let their property, but not all entrepreneurs are as honest. Some middlemen may pose as tenants and take out an AST, but then convert the property and sub-let individual rooms without the knowledge of the landlord. The first time the landlord may know that there is a problem may be when neighbours complain about the number of people living in the property. Sometimes the landlord will receive the agreed rent, but in other situations the landlord will never see a penny.

One case in south London involved Rose Chimuka, who took leases on family homes and illegally subdivided them into bedsits. Up to fifteen tenants lived in each house and she didn’t pass on the rent to the real landlord. When she was found out she simply disappeared and set up again in another part of the capital. When Chimuka was prosecuted and jailed in March 2012 it emerged that she had amassed £100,000 from the scam.

HMOs

As experienced landlords will know, Houses in Multiple Occupancy (HMOs) must be licensed by local councils and are subject to strict regulation. It can be costly to conform to these regulations and there are heavy penalties for letting out rooms in HMOs without a license. In the case of ‘Rent-to-Rent,’ the contract between the landlord and the middleman may be unclear about whose legal responsibility it is to ensure that sub-let rooms are properly licensed, leaving the unprepared landlord open to heavy fines.

Even if the landlord is unaware that their property is being used as a HMO, they may still be liable if the middleman breaks the law, so they will need to have a clear understanding of the terms of any contract that they sign. Experienced ‘Rent-to-Renters’ such as Francis Colley, look for HMOs with existing licenses or use commercial contracts exempt from the regulations in order to ensure that they comply with the law and avoid additional expenditure.

Tenants Beware

The majority of tenants who rent rooms under the ‘Rent-to-Rent’ scheme will not be issued with a standard AST contract. They will be issued with a license, which is more usual when a homeowner lets a room in their house to a lodger. Under the terms of a license, the middleman can enter the property (or room) without prior warning and as often as they like, something an AST does not permit. They can also evict tenants more easily and quickly, which means that residence is much less secure than in a traditional tenancy. Also, while residential landlords are usually expected to protect tenants’ deposits in a government scheme, in this case it is unclear who is liable if this does not happen. One particular ‘Rent-to-Rent’ landlord in London, Daniel Burton, disappeared in August 2013 along with his tenants’ deposits, leaving many out of pocket and angry (although he has since made an effort to return deposits following the winding up of his business interests).

Do Your Homework

If you are considering becoming involved in ‘Rent-to-Rent’ you must ensure that you have done your homework, as you would with any property investment. Just be sure that you understand the risks and the benefits.

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