Rent to rent has always been a polarising investment strategy. On the one hand the advocates will argue that it’s the equivalent of Uber (the world’s biggest taxi company which owns no cars) or Alibaba (the world’s biggest retailer which owns no products), where you can grow a sizeable rental income without owning a single property.
On the other hand, not owning the property leaves you with a lot of potential risk to go alongside your potential short term profits. You’re at the mercy of the property owners, their agents, lenders, freeholders, insurance companies and so on. Even if the owner is happy with the set up, it’s very easy to be in breach of any number of agreements/contracts that explicitly ban sub-letting, leaving a real risk of your cash cow disappearing over night.
I sit somewhere in the middle of the argument, as I’ve seen plenty of people change their lives with the income from an entirely rent-to-rent portfolio, and many operators insist the owner notifies the various interested parties to ensure no foul play.
When it comes to the Uber business model though I still need some persuasion, as the success of these companies isn’t really from controlling assets, it’s from building a platform to connect a consumer with a provider, and as it stands I’m yet to see a rent-to-rent operator build a booking platform to rival AirBnB.
All arguments aside around the viability of the strategy, more and more of the ‘interested parties’ (mortgage providers, freeholders, agents etc) are becoming savvy to the model, and particularly in the case of serviced apartments, it seems as though these parties are fighting back.
One particular development, West End Quay in Westminster, has taken to posting somewhat threatening flyers across their entrance ways in an attempt to stem the increasing number of apartments being let on a short term basis to people visiting the area for a few nights.
According to their message, anyone staying for less than 90 days is breaking the law and will not be allowed entry. They’re also advising visitors that any complaints need to be taken to the agent they booked with, and that ‘from our experience, you will probably lose your money’.
The 90 day minimum term they mention is likely a reference to something in the leaseholders agreement which will stipulate that sub-letting and short term letting is not allowed on that specific development.
This is not to be confused with the London specific legislation which bans owners and tenants from renting their home as short term accommodation for more than 90 days in any given year.
The example from West End Quay is just one of a number of cases of long term residents and managing agents starting to fight back against their homes being turned into guest accommodation, and as it continues to spread a lot of Serviced Accommodation providers with rent to rent contracts in place are getting nervous.
Those operating SA business in property they own have an option to go back to long term lets or simply sell up and move on, but rent to rent operators will likely be contracted to keep paying the owner an agreed sum even if the practice is banned, and will potentially lose money on the deal if the ban is enforced on their property before they’ve recouped the typical SA costs of furniture, soft furnishings, decoration etc.
With this looming over the market and no signs of it easing up, what options remain for investors looking to grow a real business in this space?
Thankfully it’s not all doom and gloom, as the more savvy investors are moving away from individual apartments to spend their time negotiating rent to rent deals with developers or owners of entire blocks.
By doing this, the R2R operator is assured that the freeholder is aware of what’s happening, and is actually encouraging it. It doesn’t even need to be the case that the whole block is used for SA, which could create an oversupply in a certain area, as many developers who own the freehold will be happy to rent a proportion of their apartments on long term rent to rent contracts to lock in cash flow whilst the others are sold or rented to residential tenants.
From the R2R investor’s perspective, having multiple units within the same building has major advantages as well, making it easier to arrange access for guests, manage cleaning services, linen changes and so on.
Whilst the tide definitely seems to be turning against smaller operators who’ve succeeded so far by flying under the radar, the demand for short term accommodation isn’t going anywhere so for those of you willing to step up and professionalise your business by working directly with developers and freeholders.
Not only will managing your serviced accommodation units become easier due to the economies of having multiple units in a single block, but you also won’t have this fear over your head that you might be in breach of some contract that the owner hasn’t told you about or that the freeholder is going to shut you down before you’ve recovered your initial investment.