Hi folks, the question that has come in and it comes up actually occasionally when I’m talking about this for the point of being creative with your strategy deals, or strategies in property.
Lease options, rent to rent which is the best?
What’s the difference?
In answer to the question, which one is the best that depends on ultimately what your outcome is you’re trying to achieve and what is your long-term plan?
Do you want to hold the property or do you want to let it go?
Several things to consider and this is where education is so important. In principle, rent to rent is simply you acting as the person in between you’re brokering a deal, but you’re not looking to buy the property. When I say brokering the deal, you’re kind of acting in between the tenant and the landlord.
So, let’s say, for example, an old school landlord has a buy to let property in a northern town and is renting it out and is tired of being a landlord, but also possibly the property is a little bit tired. They don’t want to put any work into it and thinking of selling it, but right now maybe they’ll keep onto it.
Rent to rent is very good for this so it lease option but rent to rent might be that from their perspective, they just want to pass the property to the children in the future and you step in and you say you get £500 a month. They haven’t had a great deal of occupancy and this is where you’ve got to ask the right questions, but in a nutshell what you’re doing is you’re giving them a guaranteed rent. You can set this up as a corporate type let the whole point here is that the person staying in the property is still a normal tenant, meaning that you’re going to take the property off that person and then you’re going to rent it out to someone else.
You rent it and rent it on, rent to rent. That’s where the term comes up. It’s your choice how you want to rent it out. You might want to rent it out to a company, family and manage it better and get a better income from that. You might even want to rent it out as an HMO, you turn a buy to let property from one tenant £500 a month coming in, to maybe a rent to rent with HMO strategy where there’s £1,000 coming in. Again, you’ve got to do the maths on this.
When people talk about what is the difference between a lease option what we’re doing here is we are renting the property out with a view to renting it on and not buying it in the future. You’re not purchasing it, these are the three things, you’re renting it out to someone else. You’re not purchasing it in the future. You have a contract to purchase it in the future, in fact if anything it’s set up basically like a normal AST. Yes, it might be a corporate type let but essentially you are still falling under the rules of assured short hold tenancy agreement, meaning that you put tenants in there, they will have their own tenancy agreement.
They don’t have the intention to buy the property they simply want to rent the property out. Rent to rent you will be giving the keys back to the owner of the property you have no right of ownership and all you’re really doing is you’re just simply taking over, probably tidying the property up and paying the rent or a rent to the landlord and you will be receiving additional rent over here on top and you keep the difference minus your management fees, minus your running costs. When we look at this people say this is a brilliant strategy.
Why doesn’t everybody do it?
Number one you need to know how to manage properties properly, number two you need to be educated as you need to know the law and regulations. On the opposite side is a lease option, you have the right to buy the property.
In other words this time I’m going to shake hands of the gentleman or lady saying you talked about this property and you’re tired of being a landlord and you’ve indicated you want to sell the property? Yes. Okay I will buy the property off you in five years’ time or 10 years’ time, or six months’ time, 12 months, two years. Whatever it is entirely up to you. And with this strategy what we’re doing is you have the right to buy and then you are going to give someone else the right to take the property in the future.
As an example, you’re giving them now, maybe only £350 a month because you’re taking the running costs, management fees get stripped away as you’re not actually having to rent the property out to a letting agent. Council tax all those things you could choose to take it all away from the landlord and take the stress away by buying the property in the future and effectively looking after their mortgage payments.
This is where you have to speak to lenders and it has to be done appropriately and legally as well. So, you are officially becoming the tenant buyer, you have the right to buy the property and you could be the tenant.
What you do instead of buying the property and being the tenant you have the right to buy the property and you put another tenant in there that would really love to buy this property and for that they pay more rent per month and you keep the differential. You might make £300 a month on that, but you never physically own it.
You are brokering this deal, you have the right to buy over there and then the tenant buyer comes in and they have the right to buy a different price, you might agree to buy the property for 85,000 in five years’ time, but you’re giving the tenant buyer the right to buy for 105,000 in five years’ time or three years’ time.
The difference here is you’ve got normal tenant rent to rent, you’ve got a tenant buyer here. No purchase on a rent to rent an option to purchase with a lease option. So actually you have the intention If you choose to buy the property at the end you don’t have to and then you have an option agreement in place, as opposed to a normal tenancy agreement.
Meaning that the tenant goes into the property you put in they’re going to have a right to buy and option agreement, again there is a different legal process. Which ones are the best one? That comes down to your strategies personally.
Do you want to own the property in five years’ time, in which case maybe you go down the lease options route. If you haven’t got a good credit history you can’t get a mortgage right now either of these can work, if you don’t want to own the property go down the rent to rent route, although a lease option, you set it up so you don’t have to exercise at the end of it. It really comes down to your personal strategy.
What the needs are of the seller and the person who owns property? Whether or not they want to sell.
Maybe due to personal financial situations, maybe the way their finances are set up, you’re just not in a position to be able to do a lease option at this stage. Could rent to rent turn into a lease option in the future?
Absolutely, that’s another strategy that could be implemented. You switch the strategy from rent to rent to lease options.
Great for people that don’t have a lot of available cash and want to get more creative strategies. It’s one of the things I teach when I do my three day training. Have a good day, hopefully that is useful.
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