Monday, 8 July 2013

Rent To Rent The latest Passive Income Property Scam

Rent To Rent The latest Passive Income Property Scam

According to the Guardian newspaper another property scam is doing the rounds. Actually, this one is not new, but it is being heavily promoted at various property networking events. Most property networking events are now little more than places to market scams and dodgy ways of doing things, but that’s another story.

So the premise is that you find a landlord who owns a 3 bed 2 reception ( or bigger) property and rent it from them. You then split the property yourself into rooms and sublet  them as single rooms. A Typical 3 bed/ 2 reception property can in this way give an uplift in profit. This is often called multi-letting, HMO’s or just room lets. In this way, a naive landlord will not necessarily know they have been scammed.

Another way, which is being promoted openly, is to create different contracts such as commercial licenses for the prospective tenants- rather then a regular AST and do the above with the full knowledge of the landlord. The benefit to the landlord is a guaranteed rent and for someone else to manage their property, the middle man then takes the uplift in room by room rents as profit. Everybody wins. Except the tenant, oh yeah, and the landlord.

Now, just to be clear, I have nothing against multi-let or HMO property. I’ve written about it many times, and, if done properly, it is a great way to create a good steady income with very few void periods. A note of caution, just in case there are any council tenants reading this, it is illegal to sublet a council property.

Last night on Twitter I had a lengthy discussion with a couple of legal bods about this, who are already dealing with the fallout from these schemes. My own opinion is that sub letting is fraught with so many potential things that can go wrong that its hard to know where to start listing them! Here are a few off of the top of my head:
  1. Tenants have no AST, meaning, if you need to get them out it can be extremely difficult.
  2. If the original non resident ‘tenant’ or ‘manager’ disappears, the landlord is still responsible.
  3. Most mortgage companies have clauses against sub letting. The person on the mortgage document could be repossessed and be sued by the bank.
  4. Tenants have very little if any legal protection.
  5. The landlord could more easily be prosecuted than the guy in the middle.
  6. “Licenses” issued to tenants in place of AST’s are not worth the paper they are written on. As a landlord, you probably won’t have a legal leg to stand on, not to mention the cost in sorting out such a mess should it go wrong.
  7. What about safety for the tenants. HMO’s have safety rules for a reason.
  8. Sub letting without the insurers knowledge would invalidate the insurance.
  9. Letting agents are being targeted to give info on landlords – for a cash bung.
  10. If the mortgagee does not pay the mortgage, what happens to everyone in between?
In my experience, regardless of how much information is available, tenants still do not know their rights, and neither to many landlords. The rise of ‘accidental landlords’ can only exacerbate situations like this because of their lack of knowledge and experience. It is these landlords that will be targeted first.

If you were to set yourself up as the middle man, as these people are teaching, you will need to know how to manage huge amounts of tenants and landlords, not to mention the repairs, and let me tell you, there ain’t nuthin ‘passive’ about that! I wish folks would wake up and see that there is no such thing as a  ‘passive income’ in property.

As any HMO landlord knows, houses of multiple occupation take a bigger battering than single lets. Things get broken more regularly, and there is often a bigger repair bill for electrical items, boilers, plumbing, gardening and a myriad of other things.

As a landlord, if you can’t make money in a market that has high demand and higher profit than it has has been for years, then you should not be a landlord in the first place. If you allow someone else to control the asset, then you will probably lose out one way or another, it is really just a matter of time. Lastly, as my legal friend on Twitter said, “Rent To Rent is like watching a slow motion car crash.”

Reiza K R Qureshi


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