Rent to Rent to Serviced Accommodation (R2RSA) in the UK: Pros and Cons

Rent to Rent to Serviced Accommodation (R2RSA) in the UK: Pros and Cons

Whilst buy-to-let property investment has been a huge part of the reason people have invested in the UK property market for many years, we are seeing that new and seasoned investors are often open to new and potentially higher risk investment strategies to create passive income and build wealth. In this blog post we will discuss one of these very strategy options: Rent to Rent to Serviced Accommodation (R2RSA).

It seems like everywhere you turn someone is talking about or advertising R2RSA deals as 'the next big thing'. Often described as an easy way to get started in property, but is it too good to be true?

Rent to rent to serviced accommodation (R2RSA) is an increasingly popular investment strategy in the UK property market, particularly in cities where demand for short-term accommodation is high. In this model, investors lease a property from a landlord and then sublet it to short-term tenants as fully serviced accommodation. While this strategy has many potential benefits, such as generating passive income without owning the property outright, it also has some drawbacks that investors and landlords should consider. It can be complex finding landlords willing to lease their property to an investor for R2RSA, and there are a number of points both the landlord and investor should consider when pursuing this strategy. Below we will discuss these points to hopefully help you with your decision and way forward into investment property.

Pros of R2RSA

One of the main benefits of the R2RSA model for the property owner (landlord) is the guaranteed rental income for a fixed period of time, usually three to five years. This can be particularly attractive for landlords who are struggling to find long-term tenants or want to avoid the hassle of managing their own property.

For investors, the R2RSA model provides a potential opportunity to generate higher rental yields than traditional buy-to-let investments, as they can charge a premium for fully serviced accommodation.

Another advantage of R2RSA is the flexibility it can offer investors. Unlike traditional buy-to-let investments, R2RSA allows investors to lease multiple properties from different landlords and sublet them as serviced accommodation. This means they can diversify their portfolio and potentially mitigate risk.

Additionally, the investor is responsible for purchasing or leasing furniture packs to furnish the property. This means that investors can create a more attractive space for potential tenants, which could lead to higher rental yields. Moreover, investors do not have to worry about owning the property, which means they do not pay stamp duty, legal fees and experience a potentially lengthy purchase process. They also won't have to sell the property in the future.

Cons of R2RSA

While the R2RSA model has many benefits, it also has some potential drawbacks. One of the main concerns is the responsibility for the property during the lease period. In most cases, the investor is responsible for all maintenance and repairs to the property, which can be costly if items need replacing or upgrading due to breakdowns or leaks etc. Additionally, short-term tenants may cause damage to the property, which could result in additional expenses for the investor as it is important to have the property in the most attractive state possible to obtain consistent bookings and income.

Another potential issue with R2RSA is the lack of regulation in the industry. Currently, there are no specific regulations in place for R2RSA, which means investors may be at risk of falling foul of existing legislation, such as tenancy laws. As the popularity of R2RSA grows, it is likely that the government will introduce regulations to protect both investors and tenants. It is always a positive to have regulation in place to prevent 'rogue investors', however any new changes may come as a surprise to investors whilst also potentially being costly to implement required safety measures as an example.

We mentioned the investor providing furniture packs as a positive, however this also has a negative side. Furniture can be costly, especially if you want to offer a high-end holiday experience. This all adds to your initial investment and setup fees which ultimately affects your net income and could take longer before you see a profit from your new investment. As you won't own the property, significant investment into this strategy can be seen as a risk.

Furthermore, if there are no bookings, the investor still has to pay the agreed rent to the landlord. This means that investors must have a solid plan to ensure that their property is booked consistently, otherwise they could face significant losses. Ensuring swift and clear communication during the booking process helps along with providing guests with a unique experience during their stay. It is time-consuming and much more hands on when compared with traditional buy-to-lets, so if you are looking for passive income, this may not be the right option for you.

Regulation Changes

The government has already taken steps to regulate the R2RSA model. In 2020, the UK government announced plans to introduce a new code of practice for the short-term rental industry, which would apply to R2RSA investors. The code of practice is designed to improve standards in the industry and protect consumers. It will cover areas such as safety, security, cleanliness, and communication. It is essential you are fully informed of the regulations that cover your new investment to stay legal and keep your guests safe.

Responsibility for the Property

One of the main concerns for landlords is who is responsible for the property during the R2RSA lease period. While investors are responsible for maintenance and repairs, the landlord remains the legal owner of the property and has a duty to ensure it is safe and habitable. In the event of any disputes or legal issues, it is important for both parties to seek legal advice to ensure their rights are protected. There could even be options for the landlord to take back control of their property at any time if you, the investor does not keep the property up to scratch and regulation. If this was to happen then the investor would lose all the initial outlay on furniture, deposits, rent etc.

Conclusion

Rent to rent to serviced accommodation (R2RSA) is a popular investment strategy in the UK property market.

While it has many benefits, it also has some potential drawbacks, including maintenance and repair costs, lack of regulation, and the responsibility for ensuring consistent bookings. It is important for both landlords and investors to carefully consider these factors before entering into an R2RSA agreement. Moreover, with the introduction of the new code of practice and potential future regulation changes, the R2RSA model may become even more attractive for investors who are willing to adapt to new standards and guidelines.

Overall, the R2RSA model can be a lucrative investment strategy for both landlords and investors. However, it is important to fully understand the responsibilities and risks involved before entering into an agreement.

Is R2RSA going to be your next investment strategy? Or are you concerned by the risks involved? The Property Guru team can run you through some buy-to-let investment property deals and examples to give you a comparison of investment required and potential returns. We don't offer R2RSA investment deals as we feel the lack of security for you, the investor outweighs the potential income and benefits that can be obtained.