Can Buy-to-Let investing run more smoothly?
Can you get better tenants?
Can renters build house equity while renting?
A common friend recently introduced me to the founder of Adjoin Homes, a new London-based property startup.
I thought I’d write about what they do as it might be applicable to you either as an investor or as a tenant.
I will explain what the new Rent-to-Own model is about.
Apparently, this is a big thing in the US. I didn’t know. The UK is just getting started.
Adjoin call it ‘Rent Now Buy Later’ 😉
They want to make housing-wealth accessible to everyone. At the same time, they want to improve the landlord experience.
Rent-to-Own Property: What is it?
Rent-to-Own is a scheme that gives tenants the option to buy the place they are renting in the future. It changes the traditional buy-to-let market dynamics so that both the landlord and the tenant can benefit.
To clarify, we are talking about the Rent-to-Own in the private property market. Not the government’s rent-to-own or rent-to-buy scheme.
In this article, I will explain how the Adjoin scheme works based on the discussions I had with the co-founders.
Here’s how the Adjoin Rent-to-Own scheme works:
- As a tenant, you see a property you want to buy on the open market or on Adjoin’s pre-approved portfolio.
- You start renting. While you rent you build equity in your home.
- As the home appreciates, you get part of the upside if you buy or even if you leave!
The tenant gets their dream home. The investor-landlord gets a stable income and a low-maintenance property because the tenant has ‘skin in the game’.
Let’s explore it in more detail.
Rent-to-Own for Tenants
Benefits of Rent-To-Own for the tenant:
- Build up housing wealth while renting
- Frozen rental payments for a number of years
- Try the property before you buy
- Afford to live now in your dream place – no need to move again
- Get the option (but not the obligation) to buy the rental home when you have the deposit
Adjoin will let you live in a home 8x your salary, unlike 5x which is the typical mortgage. Eventually, you have the option to buy it too.
Saving for a deposit in a housing bull market…
The Booster
As a tenant, you have the option to pay a “booster” to the landlord. This is a one-off payment, at the beginning of the agreement equal to 3, 6, 9, or 12x the monthly rent.
You don’t have to pay a booster. But if you do, it gives you 2 benefits:
- You can live in a more expensive home
- It lowers your rental payments
Speaking of rental payments, these come at a premium (around 10-20% more than the open market). The booster helps to lower that somewhat.
Even though the rent is at a premium, it is guaranteed to stay the same for the entire contract period. So even without the booster, the fixed-rent feature alone might be worth considering.
Initially, I had some second thoughts about the booster. But I understand why it exists. It shows commitment and compensates the landlord for frozen rental payments. The tenant is more likely to take the arrangement seriously once they join.
The booster is entirely optional.
When can the tenant leave?
The tenant can leave anytime. If you leave before the early exit period (1-3 years typically), then you are not entitled to any gains if the house value goes up.
Here the tenant gets an added benefit: They make sure they cannot be removed from their rental property, as long as they make payments of course. This is not the case in the open market where the landlord sometimes wants to sell or whatever.
I still remember one of the main reasons we bought before my wife gave birth was actually this one. We wanted to make sure we won’t have to move for the next 2 years.
Life with a baby is already disrupted, we didn’t want to make it worse!! It also reminds me that buying your own home is actually more psychology than finance. Money comes 2nd.
We all know there’s no free lunch.
There are upfront fees for joining as a tenant.
Tenant fees and how the booster helps
Pay once – no hidden fees.
- Booster payment (optional)
- 0.5% security deposit (returned at end of tenancy)
- 0.3% legal/due dil fees
- 1% Adjoin fee
These are the figures according to Adjoin’s current plan.
The tenant won’t pay for the maintenance of the property. It will work exactly the same as in the traditional rental agreement.
So for a £500k property, the fees are £6,500 to Adjoin, £1,500 legal, a £2,500 security deposit plus an optional booster.
This seems like a lot. But as you’ll see in an example later, you can make up the fees and then some if your future house appreciates.
Is my first-time buyer status lost if I keep renting with Adjoin?
You are still a first-time buyer as long as the first-time buyer status is concerned. So if you exit instead, and buy another property, you’d still be considered a first-time buyer.
Rent-to-Own for the Investor – Landlord
Even though the tenant side seems to be getting all the glamour, the investor has many reasons to join the scheme.
Benefits for the investor:
- Aligned incentives with the tenant who has skin in the game
- More secure rent
- Hassle-free property exposure
- Income stability
- Already have a buyer and move on to the next
They accept limited company investors too.
If you have a property already you can let it out through Adjoin for a stable rent.
If you don’t own property yet, Adjoin gives you the option to buy a BTL in a more controlled fashion than the open market. That’s because they vet both parties and the property as well.
Every landlord wants similar things. They want to make sure the tenant pays the rent, takes care of the property and stays as long as possible. They also want their house value to go up.
We know the tenant is serious about living there. They have decided they want to eventually buy it, they have paid fees and a (small) “deposit” after all. It is unlikely they will forgo all that by missing out on rental payments or damaging the property without care.
Even if the tenant decides not to buy the property, the refurb costs should be low.
This is valuable for a landlord who wants peace of mind and income stability.
Of course, all these benefits have a cost. As a landlord, you give up some of your future house appreciation.
It’s important to note that you don’t give a part of your property if the house price does not increase. You only give a part of the upside, if it appreciates.
So I’d say the scheme might be quite attractive if you are one of the following:
- An existing landlord who is tired of dealing with bad tenants
- Income-seeking investor, looking to invest in property
- A pension fund
- Risk-averse landlord
For me, the biggest win in this situation is the alignment of the incentives. In the traditional rental property, the landlord wants to maximise profits whereas the tenant wants to minimize rent.
This is still the case here, but there’s less friction. The investor also saves on fees.
What are the investor/landlord fees?
Adjoin acts as the rental agency for both the landlord and the prospective buyer.
The management fee is 7.5% of rental payments, which is lower than the typical 10-15% many agencies charge.
If a landlord provides an existing property, they charge a 1% fee of the property value for finding the tenant and coming up with the multi-year structure.
According to Adjoin’s current plan, if a new investor (not yet landlord) comes aboard, they pay a 2% sourcing fee to get a property.
Let’s have a look at a Rent-to-Own example.
Rent-to-Own Home example (with Adjoin)
Here is a Rent-to-Own example from the real world.
Adjoin gave me access to their calculator which is used by tenants/investors. To get access you need to sign-up.
From an investor’s point of view, I used these assumptions:
As an investor, you’re getting into a 6-year contract with the tenant, who pays £2,000 monthly rent. You receive £6,000 upfront from the tenant (booster).
After 6 years the tenant has bought some of your house appreciation. That’s because they paid the booster up front, paid higher market rent, and did not miss any payments.
How much of your home has the tenant bought? 5.6% to be exact. That would be £35,596 after 6 years of a 3% house price growth.
After 6 years, how does Adjoin rent-to-own investing compare with traditional buy-to-let investing?
Rent-to-Own vs Buy-to-Let
Let’s see how Buy-to-let yields compare against Rent-to-Own yields using Adjoin’s stats.
We use the Internal Rate of Return (IRR) metric. IRR simply estimates the profitability of our investments. The higher the better.
In the first few years, the IRR (internal rate of return) is negative. That’s because the upfront cost of buying the property has not been amortised enough from a discounting (ie IRR) perspective.
Here I’d like to be able to play with different rental yields for the traditional Buy-to-let.
The assumption they make for BTL is a 3.75% annual yield first year, plus 3% rental growth thereafter. This is what Adjoin believe is typical of a London property similar to the ones they target.
However, the scheme can work for any rental yield. The founders told me to contact them if someone is interested in seeing the numbers under different conditions.
We also know that a big chunk of buy-to-let returns come from house price appreciation, less so from rent. When I tweaked the house price growth to be 8% instead of 3%, the situation favours the traditional buy-to-let route. Buy-to-let wins at a 15.28% internal rate of return (IRR) vs 12.04% from Adjoin.
8% per year is less likely to happen if you ask me. But it goes to show that if house price appreciation is your strategy, then you should not sacrifice valuable equity upside!
If you want more downside protection, income stability and a vetted service then Adjoin might be the answer. Have a look at what they offer.
In fact, I like the honesty the calculator provides. Based on different house price growth, it shows you at which point BTL becomes more favourable.
So in our scenario, the break-even point when comparing Adjoin vs BTL is between 4-5% annual house price growth.
Overall, the results for an income-seeking investor look quite promising. With Rent-to-own both the tenant and the investor ‘hedge’ their bets and align their incentives.
But you know me. When a new scheme comes around, I always ask: Where’s the catch?
Where’s the catch?
This was my first question (and it always is when I hear about a new thing).
I don’t think there’s a catch, but it’s important to understand what the scheme is about.
Every tenant wants to live somewhere nice. If they plan to buy, they want to stop playing catch up with house prices.
The landlord wants to get paid. Often the landlord wants to make sure the tenants pay the rent, take care of the property and stay as long as possible.
Effectively, Adjoin has tweaked the traditional buy-to-let economics to align the tenant and landlord incentives.
It’s effectively an affordability product for the tenant, with attractive features for the investor-landlord.
It’s helping the tenant live where they want NOW while building equity towards buying it.
My opinion is that if the tenant is close to securing a property shortly on their own there’s little value in joining. But at the same time, the tenant can go for a higher value property, i.e. their dream home right now. Something that would take years to reach on their own, beating the classic ‘Rent and save’.
For the investor, there is no catch either. You give up some of your equity upside (if it happens) for a more secure income and lower maintenance.
Also worth mentioning is that as a new landlord (or existing one) you’re basically offering the option for someone to buy your property in X years. This can be as long as 12 years but still. You agree to potentially sell your property.
This might not come at a time that it’s tax-favourable for you or you might change your mind about selling. But there’s little you can do about it if the tenant doesn’t agree. So you have to view it as a fixed-term property investment.
I asked Kostas, the founder this question after looking at the real-world example:
How come both the tenant and the landlord are better off after 6 years? All else equal, shouldn’t one of the parties be worse off versus their open markets (BTL, rental market)?
Not really 🙂
– investor: by switching to adjoin they gain (relative to BTL) *both* with less operational costs (ie maintenance) and higher income (at least initially). This makes the “giveaway” in the equity, worthwhile from an IRR perspective.
– tenant: by switching to adjoin relative to renting and saving they may give more rent (at least initially) but effectively their money grows with house price growth (and with a floor at zero).
Hence, if the house price grows sufficiently they can both gain.
Kostas Zachariadis, Adjoin co-founder
What does Adjoin actually do?
They make sure both parties enter into a fair agreement. They sort out the legal side of things, the vetting of the properties and they provide technology for finding suitable properties for an investor and tenant.
Adjoin are paid for the work. They are also the manager of the property (7.5% management charge coming out of rental payments).
I think of them as both the buyer’s and the seller’s agent.
Is the Adjoin scheme the same as shared ownership?
It shares similarities, but there are some big differences. When I wrote about Shared Ownership, in 2018, I called it The Cheapest Way to Rent.
Shared Ownership is when you buy a fraction of a house you want to live in. But there are some big limitations. You need to have a household annual income of less than £90k. Sometimes even lower which makes it even harder if you are a higher earner. Then the property has to be less than £500k with big limitations.
It’s supposed to help the people without a deposit yet. But an unwanted side effect is that it inflates the prices of new homes. Basically, the main beneficiaries have been the property developers.
A Few Words from Kostas
I asked Kostas to tell us a few words about himself and Adjoin. He is an Economics and Finance Professor for 14+ years in top universities in the UK.
His academic background in financial markets triggered some interesting discussions about stocks and property markets.
Marios, the second founder, is a 2x proptech founder, data scientist, computational physicist and published quantum researcher. He holds a PhD from the University of Heidelberg. Before Adjoin Homes he worked as a data scientist for the Web of Science – the largest and oldest scientific citation database – and as a research scholar in universities such as Heidelberg, São Paulo, Vienna, Massachusetts, Los Alamos and more.
I love London, for me, it offers the best combination of career opportunities and lifestyle. However, even with a good salary people cannot buy where they work and like to live, so like me most rent.
Renting is fine, what is not great is not being able to share on the wealth that we all help create, and gets into house prices. I calculated that if Adjoin was around when I started renting my flat, I would have £100,000 now, double what I could have saved by myself, this is a lot!
My landlord would also have someone paying a high, stable rent, who wouldn’t want to leave, and who would treat the property even more like their own. It’s a win-win.
Kostas Zachariadis, Adjoin co-founder
So yeah, time will tell if the Rent-to-Own becomes the next big thing like in the US. I certainly find it promising both for existing landlords and new investors alike.
Good luck Adjoin!
