Taken from the Residential Landlords’ Association (RLA) member ‘Residential Property Investor’ (RPI) magazine comes best practice advice from the experts on making sure, whatever the challenge – from tenants to letting or managing agents – landlords get their rents.
“We look at the various ways that a landlord can try to be sure of getting their rent”
They are every landlord’s worst nightmares. Your tenant has fallen behind with the rent. You have an unexpected empty period between tenants at your property. You face forfeiting rent income because of the need to do some maintenance and refurbishment work.
There are answers to these dilemmas – which have provided not just insurers with big business but also seen the rise of specialist agents. They include:
- Rent guarantee insurance.
- Letting your property through an agent which effectively becomes your tenant, and then re-lets to other tenants. The agent offers guaranteed rent. If you read nothing else in this article, ensure you read the warnings in the section ‘What the experts think’.
- Letting your property to a local council which will often take it for a longer period, let it to someone from their waiting list and maintain the property – all while guaranteeing you rent. Similar arrangements exist with some charities.
Rent guarantee insurance
If you want rent guarantee insurance, this will either be part of, or on top of, your normal landlord insurance policies – for example, building and contents cover.
Importantly, most rent guarantee insurance products are not available where tenants are on housing benefit – one of the points made by landlord Fergus Wilson who made the headlines when he took the decision to evict all his housing benefit tenants last year, saying it was impossible to find rent guarantees.
There are a number of rent guarantee cover products in the marketplace (including those available through the RLA: www.rla.org.uk/insurance).
We found 116 different products listed on one comparison website alone. They vary considerably in the cover they offer and in their costs. Some cost under £100 for a year’s tenancy, but generally expect to pay between 6% and 12.5% of the rent plus VAT.
If you use an agent who offers a rent guarantee as part of their service, expect to pay 20% or 25% of the rent for their management services. Some rent guarantee products are available only through agents.
Most products offer rent guarantee up to a maximum per month, and cover the landlord’s legal expenses where necessary.
You do need to look carefully at the small print. In particular, see what it says about tenants on benefit, and what happens when a tenant starts receiving benefit after the start of the tenancy.
Also, be aware that some policies will pay out immediately, while others delay for 90 days.
Some policies (for example, HomeLet) pay rent for up to 12 months, with one month excess, and 50% of the rent for up to three months after vacant possession has been obtained.
LetRisks has policies which cover loss of rent up to £4,000 per month plus up to £100,000 legal protection, and three months’ worth of rent following repossession in order to allow the landlord to undertake any repairs and re-let the property.
For insurers, rent guarantee policies go hand in hand with rigorous tenant vetting and processing.
Common conditions therefore include that the tenant has passed credit and referencing checks – often specifying that these must be done by the insurers themselves.
A rent guarantor may be required in some circumstances, and the landlord must fully comply with tenancy deposit legislation. The landlord is also typically required to be very quick off the mark in notifying the insurers of any rent default.
Watch out, too, for excesses, typically equivalent to a month’s rent, and for any extra charges if more than one person is named on the tenancy.
Finally, rent protection cover does not usually apply to simple void periods – ie, when you cannot find a tenant to move in.
Is it worth it?
Beware cheap imitations, advises Michael Portman of LetRisks. He says that some policies offer only limited protection and for limited periods, up to the expiry of the policy period or end of the tenancy, rather than until the date the tenant leaves.
He also adds that landlord take-up is not great, partly because many landlords are not aware of rent and legal protection policies, and partly because they think tenant default will not happen to them.
Portman says: “Landlords should insure for what they can’t afford to lose. It takes at least three or four months to obtain possession, and a lot of anxiety, through the court process. If this puts landlords off, they should buy insurance for peace of mind.
“Letting a property is a business venture, even if you are a landlord with a single property. In business, risk needs to be identified and controlled. If the landlord can afford to take the risk, insurance for loss of rent is not necessary.
“Portfolio landlords with three or more properties typically choose not to insure, although if they have had a bad experience with a non-paying tenant, we find that even they will take out insurance.”
He says that typically, claims are not because of a landlord having chosen the wrong tenant.
He says: “The tenant looks good but circumstances can change. Typical claims start with unforeseen redundancy, or reduced hours, divorce or separation, or other debt burdens, especially after the Christmas spending spree.”
For Portman, insurance is not just about unpaid rent, but the ability of the landlord to pass the whole legal process over to the insurers to gain possession.
Sometimes, agents offer rental guarantee insurance as part of their package to landlords, using it as a sales tool to get more rental properties on their books.
Let Alliance, for example, is a newish provider, founded in 2011, although its management team are insurance industry veterans.
The firm, which has deliberately set out to shake up the lettings insurance sector, offers its rent guarantee and legal expenses insurance products only through agents.
The products seem unusual in that they offer nil excess and have a 60-day claims window. There is £50,000 cover per policy, with rent paid until vacant possession, including when this is after the end of the tenancy agreement.
Agents buy this insurance direct, and then decide how much they will charge landlords. Typically, a landlord will pay 2.5% of the monthly rent, says Andy Halstead, chief executive, who says that on average, it costs £12 to guarantee monthly rent of £600.
He insists rent insurance is a no-brainer:
“Why would anyone invest in an asset worth £200,000 and then fail to protect the revenue that is generated? A very good tenant today can become a problem tenant tomorrow, often through no fault of their own.
“Divorce, redundancy, illness – none of these can be picked up in a referencing process, no matter how comprehensive.”
Rent to rent
In other cases, agents (and sometimes tenants themselves) offer an entirely different form of guaranteed rent, which involves sub-letting.
Effectively, they become your ‘tenant’, renting the property at a lower rate than the rent the agent (or tenant) will then charge to sub-tenants.
This is commonly known as rent to rent.
Rent to rent has had some dire media coverage in recent months because it has become associated with landlords simply not knowing that the person who they thought was their tenant was sub-letting the property to others.
Some landlords caught this way have also been horrified to discover that their property has been sub-divided so that the maximum number of tenants can be squeezed in.
If you think it cannot happen to you, think again. The Association of Independent Inventory Clerks (AIIC) recently inspected a three-bedroom flat where one couple were the registered tenants.
According to AIIC chief executive Pat Barber, 30 tenants were found living there, sleeping and working in shifts. The landlord had no idea, but was left with a £10,000 bill to deal with damage including wrecked kitchen units and cigarette burns.
In America and elsewhere, an internet service called Airbnb allows people to sublet – and, despite its terms and conditions, is used by those whether they own the property or not.
The service is particularly popular with back-packers and tourists whose only other option is expensive hotels. Airbnb also operates in the UK.
Airbnb is regularly accused of undermining the hotel industry, and in New York there is the additional problem that it is illegal to rent out an apartment for less than 30 days. In some London boroughs, there are similar restrictions on short-term lets.
Airbnb is not the only site offering such a service – and horror stories abound. Even if, as a landlord, you did not believe them, the point is that you will have lost control over who is in your property at any given time.
However, not all rent to rent is like that: there are some perfectly legitimate firms around that are completely open from the start about their business offering – and it is one which seems to suit some landlords well.
Northwood, a national lettings franchise, has the best-known rent guarantee, but there are many other firms and individuals offering guaranteed rent.
However, the advice has to be: look before you leap.
What’s in a name?
After recent bad publicity, it is not surprising that some firms steer well clear of the term rent to rent, and rebrand the offering with other names.
But whatever name it goes by, the offering nevertheless revolves around the agent becoming the landlord’s tenant and then letting it out to the tenants who will actually live in it.
The attraction for the property owner is the promise of a fixed, reliable rent for an extended period, and not having to deal with tenants or managing agents. The hope is that they can sit back and let the rent roll in.
For some landlords, such an arrangement might be a godsend. They are dealing with a reputable firm, and the property has proved difficult to manage for whatever reason – often because it is geographically located away from where they live. And, yes, they get guaranteed rent.
The obvious downside, of course, is that the agent is paying less rent to the landlord than the agent is getting – and less than the landlord would be getting on the usual open market. You can typically expect 70% but there appears to be no simple formula – Northwood, for example, will only take on a property in good, rentable condition and will make a rent offer on a case by case basis.
Bear in mind, too, that the agent may also be charging the landlord fees.
This is not so in all cases (Northwood, for example, does not charge fees – see the separate panel at the end of this article), but it does apply in some cases. In the opinion of one letting agent,
Belvoir in Basingstoke, Hampshire, which does not offer such schemes, such an arrangement is simply not worth considering.
The agent says that built into the arrangement is the cost of risk: “The agent will be building-in periods of void during which you will effectively be paying not only the rent, but also his fees.
“Yes, you did read that correctly; you will be paying yourself the rent! Despite his protestations to the contrary, the agent most assuredly will not be paying your rent when the property is empty. It will all be built into his figures somewhere. He is a commercial venture – not a charity.”
What the experts think
In a nutshell, tread very carefully indeed.
This is potentially a minefield. Lawyer Giles Peaker, a partner in the housing and public law team at Anthony Gold Solicitors, warns that messes can easily be created, and that the terms of agreement are crucial: he cautions that an agreement can easily leave the property owner legally liable for tenants’ deposits and repair liabilities, while removing all control over the appointment of tenants, numbers of tenants and levels of rent. He also says that any agreement that provides for the rent to rent tenant to give ‘licences’ to occupiers is not worth the paper it is written on.
He warns, too, that property owners will be in a nightmarish situation if the rent to rent company fails in its obligations, vanishes or goes into liquidation.
Occupants of the property would still have the perfect right to remain there, even if they are not paying rent.
Justin Selig, legal director at Landlord Action, echoes these warnings. He says:
“Generally speaking, this is a risky way to rent out your property unless it is to a very reputable tenant or rent to rent agent who has a sound financial background.
“If you have any question over the tenant, my advice is to walk away, as it can be very problematic for you as the landlord.
“When it comes to deposits, if a landlord enters into a rent to rent agreement they require a commercial lease rather than an Assured Shorthold Tenancy Agreement (AST) and this is subject to different laws than a residential tenancy.
“If your tenant wants permission to sublet and you’re being offered a Company Letting Agreement or an AST, that’s the wrong contract and should sound warning bells. The R2R agent / tenant would then need an AST for each tenant he sub-lets to.
“In terms of deposit protection arrangements, the landlord is not obliged to protect the ‘R2R agent / tenants’ deposit because it is not an AST. However, the R2R agent is responsible for protecting any deposit taken from a sub-tenant as this should be under an AST agreement. If the R2R agent / tenant fails to pay rent to the landlord, this is where you have problems.
“Whilst the agreement will be a commercial agreement, you may have difficulties obtaining possession because the property is residential and you will therefore need a court order to obtain possession.
“Because of the ambiguity surrounding the legal practices of rent to rent, I have drafted a legal agreement for landlords to use which clarifies all arrangements and is available for purchase.
“Within this, the R2R agent is the ‘tenant’ and the agreement, which is between the landlord and tenant, holds the tenant personally accountable to the property owner should things go wrong.
“As a commercial lease agreement, it covers all legal aspects of the agreement and sets out certain conditions and responsibilities of both parties.”
Paul Shamplina, founder of Landlord Action, said: “Many property owners are attracted to the concept of rent to rent because they don’t want the hassle of being a landlord. The reality is that rent to rent is often very difficult and can quickly go wrong. If it isn’t carried out diligently, the landlord loses control of the property, which is where problems begin.
“Over the last six months, we have come across the same companies who have conned landlords over and over again.
“Before embarking on any rent to rent scheme, landlords must ensure it is being operated by a financially sound and trustworthy business. They can do this by carrying out research, finding out if the company has ever had any CCJs and checking their financial background on Companies House.
“However, I should also point out there are some ethical operators who do have sound business practices that work very well in taking the stress away from landlords with regards to making sure rent is paid on time, as well as covering void periods and property maintenance.
“One such example is Northwood. As with any product in the buy-to-let market, landlords must always carry out their homework before instructing someone to take responsibility for their property.”
We also asked Richard Jones, the RLA’s solicitor, for his opinion. He says: “All that rent to rent agents are doing is taking a tenancy in their own name and sub-letting at a higher rent. Ostensibly, the agent ‘guarantees’ the rent. It would be interesting to see what the discount is on the market rent.
“This is similar to a local authority leasing scheme. The advantage of a local authority leasing scheme, however, is that the landlord has the much stronger covenant of a local authority.
“Here it all depends on the financial strength of the agent’s business. On the face of it, this may be greater than that of an individual tenant, but what would worry me would be a landlord who placed a portfolio of properties with one rent to rent agent. It is not at all unknown for agents to go bust in this scenario.
“Also, there can be mismanagement by the agent. The risk here is that the landlord simply leaves everything to the agent and only finds out about problems when it is too late. Indeed, if the agent goes bust, then the landlord would still be legally saddled with the tenants.
“I have been involved in cases where the ‘agent’ has been the villain and the tenants have not been a problem. Indeed, the tenants have paid their rent to the agent / landlord who has then failed to pass it on to the real landlord.”
He also warns that some landlords can be misled by a rent to rent agent’s ‘blurb’ over the extent to which they can avoid their basic responsibilities as a landlord.
Letting to a local authority
A number of local councils will take on landlords’ properties, often for periods of up to five years. While the landlord will forfeit some rent, since the local authority will usually pay under-market value, rent is guaranteed continuously, there are no agency fees to pay, the property will be maintained and damage put right, and the tenancy fully managed.
Councils offering such schemes include Glasgow, where the Let First scheme is run by Orchard & Shipman, which is building up a portfolio of over 1,000 properties.
Some councils, for example Brighton and Hove, are using a Homes & Communities
Agency scheme to give owners of properties that have been empty for six months or more loans of up to £20,000 to renovate them. In return, the council will then rent out and manage the property for five years.
Other local authorities offer their own private sector leasing arrangements. As with rent to rent agencies, the council becomes the landlord’s tenant and sub-lets the property.
Some charities for the homeless also work with private landlords. For example, Real Lettings in London is a lettings agency that is an offshoot of the charity Broadway, which has merged with St Mungo’s. It looks for landlords across London, in some cases offering cash incentives.
In Hampshire and West Berkshire, Real Lettings works in partnership with the charity Two Saints, and offers guaranteed rent with no voids for up to five years.
The Northwood Proposition:
Eric Walker, managing director, explains what’s in it for landlords Guaranteed rent is ideal for many landlords who don’t want to deal with the issues and risks associated with lettings. It provides certain income on the same day, month in, month out.
We offer a minimum 12-month contract during which we manage every aspect of the tenancy. There are absolutely no fees, commissions, renewal fees, VAT or hidden extras to pay.
The key difference between guaranteed rent and more traditional services is that it is a contractual agreement between us and you (the landlord) in which we effectively become your tenant.
It is vital that the tenants we select treat your property with respect. At check-out, we cover the cost of internal damages up to 1.5 months’ rent, so if things do get damaged, we take the financial hit.
If your tenant leaves early, we continue to pay the rent even if the property is empty. Occasionally there may be a need for court action to evict a tenant or recover unpaid rent. This can be both time-consuming and costly. With our guaranteed rent, we will meet all the legal costs and manage the process while you continue to receive your rental payments.
Is there a catch? No, it’s very transparent and there are no hidden costs or charges. We pay the landlord a little less than the market rent they would normally receive, but in the event that there is even a short void period, many landlords often find they receive more rent over the term of the contract with us.
Why don’t more agents offer this service? Simply because our branches are run by the business owner, not just an employee.
Many agents advertise ‘guaranteed rent’ but in reality this is simply a bolt-on insurance policy where the landlord has to make a claim and often pay a substantial excess in the event that the claim succeeds. Often, agents will also earn an additional commission from selling this policy.
When we value a property we discuss the alternatives and whether guaranteed rent is the right option for the landlord.
As the lettings market can be fickle in terms of supply and demand, the number of landlords opting for our guaranteed rent is growing, fast.