Are Rent Guarantees Worth Buying?

by Property 118

12:35 PM, 6th March 2013
About 7 years ago

Are Rent Guarantees Worth Buying?

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Are Rent Guarantees Worth Buying?

Rent GuaranteeIncreasing rents, a difficult economy and job losses mean a growing number of tenants are struggling to pay their rent. When rental income is relied upon to cover a buy-to-let mortgage, arrears can be a very real risk and it doesn’t look like the economy is going to improve significantly any time soon.

As rents typically increase towards the summer months, we could see tenant’s budgets being squeezed, leading to some unwanted arrears. The question is, if you’re a buy to let landlord, how can you protect yourself against every landlord’s worst nightmare: a tenant who can’t, or won’t, pay the rent?

Many with landlord insurance may be disappointed to find that unpaid rent isn’t covered in their standard policy. Whilst most landlords have some form of insurance in place, this is most commonly simple buildings cover, which would offer little support if a tenant were to stop meeting rental commitments.

One way to protect yourself is to take out specific rent guarantee insurance, a policy designed to limit risk should a tenant be unable or unwilling to pay the rent. But is it worth taking out, or is it an expense you could live without?

How do rent guarantee insurance policies work?

Obviously they vary from one insurer to the other, but common features are:

  • You will normally need to let a property under an assured shorthold tenancy
  • Insurers will insist each tenant named on the tenancy agreement and is property credit checked and the relevant references are obtained.
  • Policies generally only pay out for a maximum fixed period (6 or 12 months).
  • Some policies charge a premium based on the amount of rent covered, while others charge a fixed price per tenancy agreement.
  • There is likely be an excess which means you may not be covered for the first month’s rent arrears.
  • Rent will be covered until the policy expires, or when the tenancy agreement ends, or you gain vacant possession of the property so it can be re-let.
  • Some policies (mainly comprehensive policies) may cover rent for a limited period even after possession of the property is obtained.
  • Legal expenses insurance might be included which covers the legal costs incurred in proceedings against tenants.
  • Some insurers may deal with the tenant eviction process on your behalf.

Do you need rent guarantee insurance?

If you’ve decided that cost is not prohibitive and like the idea of being insured to reduce the risk of rent arrears, is there anything else to consider? You might be able to recover arrears through any normal arrears process you use, contacting and visiting tenants or through the courts if the situation deteriorates. You may have a savings cushion to fall back on and arguably this is a better way of protecting yourself, but this isn’t always easy to achieve. So you may think paying a few % of the rent is a small price to pay to cover the rent and provide legal protection. Afterall, you don’t want to fall into arrears on your mortgage just because your tenant has let you down. There are two important points each should consider here 1. what’s the likely risk i.e. what’s the impact of the tenant defaulting and the chance of this occurring? 2. what level of risk am I comfortable with? If you’re comfortable with risk a rent guarantee may not be for you, but if the risk and impact are high and you’re uncomfortable with your level of risk, it’s worth considering a policy.

Last, but not least, beware of exclusions and read the small print. Insurers can be strict when it comes to following procedure, particularly with regard to how tenants have been referenced.

This is a Guest Post submitted by Andrew Sainsbury of Go Property Services, an ARLA member letting agent based in Nottingham.



Comments

13:11 PM, 6th March 2013
About 7 years ago

Another option for pressed landlords is Northwood's Guaranteed Rent Scheme. About 80 branches throughout the country offer this scheme including ourselves in Milton Keynes. The guarantee we offer does not involve insurance companies - we 'indemnify' the landlords ourselves. We contract with them for a minimum of twelve months to pay a guaranteed sum of rent on the same day each month. This sum is paid whether or not the tenant pays the rent or indeed whether the property is empty. Towards the end of each contract period the landlord is offered the opportunity to continue for a further period (again a minimum of twelve months). Another advantage of the scheme is that the landlord has no need to be involved with the tenant as Northwood takes the strain. If the tenant falls into arrears the landlord is shielded from the problem. Northwood process the recovery and pays all relevant legal and court fees as necessary.

Mark Alexander

13:50 PM, 6th March 2013
About 7 years ago

Hi Steve

I have asked Northwood directly and via their PR agency to discuss their business model here before but they have always declined. Could it be that they are worried about the wrong questions being asked?

Given that the landlord pays you no fees whatsoever and you apparently underwrite the risks of arrears and even voids I've often wondered why many portfolio landlords don't use Northwoods. Could it be scepticism and fear of the unknown perhaps? It certainly is for me. I suppose my biggest fears are as follows:-

1) Who underwrites the monthly rent payments? Is it the franchisee, the franchisor or an insurance company?
2) Will Northwoods franchisees seek to maximise the rental value by letting to sharers and if so, how does that impact on the landlords who, presumably, have much bigger wear and tear cost to factor in?

Ian MacQueen

15:56 PM, 6th March 2013
About 7 years ago

Here is how I view rent guarantee. The guarantee I have seen cost 6% of monthly rental income. I have calculated the money lost through tenants not paying and through properties lying empty between tenants and compared this to the income from each property. For my first property the money lost was just 0.042% of the income and for the second property 0.025% of the income. Therefore, for me I would much rather carry the risk than take out insurance. However, I generally do not have problems re-renting my properties so never have them lying empty for long at all. Hope this is useful. Ian

Puzzler

15:57 PM, 6th March 2013
About 7 years ago

My policies only pay out a maximum of 4 in a six month rental and only until the cover period ends if that is shorter. This is daft, it's like saying if you have an accident on the last day your car is insured, your cover and its benefits cease the next day. I have queried this but have not found better cover, so advice welcome. I keep it for the legal cover. My insurer is Homelet.

Puzzler

16:00 PM, 6th March 2013
About 7 years ago

Re Northwood, I enquired about using them and think their model is to keep a percentage of the rent, so to say there are no fees is disingenuous.

Mark Alexander

16:02 PM, 6th March 2013
About 7 years ago

@Puzzler - for several years I too have self insured and I think I've probably looked into the same 6% scheme as you have in the past. However, the market seems to have become very competitive of late and I am beginning to re-think my strategy every time a tenant now serves notice. I wrote about one of the schemes I'm using to re-let my properties with RGI include not so long back. The entire package costs just £97 + VAT for the first year and includes advertising on all major portals, tenant referencing, RGI and legal expenses cover. See >>> http://www.property118.com/index.php/how-private-landlords-can-beat-the-rent-arrears-problem/35711/

16:06 PM, 6th March 2013
About 7 years ago

Thank you for your interesting response! In answer to your questions we, the individual franchisees are the ‘underwriters’. We assess and stand the risks ourselves. We, the Milton Keynes branch, do not attempt to maximise the rents other than through careful, prudential management and efficient arrears and voids monitoring. For the record, the Franchise MD is a founder member of SafeAgent movement and (our) the Milton Keynes branch, in common with many other Northwood branches, is a member of NALS and SafeAgent and we subscribe to the Property Ombudsman scheme. I hope this clarifies the position for you.

Mark Alexander

16:25 PM, 6th March 2013
About 7 years ago

Hi Steve

Thanks for responding and for taking my call just now, it was a very interesting chat and I look forward to welcoming your franchise to The GOOD Landlords Campaign in due course and perhaps reading your "Property Hotspots" article on what makes Milton Keynes such a great place to invest.

One question which has crossed my mind since we spoke is this .... what happens to landlords and tenants contracts if a Northwood franchisee makes one too many bad judgement calls and the franchise goes under?

Graeme

16:45 PM, 6th March 2013
About 7 years ago

Regarding RGI - 2 of my properties are with lettings agents and in both those cases RGI is included in the agents fees which includes legals to evict the tenants. On 2 more of my properties which I self manage I have RGI with Endsleigh. £108 per property per year. 1 months rent is excess, then 5 months rent payments and all legals to evict the tenants. This equates to 1.25% of the annual rent. On my 5th property I have nothing - I still have my original tenant after 14 years --- and 14 years ago RGI barely existed; landlords were generally unaware of it. So far, luckily, I have never had to claim on any of my RGI's.

Kevin Thomson

19:06 PM, 6th March 2013
About 7 years ago

I've found that the cost of the RGI itself is just the tip of the iceberg.

I have some 5 bedroom student HMOs.

Credit checking each student is a pointless exercise as many have no credit history. However, I've found that to get RGI I have to credit check each tenant plus each of their guarantors. Not cheap.

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