Guaranteed Rent – The pros and cons

by Andy Graham

13:33 PM, 25th April 2018
About 5 months ago

Guaranteed Rent – The pros and cons

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Guaranteed Rent – The pros and cons

When Frankie Valli sang “You’re just too good to be true (I can’t take my eyes off you)” we’re pretty sure they weren’t singing about guaranteed rent. But he might as well have been. People have been deliberating the catch when it comes to guaranteed rent for years. We’ve gone through and laid out the pros and cons so that you can decide for yourself.

What is guaranteed rent?

It’s pretty self-explanatory but worth providing a definition of guaranteed rent: for whatever reason, a landlord enters into a contract with a third party which (normally a letting agent) takes control and management of the landlord’s property. The third party, effectively the landlord’s tenant, pays a fixed monthly income to the landlord over a definite period, usually guaranteeing a percentage of the achievable rental income.

Guaranteed rent is a broad term with many different products, policies and schemes. We’ve split it into three categories:

  • Insurance
  • Council-backed
  • Letting agency-backed

At Smart Property we’re a dedicated bunch of industry professionals with a load of experience and expertise in the HMO rental market. We certainly don’t feel that guaranteed rent is right for every landlord, but we do know the pros and cons and how to spot the false promises.

But first, here’s our insight on the recent surge in popularity of guaranteed rent.

The recent rise of guaranteed rent schemes

The macro picture looks something like a slider. Recent government-led regulation, the squeeze on revenue and the general slowed growth of national rental prices all proportionally dictate BTL landlords’ appetite for risk versus reward.

Here’s a brief chronological view of the rise in costs and fees (2016-2018):

(*Find out more in our article on Property118 as we peek inside this legislation and ask what it means for the Buy-to-Let market)

It has left many Buy-To-Let landlords reeling following the clear message from the government, to cool down the Buy-to-let spending in the housing market. Whatever your thoughts on the role the private sector plays in providing affordable housing, many landlords are questioning their position as their properties slowly lose their yield value as costs climb.

Of course, there’ll be many seasoned veterans who’ll be confident in their own ability to weather this as yet another storm. But, particularly with the lead up to scrapping mortgage interest rate relief by 2020, many portfolio landlords will be feeling the pinch as their profit margins wane.

The National Landlords Association (NLA) has reported that 20% of their members (n. 856) intend to sell at least one property in 2018, with 1/5 planning to reduce the number of properties to rent out (Source: NLA Quarterly Landlord Panel, Q3 2017).

Guaranteed rent, an attraction or a necessity…

It is for this reason, combined with more competitive standards of HMO accommodation that those feeling the squeeze the most find the thought of a hassle-free guaranteed income an attractive possibility.

The promise is enticing. Section off a portion of your portfolio and let professionals pay you to take the admin and hassle of finding and managing tenants off your hands. Evidently, the third party, for whatever number of reasons, feel they can make a profit between the monthly payout and what they believe they can achieve in the market.

Guaranteed rent schemes have been around for years, particularly councils, but the conditions outlined above are pushing many to consider it as an option. Below are the pros and cons of each.

Council guaranteed rent

Britain’s long standing affordable housing crisis has seen many councils down the years looking at ways to work with the private sector to provide much needed social housing.

Offering guaranteed rent is one such way to entice property investors to hand over their portfolio. Milton Keynes City Council, for instance, offered a guaranteed monthly income of 10% above the Local Housing Allowance rate, granting a landlord with a two-bed flat £722 a month.

Councillor Nigel Long, said: “We’re really keen to work with landlords who might not have considered a council tenant in the past, but who want minimal hassle along with the security of a regular income. Having the council as your tenant is a very reliable and low risk way of renting a property.

“The more properties we can offer in MK, the more we’re able to provide accommodation nearer to where people work or where their children go to school, which can make all the difference to how a family copes with the tough situation they find themselves in.”

Pros Cons
Guaranteed monthly income. Monthly income is often lower than what is offered by other schemes
Depending on council arrangement, fairly hassle free with the council managing. Again, depending on the arrangement, landlords may have limited say over who the tenants are.
Stable income in less desirable and low growth areas. Long setup time and council staff and private landlords rarely speak the same language.
Council-given perks such as free accreditation and exemption from council fees.
Making a social difference.

 

Our thoughts

Guaranteed rent council schemes are great initiatives designed to free up affordable housing in the council’s ward. These tenants may be high risk, so it’s worth checking the fine print (as with everything in business) as to who decides upon tenants, who foots the repair bill and who performs day-to-day management. In many cities, particularly London, councils are particularly keen to work with private landlords to house nurses, teachers and other professionals close to hospitals, schools and other public services.

Council guaranteed rent can be particularly appealing to landlords who have inherited properties in less desirable locations with slow or stagnating rental prices.

Guaranteed Rent insurance

Guaranteed rent insurance is more for the peace of mind than serving as any economic income. Typically, the product lasts the duration of individual tenancies at a premium between 6-12% of monthly rent. As with all insurance, guaranteed rent policies are inherently reactive – waiting for arrears to materialise – before any talk of a payout; that can be anything from 8 weeks to pay rent in arrears up to an average of 41 weeks to repossession claims, according to the Ministry of Justice.

This makes it all the more important to consider whether your finances are up to the task of surviving the interim processing period.

Pros Cons
Peace of mind. Cover in the event a tenant fails to pay. Stringent restrictions and conditions designed to minimise risk on the underwriter’s part.
Retain control of tenants and upkeep. Lengthy claim processing times that will need robust cash flow to weather arrears.
Cheapish premiums. Possibility a landlord will have to appear in court in the event of a claim.
No cover for void periods.

Our thoughts

Guaranteed rent insurance can be a sound idea. Anyone who has had experience of evictions and tenants who’ve run into arrears will know how damaging it can be to the finances. If you are prepared to wait and are not reliant on that property’s income to pay the mortgage, then perhaps guaranteed rent insurance is worth it for peace of mind.

Guaranteed rent schemes

Smart Property has a guaranteed rent scheme but we recognise it’s not for everyone.

The general idea is that a landlord looking to minimise stress and risk, rents out to a letting agency at fixed market value for a fixed period (anything from 3 to 10 years), with the agent confident enough to use their experience and expertise to achieve above market value and thus pocket the profit and make it worthwhile. At Smart Property, we do this by investing into a property to upgrade the condition, and we have examples of guarantees where we pay landlords up to £70,000 pa.

Speak the same language and understand time sensitivity of landlords’ lives.

Pros Cons
Good monthly income, covering void periods. Property location needs to be prime to given rental demand confidence
Great for peace of mind or if in need to outsource management. Depending on arrangements, can be locked in for long contract periods
Hassle-free. Generally, total control by letting agents including repairs and admin. Limited control over design, maintenance or tenants
Retain risks when in breach of regulations, or if the letting agency collapses

 Our thoughts

Do your homework. These guaranteed rent schemes can be great so long as the letting agency can continue paying your rent. We’d highly suggest performing thorough due diligence on any letting agency offering guaranteed rent services by checking over their credit and financial history at Companies House. In the event of the letting agency running into administration, complications may arise where they forfeit on debt and are not legally obliged to pay. Similarly, any fines imposed resulting from breach of regulations (such as the new HMO changes) are ultimately payable by the landlord, unless otherwise agreed.

Contact Andy Graham

Andy is the Managing Director of Smart Property


Comments

Robert Mellors

21:42 PM, 25th April 2018
About 5 months ago

The guaranteed rent scheme in the format you offer sounds like a Rent to Rent scheme. There is nothing wrong with this, it can work very well for the landlord, the rent to rent company, and the tenants, BUT this is different to a letting agent guaranteeing a rent, because the company operating the rent to rent scheme would become the organisation responsible for any breach of HMO regulations (which are incredibly onerous and open to wide interpretation by Council officials). With your scheme, do you lease the property from the owner, or are you acting as the owner's letting agent?

Anyone thinking of operating a rent to rent scheme needs to be aware of the obligations that this may entail. However, landlords who lease their properties to a rent to rent company, also need to be aware that they may ALSO be liable for various repairs and could even be held liable for some breaches of HMO regulations, while having lost control of the day to day running of the property.

I should mention that my "not for profit" company operates a rent to rent scheme, and it is the type that leases the properties from the owners for a fixed monthly rent on a 5 year lease agreement. This usually works well for the owners as it reduces their exposure to risks, e.g. voids, damage, unpaid rent, etc, but if the owner does not understand their obligations (e.g. for structural repairs, insurance, etc) then the relationship can break down. It is therefore important that owners go into such agreements with their eyes wide open, to both the advantages, and also to the possible complications.

Mick Roberts

9:09 AM, 26th April 2018
About 5 months ago

I know this post is about Guaranteed rent.
Which also started off about extra costs Landlords now face.
And on that subject, your extra costs words should be sent to Govt and Councils etc. along with Benefit cap for HB landlords, Universal Credit for A LOT OF Landlords forthcoming, and in the areas where it is now or will be soon, Selective Licensing.
Then just maybe one day, maybe in 100 years or who knows maybe next month, some daft MP or councilor may look at these extra costs Landlords are facing and think Hang on, they've already had their bank accounts bled dry, if we bring in this extra cost, where they getting money from?
Is that gonna really help the tenant, if we TAKE MORE MONEY from the Landlord?


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