Tenants Deposit Protection – what are the alternatives?

by Readers Question

10:18 AM, 23rd January 2013
About 6 years ago

Tenants Deposit Protection – what are the alternatives?

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Tenants Deposit Protection – what are the alternatives?

Tenants Deposit Protection - what are the alternatives?I find the current tenants deposit protection schemes very time consuming and a waste of money, which all tenants sadly ultimately pay for through their rents.

I fully appreciate that a few tenants and a few landlords do give the other side a tough time hence understand why deposits need to be regulated if they are taken.

However, is there a better way to manage this area? How else can landlords get protection against tenants not paying their rent or damaging their property?

I would really appreciate the opportunity to read the thoughts of other Property118 readers, especially if they have any practical experience of letting in Australia or the USA ?

Alternatives to Deposit Protection

The main reason I take a deposit is to cover me if my tenants leave owing me rent or have damaged my property, also it gives the tenant a stake in the property so they tend to look after it better.

I like to hold the deposit so I can agree any claims direct with my tenants. After 16 years I have not had one dispute in which we could not simply agree a solution.

Below are some of the ideas and products I’ve considered as alternatives so there is no deposit to protect.

1) Have a Guarantor for the tenants; these also need to be referenced in the same way as you reference the tenants.

This obviously reduces the risk to you of non-payment of rent but does not eliminate it as your tenants and guarantors could go bad at the same time. Also many tenants do not want to ask anyone else to be their guarantor and so would not be interested in renting your property, plus it might not give effective cover against damage done by tenants.

2) Do not take a deposit so there is no deposit to protect.

This gives you no protection but you will fill your properties more quickly. However, you may attract the poorer tenants who statistically are more likely to give you problems with no payment of rent or damage to your property in the future.

3) Ask the tenant to pay for a Warranty.

Warranty companies such as Deposit Approve promoted by Landlord Assist offer an interesting product which is actually worth about 12 weeks rent so on paper. In theory that’s twice as good as taking a 6 week deposit. However, I understand that Warranty companies are not regulated so if they got hit with some bad claims they may just go bust and disappear leaving you with no protection.

4) Do not charge a deposit but simply charge a non refundable Administration Charge of say £100 for every tenant you take, payable by the tenant before they move in.

All these non refundable administration charges will hopefully add up and will go towards any non payment of rent and damage done over the long term but you are likely to be left out of pocket especially if you had a few tenants go bad on you at the start.

5) Take out a rent guarantee product.

The cost of the rent guarantee is likely to be £100 per year. For smaller landlords this makes excellent sense if you look at the upside/downside risks. However, if you are a larger landlord you may find it makes more economic sense not to insure your rents and run the risk yourself.

I would really appreciate your thoughts especially if you have used a Warranty company or have practical experience of this area in Australia or the USA? Please leave vyour comments in the section below this article

Many thanks

Mark Garner – Garner Homes



Comments

19:41 PM, 24th January 2013
About 6 years ago

A guarantor without a RGI policy inforce on them is pretty useless as you correctly conjecture.

Therefore with RGI on them that is all you need to guarantee being paid out by the RGI company.

Even a guarantor with a property is a waste of time as equity can change; charges can be applied to it and an OR can take any proceeds following a bankruptcy.

I would only accept a guarantor on whom I could obtain a RGI policy on.
The problem with RGI is that when you insist on it; you find out how many wrongun tenants there are out there!
These don't qualify for RGI; so if you have the invidious position of not taking on tenants or taking a massive risk on a tenant who doesn't qualify for RGI.
This makes the LL game a high risk activity; especially if you are a small LL without vast amounts of cashflow or funding to cover the average time of 9 months it takes to evict a tenant.
With no rent coming in the LL could be bankrupted.
Small LL who do not wish to gamble on a tenant paying rent are forced to make investment decisons based on a tenant profile which would qualify for RGI.
This may mean less cashflow but massively less risk and less tenant choice.
I do not believe the vast majority of small LL understand this risk and who consequently make inappropriate investment decisions.
They may be lucky and get away with things and I think most do.
Property investment and becoming a LL for the first time is not sold as a gamble and it should be if you CANNOT obtain RGI on your tenants.

Paul Baldry

20:11 PM, 25th January 2013
About 6 years ago

RGI insurance from what I have found will only insure the tenant/LL if there is a deposit registered with a scheme. I have one company that offers deposit replacement insurance 'as a bond' but that alone is £120 and RGI another £80 per annum making it very expensive. His is on top of the RGI requiring a home owner guarantor! Has anyone found RGI that does not require a bond????

Mark Alexander

23:22 PM, 25th January 2013
About 6 years ago

Have you ever had to claim on the bond? I share the same concern about these bonds being unregulated and the lack of capital adequacy requirements of the providers too. If they were viable, why wouldn’t the big insurers in our market such as DAS, Aviva etc. be offering them?

Mark Garner

23:35 PM, 26th January 2013
About 6 years ago

Does anyone have experience of what products and requirements there are in Australia or USA to deal with deposits and non payment of rent?

Paul Baldry

18:27 PM, 27th January 2013
About 6 years ago

Mark the deposit replacement i have found is underwritten by a 'big player' and fully insurnace backed rather than a 'cowboy' warranty products. If we want to reduce the cost of a property for the tenant then pay for a RGI rather than a bond is the way to go. What we have at the minute is the tenant paying for the bond (so no cost reduction) and the landlord more out of pocket paying for the RGI themselves. Anyone found a way to have RGI without a bond?


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