Guaranteed Rent Guide
Only two things in life are certain – taxes and death. And possibly guaranteed rent?
The name sounds promising, especially to landlords who’ve faced late payments and evictions due to nonpayment.
But is guaranteed rent really as reliable as it seems or is it, perhaps, too good to be true?
What is Guaranteed Rent?
Despite what some people believe, guaranteed rent isn’t an agreement directly between the landlord and tenant but instead between the landlord and a third party (usually a letting agent).
Landlords who don’t want the daily responsibility of managing either their property or tenants, hire a letting agent to do the dirty work for them.
In some cases, a letting agent wants to rent out a property but doesn’t own one, and needs the help of a landlord to achieve their financial goals.
At this point, the landlord and a letting agent enter into an agreement that essentially makes the letting agent the landlord’s tenant.
The letting agent pays the landlord rent on a strict basis and then, in turn, charges the tenant slightly more in hopes of turning a profit. Different products, policies, and schemes offer guaranteed rent for landlords. These include:
- Letting agency-backed
So, what are the pros and cons of guaranteed rent and why is it so popular? Let’s take a look.
Why Guaranteed Rent Schemes Are Becoming More Popular
A rise in government-led regulations and tightening of revenue has slowed down the growth of rental prices.
Because of this, many landlords are now open to a guaranteed reward vs uncertainty that comes with a traditional tenancy agreement.
Most buy-to-let landlords are left wondering what the right decision is, as spending and revenue decline while costs remain the same, or in some cases, rise.
Interest rate relief is predicted to end in 2020, which is also driving many landlords’ decisions to enter into a guaranteed rent scheme.
While there are some seasoned veterans who plan to stick it out, most landlords are predicted to err on the side of caution. Reports from the NLA (National Landlord Association) show that many landlords are looking to sell rental properties and reduce the number of properties they let.
While guaranteed schemes have been around for years, the above-mentioned changes are pushing more and more landlords in this direction.
The thought of a hassle-free rental experience and guaranteed income is extremely attractive – especially in such uncertain times. Landlords are tempted to pay a letting agent to take over the daily responsibilities of finding and managing both tenants and the property.
These third-party agents believe they can turn a profit after paying out monthly expenses, based on the current market.
Let’s examine the pros and cons of the three most common types of guaranteed rent schemes.
Council Guaranteed Rent
This is the most popular type of guaranteed rental scheme and the one that’s been around the longest.
The long-standing affordable housing crisis in Britain has driven many councils to work within the private sector.
Guaranteed rent is an attractive incentive for property investors.
Anyone who can offer a guaranteed monthly income above the Local Housing Allowance rate is likely to attract interest from current landlords.
Having the council as a tenant is reliable and comes with minimal risk. But, like any guaranteed rent scheme, there are pros and cons to consider.
- Guaranteed income
- Hassle-free experience (depending on the council)
- Perks such as exemption from council fees and free accreditation
- Reliable income in times of low-growth
- Promoting social change
- Lower-income than some other available schemes
- Long process
- Miscommunication or misunderstanding between private landlords and council staff
- Landlords have little to no say in the chosen renters
Council schemes are a great way to provide more affordable housing.
It’s important to keep in mind that these tenants are sometimes considered high-risk so special care must be paid to things like who’s responsible for maintenance and repairs, if a security deposit will be collected, etc.
Another positive of using this type of scheme is that many councils look to work with teachers, nurses, and other essential workers looking to live closer to work.
Landlords who inherit rental properties in less favorable areas often prefer a council scheme.
Guaranteed Rent Insurance
Like most insurance, guaranteed rent insurance is more about peace of mind and less about a guaranteed income.
Most policies cover landlords for the duration of the tenancy, at a cost of approximately 10% of the monthly rent. In the event that a tenant is in arrears, the insurance will kick in.
One thing to keep in mind is that you won’t receive a payout until the tenant is late for 8 consecutive weeks.
Payouts under a guaranteed rent insurance policy can cover your expenses for over 40 weeks, depending on the policy.
The biggest question is whether or not you can afford to pay for guaranteed rent insurance without knowing if you’ll ever need to cash in on it.
- Peace of mind in the event you have an unreliable tenant
- Gives you more control over the tenants and maintenance
- Affordable premiums (in most cases)
- No coverage during vacancies
- Landlords may need to appear in court to process claims
- Claim processes take time, which is a financial burden when tenants are in arrears
- Strict guidelines and conditions to protect underwriters
If you’ve faced unreliable tenants or even evictions, you know how stressful both financially and mentally. Having guaranteed rent insurance gives you peace of mind that you’ll eventually get paid.
If you can handle the monthly premium and the waiting period to file a claim and receive a payout, it’s a worth wild investment.
Guaranteed Rent Schemes
The main idea behind these schemes is that a landlord looking to reduce risk and responsibility, rents to a letting agent at a fixed market value for a predetermined about of time.
Most schemes are designed for 3 to 10 years. The letting agent must have experience and knowledge of the market so they can turn a profit.
- Guaranteed monthly income that covers even vacancies
- Generally, hassle-free
- Landlords and letting agents are often on the same page
- Peace of mind and reduced stress
- A viable outsource management option
- The risk that the letting agent’s company might go under or the agent may breach the contract
- Long contract periods
- Limited control over the details including tenants, maintenance, and design
- The property location needs to be attractive
- Higher letting agent fees
Make sure you do plenty of research before entering into an agreement with a letting agent.
You need someone who is reliable, experienced, and knowledgeable. After all, this type of guaranteed rent scheme is supposed to create less stress for you, not more.
There’s nothing wrong with researching the agent’s financial history — in fact, you should! You should also create a detailed contract that protects you in the event the letting agent breaches the regulations.