What Does Guaranteed Rent Mean?
Landlords, like all business owners, are looking to reduce their risk while generating profits year-over-year. One risk reduction strategy is a guaranteed rental agreement.
You should know that these agreements are not the same as the similarly titled rental guarantee, a type of insurance for times when tenants default on payments.
How Does Guaranteed Rent Work?
Guaranteed rent is an agreement between a landlord and a second party, typically a letting agent or property manager. In this agreement, the party who is offering the guaranteed rent agrees to pay a sum of money to the landlord over the course of a particular term – often months or years. In effect, they’re offering to pay rent for the building – ownership is not transferred.
Why Would a Landlord Agree to Guaranteed Rent?
There are a lot of financial planning tips business owners are bound to get – one of the most often repeated is the age-old adage “A bird in the hand is worth two in the bush”. The main advantage of guaranteed rent is that you’re doing business with a well-established company of good repute, instead of with random tenants you’ve never met before, who may or may not decide to keep paying you rent month-to-month.
In other words, you’re reducing your risk. Drastically.
Now, of course, the problem of bad tenants can be mitigated to some degree through the use of letting agents. There are other advantages to guaranteed rent, however. While most tenants will sign, at most, a year-to-year lease, you can sign much longer rental agreements for guaranteed rent. What’s more, if the individual or company in question defaults on a payment, it’s more probable that you’ll have legal recourse to recover that money, if for no other reason than that they’re likely to have more assets.
The nature of guaranteed rent agreements makes them extremely flexible. You might ask the person who is renting the property from you to manage your whole property, from finding tenants to maintaining its upkeep. They might instead simply want to find tenants, and leave some elements of upkeep to you. It’s a contract between you and another party, so you can iron out the details together.
Why Would a Letting Agent/Property Manager Agree to Guaranteed Rent?
Another age-old adage serves to explain this part of the transaction: “You’ve got to spend money to make money”. Quite simply, the amount of guaranteed rent a landlord will receive is less than the amount that the party offering rent expects to earn.
Let’s say you’re the party offering guaranteed rent:
You’re going to have to find tenants, and (potentially) take care of tenant complaints and make repairs. The more money and time you expect to pour into your duties managing the property, the less you’re going to offer in guaranteed rent. From there, you’ll find tenants who, collectively, will pay you more than the sum of your work, the expected costs of repairs, and the cost of guaranteed rent.
In other words, the exchange that’s occurring is one as old as time itself: you’re offering to take on some of the burden from the landlord in exchange for some of the profit. You make money, the landlord makes money, and everyone is happy.
As a landlord, the risk is simple: you risk making less money than if you simply rented the units out yourself. Even using a letting agent whom you pay a percentage of your profits, typically leads to higher earnings than getting guaranteed rent – as long as your tenants continue to pay you.
For property managers and letting agents, guaranteed rent comes with a number of risks – mainly, that they won’t find tenants, or they won’t make as much money as they expected. In effect, these parties are taking on the risks of a landlord, in exchange for not needing to buy the property outright. When tenants default, or they don’t earn as much as they expected, they still need to pay the landlord the rent due.
Guaranteed Rent vs. Sale and Rent-Back
Sale and rent-back is, in some ways, the opposite of guaranteed rent. While with guaranteed rent the landlord maintains ownership of the building, in sale and rent-back scenarios, another party purchases the building and then rents it to the previous owner.
Guaranteed rent is one of many ways you can transact with letting agents. They often offer their clients a “find the right apartment for you” service, complete with filters for costs, location, and amenities. That means these agents typically have a lot of data at their disposal, so if they’re offering you a guaranteed rent agreement, it’s very likely they’re quite sure they can make a profit. Want to work less and reduce your risk? Guaranteed rent could be a win-win scenario.
Guaranteed Rent vs. Rental Guarantee Insurance
As we mentioned at the top of this article, there’s another way of “guaranteeing” rent – rental guarantee insurance. This type of insurance is akin to business interruption insurance in the broader world of business. In essence, you enter into an agreement with an insurance company who will offer to pay your tenant’s rent should they default.
Of course, insurance companies don’t give away this insurance for free, so you are taking on some extra cost. Deciding between guaranteed rent and rental guarantee insurance, then, is a matter of cost-benefit analysis.
Let’s say, for example, you think you could rent to tenants for £1,665 a month. You’re offered a guaranteed rent of £1,200 a month. You might be able to find rental guarantee insurance for £100 a month. Should you opt for rental guarantee insurance, you’d still be making £455 a month more than if you were to accept guaranteed rent – but you’d also have to put that much more work into your duties as landlord.
Sometimes, guaranteed rent is known as rent-to-rent. Sometimes, rent-to-rent can be quite problematic.
Those of you who are interested in guaranteed rent would do well to make arrangements with a well-established letting or property management company; there are some individuals who participate in rent-to-rent schemes with less than honest intentions.
You see, while guaranteed rent leaves you with a number of advantages (chiefly, ownership of the property), the individual who is guaranteeing you rent may not be the most scrupulous person. There are a lot of “get rich quick” rent-to-rent schemes popping up on letting forums across Great Britain. There are, in turn, a lot of horror stories. People paying landlords six months worth of rent, jamming as many tenants as they can into a household, collecting as much cash as possible, and then disappearing.
The Guardian has a piece on rent-to-rent horror stories that you’d do well to read if you’re thinking of making an arrangement with a relatively unknown person or company. There are a host of potential financial and legal consequences to a guaranteed rent agreement gone wrong.
Finding a Trustworthy Letting Agent
Should you opt to look into guaranteed rent, then, it’s important to find a well-established letting agent or property manager who has offered guaranteed rent to other landlords in the past. Fortunately, the very site you’re reading this on right now offers this exact feature. You can look at feedback for the various letting agents and property management agencies who are interested in guaranteed rent in your area. A number of online letting agents offer their schemes nationwide.
There are all kinds of advantages to finding people who have experience with guaranteed rent agreements. There are the obvious advantages of trust and expertise. Then there are some less obvious advantages:
For example, a letting agent or property manager in a long-term guaranteed rent agreement may offer to make improvements to your property. They’ll do this in order to secure higher rents and more reliable tenants. They don’t, however, own the property, so any gains from these improvements when you sell your property will be yours to keep.
You’re also more likely to secure long-term or repeat guaranteed rental agreements with letting agents who know the market well. Moreover, it’s more likely you’ll get a fair rental agreement. They’re not interested in making a quick buck, after all – they’re interested in creating a business arrangement. They’ll want positive feedback from you, testimonials, and maybe even guaranteed rent agreements for other properties you own. In other words, they have a lot of incentive to be fair.
Hopefully this article has given you a plethora of insights into the world of guaranteed rent. There’s no obvious answer as to whether or not guaranteed rent will be worth it for you – you’ll have to run that analysis yourself. That said, if you’re going to get into a guaranteed rent agreement, don’t go for something that looks too good to be true – shop around, find a letting agent you trust, and make a deal that you can stand by.