Select Page

See local estate & letting agent fees & ratings

Compare agents to sell or let your property using your postcode - for free

Слой-0-копия-1

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 an agent).

Landlords who don’t want the daily responsibility of managing either their property or tenants, hire an agent to do the dirty work for them.

In some cases, an 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 an agent enter into an agreement that essentially makes the agent the landlord’s tenant.

The agent pays the landlord rent on a strict basis once a let is agreed and then charges the tenant slightly more in hopes of turning a profit. Different products, policies, and schemes offer guaranteed rent for landlords. These include:

  1. Agency-backed
  2. Council-backed
  3. Insurance

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.

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.

Furthermore, Covid-19 brought in a lot of uncertainty in the property market.

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 an 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.

 

Bad tenants

Now, of course, the problem of bad tenants can be mitigated to some degree through the use of 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.

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.

Pros

  • 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

Cons

  • 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

landlord who are private

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.

Pros

  • 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)

Cons

  • 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 worthy investment.

 

GUARANTEED RENT SCHEMES

The main idea behind these schemes is that a landlord looking to reduce risk and responsibility, rents to an agent at a fixed market value for a predetermined amount of time.

Most schemes are designed for 3 to 10 years. The agent must have experience and knowledge of the market so they can turn a profit. 

Pros

  • Guaranteed monthly income that covers even vacancies
  • Generally, hassle-free 
  • Landlords and agents are often on the same page
  • Peace of mind and reduced stress
  • A viable outsource management option

Cons

  • The risk that the 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 agent fees

 

WHY WOULD AN AGENT 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.

 

Do your research

landlord who are private

Make sure you do plenty of research before entering into an agreement with an 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 agent breaches the regulations.

As a landlord, the risk is simple: you risk making less money than if you simply rented the units out yourself. Even using an 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 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.

 

Less stress for a landlord

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.

 

RENT-TO-RENT PITFALLS

landlord who are private

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 your 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

Compare Agent Fees Near You

Helping sellers & landlords find their ideal agent

No thanks

Compare estate & letting agents

marta wonder

I got the best priced agent in my area with all the services I wanted. Using Rentround I could see all the local agents in my area after just putting in my postcode.

Sellers & landlords

Should a Landlord Accept Tenants With Pets?

Rentround November 8, 2021