Rent Guarantee Schemes – Are They Worth it?
Are Rent Guarantee Schemes Worth It?
Hearing the term “guaranteed rent” sounds like a blessing to landlords who spend their valuable time chasing up tenants over unpaid rent.
However, is the rent guarantee scheme really worth it?
- What is a rent guarantee scheme?
- Why are rent guarantees offered?
- What are the downsides of rent guaranteed schemes?
- Should I use a rent guarantee scheme?
- Real life example
- Final words
What is a Rent Guarantee Scheme?
First off, it should be noted that a rent guarantee scheme is not the same thing as rent guarantee insurance.
Rent guarantee insurance is a policy which you can take out with a specialist property lender who can pay out if your tenant is over a month in rental arrears.
With a rent guarantee scheme a landlord will sign their property to a management company or letting agent, who will then sublet the property and pay a guaranteed fixed monthly payment to the landlord.
Companies that offer a rent guarantee will pay you each month, regardless of whether the property is in a void period. Some companies also offer to pay any required maintenance costs.
Why Are Rent Guarantees Offered?
Some property management companies prefer these schemes because they aim to profit from the difference in rent income to landlord payments.
i.e. The property will be sublet at a rent higher than the payment made to the landlord.
Although the monthly payment made to landlords will be lower than market value, it is a small price to pay for the security of having a guaranteed monthly income from the property.
Property developers will sometimes act as the management for the property once it is completed and will offer a rent guarantee on the off-plan property as an incentive to prospective buyers/investors to purchase the property/properties.
What Are The Downsides To Rent Guaranteed Schemes?
- Less control over the property
- Landlord is still liable for the property
- Some lenders apprehensive to lend against the property
- Management/letting company may enter liquidation or administration
1. Less Control Over The Property
Due to signing the property over to a management company or letting agency for a set period of time, usually 2+ years, you will not have a say in who is renting the property for the entire period of time.
Further to this, you’ll be unlikely to be able to sell the property if you enter personal financial difficulty as your contract with the management company or letting agent will still be binding.
2. Landlord is Still Liable For The Property
Regardless of the fact that the property has been signed over to a management company or letting agent, as the landlord, you will still be liable for the property.
For example, if the property is in breach of fire-safety regulations, is an unlicensed/illegal HMO or breaches any other regulations, you could be fined up to £20,000.
3. Some Lenders Apprehensive to Lend Against The Property
It would seem like a logical decision to lend against a property which has a rent guarantee in place. There are however many lenders who will not lend against a property which has a rent guarantee scheme in place.
For this reason, you should discuss a rent guarantee scheme with your current mortgage provider if you are looking at entering a rent guarantee scheme/program.
4. Management Company or Letting Agent May Enter Liquidation or Administration
If the company sub-letting your property does not have the ability to absorb late payments from multiple tenants, they may stop paying you and eventually enter liquidation or administration.
This is the potential worst case scenario, as you’ll have no monthly income from the property but it will still be occupied.
Depending on the circumstances of whether the company has entered liquidation or administration will determine the options available to you as the landlord to regain control of the property.
If the management company / letting agent has entered liquidation, then you can follow the normal process of evicting tenants.
However, if the company/agent has entered administration, then you will have to proceed through the court system in order to evict the tenants and regain control of the property.
Should I Use a Rent Guarantee With My Property?
Apart from the downsides listed above, entering a rent guarantee scheme can be advantageous:
You will not have to stress over any void periods which the property encounters as the scheme will pay you each month, regardless of if there is no one renting the property. You may also not have to foot the bill for any maintenance costs.
However, there are a few points you should consider before entering a rent guarantee scheme:
- Sign a commercial lease contract with the management company or letting agent, not an AST (assured shorthold tenancy)
- Read the contract between the management company/letting agent thoroughly
- Ensure that the company offering the rent guarantee has a proven track record for success
- Further to above, ensure that the company has sufficient liquidity to absorb and cover any void periods on their side
Example of a Failed Rent Guarantee Scheme
One landlord has stated that they entered a 1 year contract with an agent who offered a rent guarantee on their 3 bed flat. The first year went smoothly, so the landlord decided to extend the contract for a further year.
The agent then proceeded by increasing the monthly rent which ended up in the current tenants leaving. New tenants were found for the property, however the new tenant converted the 3 bed flat into a 5 bed HMO and sublet the property on short term contracts.
A few months down the line, the landlord decided that they would re-mortgage the property, only to find that the property was no longer a 3 bed flat. This was brought to the agents’ attention, who had no idea that it had been converted to a 5 bed flat.
The agent evicted the tenant, repainted the property and handed the keys back to the landlord.
In this situation, if the authorities had found out before the landlord, they could have been faced with a fine and allegations of bank fraud due to remortgaging the property as a 3 bed when it was actually a 5 bed illegal HMO.
If you are considering a rent guarantee scheme, ensure that you are completely aware of who will be renting the property and that the commercial contract between you and the management company/agent is completely understandable and transparent.
You do not want to be liable for an illegal HMO property or in breach of any other property letting regulations.
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