Hello Medway property investors,
I regularly get asked by investors about guaranteed rent schemes and, after reading an article regarding a potentially catastrophic change in DWP, I wanted to share a warning with those considering it as a potential investment route (both in letting a property under a ‘guaranteed rent’or’rent-to-rent’ scheme and operating the scheme as part of a property strategy).
I was further shocked to hear about the recent experience of a landlord couple who were defrauded by a letting agent offering a guaranteed rent scheme.
Looking beyond than criminal letting agents, there are also further and significant risks even with more legitimate schemes that are offered. These risks are for both the guaranteed rent operative (GRO) and the property owner.
Universal Credit Clawbacks
After the first lockdown, the Government suspended full checks for universal credit because the DWP was unable to see claimants face-to-face and claims were being fast-tracked. There is now a process underway to revisit all the claims approved during this time and, as part of this, proof of a tenancy agreement is required if housing benefit has been claimed.
Where tenants are unable to provide a tenancy agreement or written letter from the landlord, they are now at risk of being forced to repay the back-dated housing element of their Universal Credit.
This was the case with one tenant from Essex, who must now repay £5,372 after moving into an informal house share with a friend, with the landlord refusing to provide any confirmation that she ever lived at the property.
Obviously, I do not know the full details and it may be that the landlord was unaware of the situation (clearly no inspections were carried out if this is the case!), however, it is extremely concerning that it ended up also revealing an unlicensed HMO!
Ok, so I get that the majority of rent-to-rent schemes will have a tenancy agreement in place however, it is extremely important that the correct type of tenancy agreement is signed. I see have seen numerous posts on social media where landlords have signed Assured Shorthold Tenancy Agreements with guaranteed rent operators. This is completely wrong and poses significant risks for the landlord.
Billed as ‘no money down’, this is rarely the case as rent to rent operators take on significant financial risk
As an investor looking to enter the rent-to-rent market, not only will you lose the benefit from appreciation (which can make up 50% or more of an investors’ profits), but this kind of investment usually has a significant start-up cost.
For example, you may need to make improvements, repair and/or convert along with potentially furnishing a property that you do not own at your cost whilst also paying rent and bills. There is also no guarantee that you will find suitable sub-tenants. Furthermore, there are extra costs faced by Guaranteed Rent Operators that they may not have anticipated (e.g. marketing costs), unexpected maintenance costs.
Operators also remain liable for the rent for the full period of the tenancy and the landlord may seek possession along with the relevant recovery action should it not be forthcoming. In addition, there is no guarantee that your tenancy will be renewed and therefore this simply increases the risk of losing more than you make.
A large number of guaranteed rent schemes are simply plain dodgy
If you are letting your property under a guaranteed rent scheme and getting paid the right amount, on time, month in and month out then you are lucky.
As a professional agent, you would be shocked at the number of times I receive calls from landlords who have signed up with a guaranteed rent scheme, yet payments ceased or stalled after a couple of months due to a lack of quality, paying sub-tenants being sourced.
It can be difficult and expensive to end a guaranteed rent contract gone wrong
Despite knowing the risks, should you choose to let your property under a ‘guaranteed rent’ scheme, if it goes wrong, it could prove difficult to regain possession.
For example, if you are unhappy with the operator but they keep paying then there is very little you can do.
In the event that rent stops coming in, landlords face a lengthy legal case to evict not just the rent to rent operator, but potentially also the non-paying tenants (who may, or may not, have the right paperwork in the first place).
When rent to rent agreements go wrong and the operator disappears, this could leave the property owner in a very tricky situation as the tenants occupying the property do not have a tenancy agreement with the landlord. This means that normal routes to eviction could be difficult or impossible.
The landlord ultimately remains liable for the property, with very little control over it
I’m sorry landlords, but you remain wholly responsible for your property if you choose to let it under a guaranteed rent scheme and the courts will have very little sympathy if something goes wrong.
Robin Stewart of Anthony Gold solicitors, highlighted this when saying: “Despite what any of the paperwork might say, the landlord can never fully hand over responsibility for compliance with the law to the rent-to-rent operator.”
You could get yourself into trouble for a non-compliant property with potentially illegal sub-tenants, who are not adequately referenced or credit checked, and who have not been provided with the right documentation before moving in.
Or you may face potential charges for an illegal HMO where your master bedroom is divided into two smaller rooms that don’t meet minimum space requirements without your knowledge.
If you’re ok with taking these risks, then rent-to-rent is the perfect scheme for you.
A landlord could find their insurance invalidated or be in breach of mortgage conditions
Another point to consider for landlords is how they could find their insurance is invalid under a guaranteed rent arrangement and mortgage conditions become breached.
Let alone the risks of potentially not being able to make a claim, if your insurance or mortgage company catches up with this, there could be significant consequences for the future.
Clearly, given the risks outlined above, and the increasing regulations within the property rental market, my opinion as Medway’s leading HMO agent is that guaranteed rent schemes are an extremely high risk and dangerous strategy for both property owner and operator.
If landlords are struggling to let their property (be it an HMO or single let) then simply they need to get a better agent as there is significant tenant demand and, for investors looking to break into the market, there are much safer options than the high risks and low rewards of being a rent-to-rent operator.
Do you have questions about investing in property? If so, then I will be more than happy to book a time to speak and assist where I can. The best way to reach me is through LinkedIn.