The pros and cons of guaranteed rent
There are many different types of guaranteed rent, from insurance to council-backed and letting-agency-backed [1]. There has been a recent surge in the popularity of guaranteed rent, driven by rising costs due to government-led regulations to reduce buy-to-let spending in the housing market [2]. It sounds like an enticing option for landlords who are feeling the pinch, but what are the pros and cons of the various products, policies and schemes?
Council guaranteed rent
Over the years, many councils have had to turn to the private sector to address the affordable housing crisis and provide more social housing. The offer of guaranteed rent is one of the ways in which councils have been able to attract investors looking for a guaranteed monthly income. It can be a hassle-free way to generate stable income as it is managed by the council and is low risk. There are often perks such as exemption from council fees and it makes a positive social difference.
For landlords who have properties in less desirable locations where rental prices are stagnant, council-guaranteed rent is an appealing option. However, the monthly income is often lower than that which can be generated through other schemes and it can take a long time to set up. Landlords also have little involvement in accepting tenants and they may be high risk.
Guaranteed rent insurance
Guaranteed rent insurance [3] provides cover for when tenants fail to pay, so it offers peace of mind. Premiums are fairly low and tend to be between six and twelve per cent of the monthly rent. When tenants get into arrears, this can be financially disastrous for landlords and rent insurance provides some protection. However, claim processing times can be lengthy, so anyone relying on the rental income to pay the mortgage should assess whether they could survive the time it takes to process the claim.
According to the Ministry of Justice, it takes eight weeks to pay out rent arrears [4] and repossession claims take an average of forty-one weeks. Policies vary in coverage and may include an excess or a cap on how much is recoverable. In addition to this, insurers will impose stringent conditions and will only cover tenants who can pass robust reference checks, meaning they are highly unlikely to default.
Letting-agency backed schemes
This is where a landlord rents their property to a letting agency at a fixed market value price for a fixed period. The agent believes they will be able to make a profit by charging above market value. This is designed for landlords looking to reduce risk and minimise stress which means monthly income is guaranteed. Void periods are also covered, so this type of scheme offers great peace of mind. The letting agents are usually responsible for all repairs and administration, making this a hassle-free choice.
One of the main disadvantages is that only properties in prime locations are likely to be accepted as the letting agent will want confidence in high rental demand. Landlords may be locked into long contracts and their control of maintenance and tenants is limited.
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Resources:
[1] https://www.theprs.co.uk/news/how-does-guaranteed-rent-or-rent-to-rent-work
[3] https://www.theupperkey.com/post/what-is-guaranteed-rent
[4] https://www.lettingaproperty.com/landlord/blog/guaranteed-rent-scheme/