Guaranteed Rent Scheme: The Pros & Cons | Guide for Landlords

Guaranteed Rent Scheme: The Pros & Cons | Guide for Landlords

Being a landlord can be stressful. From last-minute callouts for maintenance and repairs to chasing up tenants who are late paying rent, it’s not without its challenges. This makes the prospect of guaranteed rent particularly enticing—especially for landlords who’ve been struggling to find reliable tenants.

A guaranteed rent scheme, also known as a rent to rent scheme, is similar to sub-letting except it’s a commercial agreement rather than a standard Assured Shorthold Tenant agreement.

Guaranteed rent schemes are when a landlord enters into an agreement for a fixed term (typically between six months and a couple of years) with a third party who then takes control of managing the property and letting it to tenants. They pay the landlord a fixed monthly fee in return and effectively becomes the renter or tenant.

This third party is usually either a local council or housing association or a private letting agency. For councils and housing associations, working with private sector landlords allows them to expand the amount of social housing they can offer.

Letting agents are able to make a profit by charging tenants more than the monthly fixed fee that they pay the landlord. They may also turn the property into an HMO (House in Multiple Occupation) in order to make more money.

It’s worth pointing out that guaranteed rent schemes are not the same as rent guarantee insurance which is essentially an insurance policy that guarantees you a payment in the event that a tenant falls behind with rent. You can make a claim once your tenant has met a certain minimum in arrears (usually at least one month).

On the other, with guaranteed rent schemes, landlords receive payments every month, whether tenants have paid rent or not.

In recent years, there’s been a rise in guaranteed rent schemes with more and more landlords attracted to the security and stability they offer. Here we outline the advantages and disadvantages you should consider before entering into a guaranteed rent scheme.

Guaranteed Rent Schemes: Pros

Guaranteed Monthly Income

The main draw for landlords when it comes to guaranteed rent schemes is the prospect of a reliable and essentially passive income.

Landlords can feel reassured that they will receive a certain amount of money in their bank account at the same time each month—all for little to no effort. This money will arrive even if the property is empty and even during times of low growth in the rental market.

The third party will also cover utility costs, further reducing the financial strain of traditional tenancies, and landlords won’t be landed with sudden and unexpected costs. This makes property investment less risky. And, for buy-to-let landlords with mortgage repayments, it’s particularly attractive.

Meanwhile, council guaranteed income schemes are a good choice for those landlords whose properties aren’t in particularly desirable areas or in areas where rental prices are stagnating. There’s also the advantage that you’ll be exempt from council fees if you enter into such a scheme.

Finally, sometimes the third party will upgrade your property before renting it out, further adding value and equity—although it’s worth remembering that you won’t have any control over the renovations or refurbishments.

Less Stress

Landlord duties can be stressful. Having to accommodate late night and weekend viewings, dealing with late payments and evictions, or being called out to deal with repair jobs can take its toll. Handing over these responsibilities to a third party is very tempting.

Saves Time

Maintaining and managing properties is time-consuming. Being able to give control of the property over to a third party saves landlords the time and hassle of everything from finding tenants and ensuring bills are paid on time to dealing with repairs, handling administration details, and making sure the property is well-maintained.

No Need to Read Up on Regulations

The third party, whether it’s the council or a letting agent, is tasked with ensuring the property is compliant with the necessary health and safety requirements. This means landlords no longer have to make sure they’re up-to-date with the latest regulations including building codes and rental property guidelines.

That said, as we’ll mention later on, these third parties don’t always take the necessary precautions as far as regulations are concerned.

Social Impact

Entering into a contract with a local council means landlords who might not otherwise consider council tenants can help to provide housing to vulnerable individuals. Or they may be helping to house key workers such as teachers, police, and nurses who need to live near their workplace. The other advantage of council guaranteed rent schemes is that, in general, you know the council can be trusted.

Guaranteed Rent Schemes: Cons

Less Money

The reason guaranteed rent schemes are appealing to letting agents is because they are able to make a profit by charging tenants more than they pay landlords.

This fixed monthly price is typically lower than landlords might make if they managed the rental themselves, and usually below the average rental market value in the area—typically up to 15% less. Nevertheless, the fixed price does mean you mitigate against changes in the local property market.

No Control Over Tenants

One of the major drawbacks of guaranteed rent schemes is the fact that landlords have to surrender control over who resides in their property. Filtering and choosing tenants becomes the responsibility of the letting agent and you can’t guarantee that you will like the tenants. As these agents need to fill the tenancy in order to make money, they may be tempted to take on tenants that you would normally reject.

In council guaranteed rental schemes, in particular, there’s a chance the tenants will be high-risk. You should always check the contract to see if there’s a higher security deposit as a result.

Certain Properties More Desirable Than Others

Letting agents want to know that they can make a profit on your property. This may mean they are only interested in those properties that are in high-demand areas. Nevertheless, you can still find agents interested in areas that are less popular—they may turn your property into an HMO instead. Council contracts are another option.

Long Contracts

Guaranteed rent contracts can run for a long time—sometimes up to five or ten years. This is great if you’re happy with how your property is being managed but if you run into difficulties with the agent, this may cause problems.

Scams and Unreliable Agents

As there’s recently been a rise in guaranteed rent companies providing services for landlords, there’s also been an increase in unreliable providers. These providers may go into administration, unable to meet all their costs, and this could leave you in a tricky situation.

Always check a letting agent’s financial history before entering into any agreements and ask for testimonials or references from other landlords. If they have plans to turn your building into an HMO, check to see that they have experience with HMO properties.

These agents are in charge of maintaining your property and if they don’t do their job, the market value may suffer in the long term, and you may have to spend a lot of money on renovations. What’s more, if the property is unsafe, you are liable for any claims made against you for injuries.

For example, if the company fails to carry out annual gas checks or doesn’t do anything about too many people living in the property, you might be subject to hefty fines.

Are Guaranteed Rent Schemes Worth It?

Whether you choose a guaranteed rent scheme or not ultimately depends on your individual circumstances. If you’re struggling to find tenants or the stress of being a landlord is overwhelming, handing over responsibility to a third party could certainly be worth it. Financially, it could also make sense, especially if the market is stagnating or you need to meet mortgage payments.

That said, make sure you do your research and due diligence on any letting agents before signing the contract. Check their financial history and make sure you feel confident that they are equipped to manage your property effectively.

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