Rent Guarantee Insurance and Guaranteed Rent – What’s The Difference?
When you rent out your property, your choice of rent guarantee products – be it rent guarantee insurance, rent guarantee schemes, or guaranteed rent, can influence what the best route for you is. But sadly, unless you understand the world of BTL (buy-to-let) quite well, navigating these complicated areas could be somewhat tricky, especially when you want to decide what works the best for you as a landlord.
To put it simply, all these rent guarantee products’ goal is to ensure the landlord gets paid each month. Thus, even when a tenant fails to pay the rent, either due to financial hardships or just because he/she had a dispute with the landlord, the landlord would still get a guaranteed rent.
Several guaranteed rent schemes are available in the market, each having unique eligibility criteria, terms and conditions, and restrictions. To help you decide, let’s start by understanding what rent guarantee insurance is.
Rent Guarantee Insurance Explained
As a landlord, your rental income is protected against loss of rent by rent guarantee insurance. Thus, it’s an insurance product, which you can buy from a specialist landlord insurance broker.
You can consider it similar to a ‘life insurance policy’ or insurance for ‘building and its contents.’ Since it’s an insurance-backed product, it usually has somewhat strict terms and conditions that could differ based on the insurer. However, it typically includes the following:
- Comprehensive tenant referencing must be carried out on the tenant before signing the agreement.
- Tenants receiving housing benefits may not be accepted by some insurers, while others could accept them with a working guarantor.
- You must purchase the rent guarantee insurance before signing the tenancy agreement. If not, you’ll be unable to claim within a specific period.
- To make a claim, you may have to pay an additional sum that is typically equivalent to a month’s rent.
- You must serve your tenant with all the proper notices like the EPC, How to Rent guide and a gas certificate at the tenancy’s commencement.
- The rent guarantee insurance covers you until you have taken back possession of the property or until your tenant surrenders the keys.
- Generally, there’s a limit on the amount of rent recovered, which is £25,000 to £50,000 in a total claim.
- To make a claim, the tenant must be 8 weeks in arrears before getting your first month’s rent paid; This means you should have adequate funds to continue with your mortgage payments during this period.
- Rent guarantee insurance generally includes solicitors’ fees when you need to get possession of your property back.
These points are some of the basic minimum requirements you would want concerning ‘financial protection’ when you let out your property, particularly if it was mortgaged. To get the rent, a landlord usually has to wait for up to 8 weeks, and it’s this time period that’s the main differentiating factor of a rent guarantee insurance product.
As a landlord, you should ideally have funds to cover your expenses for at least three months, including your mortgage payments.
In situations where your tenants don’t or can’t pay, rent guarantee insurance can help. If you’ve got one, it could kick in within 2 months.
Guaranteed Rent vs. Rent Guarantee Schemes
Some benefits of a rent guarantee insurance are also offered by guaranteed rent. Some guaranteed rent packages pay the landlord’s rent each month on a set day, even when the tenant doesn’t pay rent. Thus, landlords would no longer need to wait for up to 8 weeks to get their rent paid and feel stressed in the process.
Though the industry may call a product of this kind a guaranteed rent scheme, and you could find some letting agents that offer such a service, we believe there’s one key difference: your entire rent is paid to you at the current market value.
As a landlord, a guaranteed rent scheme would bring you benefits in the following ways:
- The tenant undergoes referencing, which includes a credit and employment check along with a landlord check.
- At the commencement of the tenancy, the legal documentation is taken care of, including having a suitable tenancy agreement between your tenant and you.
- You get your property’s full market value and pay just a fixed monthly fee that’s small.
- It acts as a rent collection service that pays your rent on time, on the same day each month, with clockwork precision.
Rent-to-Rent Scheme – What Is It?
Even when high street letting agents offer you guaranteed rent, they’ll become your tenant in reality and sub-let your property to other tenants. After that, they’ll pay you an amount that’s slightly lower than the market rent value. This is called rent-to-rent.
Under a rent-to-rent system, a landlord will let out his/her property to a company, an individual, or a letting agent, who’ll become the ‘tenant’ for a specific period in return for paying the landlord a guaranteed monthly income. Next, the ‘tenant’ would sublet the property and deal with the tenancy. The tenant will earn a profit based on the difference between the rent they get from the subtenant and the amount they pay the landlord. Most rent-to-rent arrangements guarantee to cover any void periods as well as maintenance costs.
In such arrangements, issues can crop up if the middleman lacks the financial resources or the inclination to support the guarantee. The worst-case scenario could be where landlords no longer get any rent but are nevertheless stuck with tenants living in their property. In case a rent-to-rent scheme goes wrong or the company that has offered the guarantee becomes broke, landlords may find it pretty challenging to regain their property.
Guaranteed Rent – What’s The Cost Of Not Having It?
In 2017, between January and March, landlords in England and Wales registered 35,188 possession claims. Of these, an astounding 25% of claims were escalated to a repossession, which a county court bailiff completed. On average, that’s 100 rented homes, which a court bailiff visited a day and forced the tenants to leave.
But why do you need guaranteed rent schemes as financial protection against tenants who don’t pay the rent? The strongest reason lies in the average time it takes for landlords to regain possession of their properties. The Ministry of Justice says that it takes 41 weeks, on average, from submitting a claim to taking the property’s possession. Some of the worst-case scenarios across the nation are where the total costs, including legal fees and costs of loss of rent, were over £10,000.
If you’re a landlord who lets out his/her London-based property, that figure could escalate to £16,000. Perhaps now you understand the cost of not having a guaranteed rent scheme.
It’s important to note that due to the pandemic, some changes have been made to claims for possession made by the landlords and enforcing evictions during the period of national restrictions, details of which are available.
How To Offset Guaranteed Rent Schemes’ Costs
After the latest changes brought to tax calculations for landlords, landlords are seeking ways to offset their regular costs to reduce their payable tax while retaining their rental income as much as possible.
The monthly costs of having a guaranteed rent scheme or rent guarantee insurance product could be anywhere between £49 and £69. When you compare this amount with the probable loss of income, you’ll find this to be a small price, which would secure your peace of mind in the future. But it’s still an extra monthly expenditure. But there’s good news as you can claim this cost as an allowable expense. Though this would have a trivial impact on your net rental income, it would nonetheless be positive.
Secondly, buying a rent guarantee scheme from a reputed broker is essential to ensure you get a fair deal. If you buy it from a high street agent who sub-lets your property, you’re likely to get paid lower than the market value. And you may find that the difference between the amount you’re paid and the market rate is over 3-4 times than what a fixed-fee guaranteed rent scheme would have cost.
Finally, depending on your buy-to-let property’s location, you could consider increasing your rent just a little bit to offset the costs of having guaranteed rent without affecting how fast your property is let out.