Introduction
The word “letting” essentially refers to a legally binding agreement where the owner of a real estate asset trades it off for temporary use by a tenant in exchange for a payment. Letting can come in many shapes and forms, each with its own benefits and disadvantages.
In trying to understand letting and the different types of tenancy, also called letting type, one has to look at what components impact both the tenant and the landlord within the short term as well as over a longer period of time.
Short, medium and long-term lettings
These are the three main types of letting. Each has its unique uses specific to the landlord. Here are their outlines and how to decide on the best based on the circumstances.
Short-term letting type
A short-term let is a rental contract that can last any amount of time up to six months.
However, in today’s context, the term has come to generally refer to a stay lasting between a night to a few days/weeks. A rather affordable substitute to hotels and Airbnbs, the short-term letting type is perfect for renters visiting the area for a temporary period. This letting type typically includes people travelling for business or short holiday trips.
Short-term lettings also prove to be popular amongst renters dealing with house renovations or relocations that often leave the accommodation unavailable for a while.
This demand is attributed to the homely comfort and privacy these usually well-furnished letting types offer, best suited for people staying with or inviting family, friends, and coworkers.
Short-term lettings allow both the tenant and the landlord the flexibility to move on quickly from a contract due to its short length, in case it turns out to not be ideal for them.
For an owner of a property, this letting type can be an excellent fit if they prefer a tenant for only a certain period throughout the year.
Moreover, if an owner is waiting around to sell or lease the property long-term, this letting type can meanwhile create extra rental income. However, short-term lettings are most frequently desirable simply because they generate lucrative returns compared to long-term lettings.
At the same time, the short-term letting type carries the nuance of constant management for landlords. Every tenant cannot be vetted properly due to the time needed to do so. Since tenant stays do not last long, landlords have to provide furniture, necessities, utilities, and extra services (such as Wifi) in the property.
Additionally, landlords have to be constantly on top of curating good listings, communicating with potential clients down to the last details, greeting new renters, and clearing out and maintaining wear and tear of the property after every tenant moves out. Landlords also have to be careful of issues such as electricity safety and gas safety.
Landlords also have additional difficulties with property planning, class use orders and government white papers. Because attracting clients is a constantly ongoing hassle, a landlord cannot predict their income. For tenants, all problems that are now the headache of their landlord come at the cost of higher rent compared to longer rents.
Long-term letting type
In contrast, long-term letting types, as the name suggests, are rental contracts lasting more than 6 months or a year. While it isn’t an official requirement for a letting to be considered long-term, there is often a mutual understanding between both parties, in both corporate lets and residential lets, that most of the time the contract will be renewed for years to come.
The proof of ownership and property documents obviously always lies with the landlord. For a landlord, long-term lettings are a reliable source of income with little maintenance or effort required. At the same time, compared to the short term letting the payment will be smaller since there is less admin work to do for the landlord and there isn’t much value being added to the property.
So, long-term lets, typically have the least amount of management work required from the Landlord but still have the most certain money on the table.
With the contract duration being long, the landlord will have to keep fixed the agreed payment amount regardless of the trends in the housing market for the set time period in this letting type. While this could mean they would often be getting a lower yield on their property than if the same property is a short let, it could also mean that the income will be regular and not fluctuate during low-demand periods.
So the two variables of let length and the property rental yield must be constantly considered whenever property owners are considering the best type of letting agreement for them.
This letting type also offers the same reliability to a tenant, not having them be constantly on their toes in search of their next accommodation. Prices are also relatively affordable for renters and over time, a tenant and landlord can ideally build a relationship of mutual trust.
Medium-term letting type
When it comes to medium-term lets, it is a slippery slope between short-term and long-term lets. For some time now, there has been a relatively agreed-upon definition which refers to medium-term lets as rental contracts that last for over 6 months but less than a year.
Other features of this letting type are also predominantly a result of a flexible mix and match of the previous letting type covered. Medium-term lettings are largely considered by students or employees settling in an area for the duration of a semester or specific project.
Letting vs Renting
Letting and renting are interchangeably exchanged in real estate vocabulary which can lead to some confusion. Simply put, both terms mean the same thing.
When it comes to letting and renting, there is a slight linguistic distinction. “Let” as a verb only refers to the action of a landlord. For example, the sentence “Peter is letting a house in London” would mean Peter here is the landlord. But if “let” is exchanged with the word “rent” in this sentence and it now reads “Peter is renting a house in London”, Peter would now be considered the tenant.
The same cannot be done with the word let since it has a limitation where it cannot refer to the action of a tenant. The word “rent”, however, can also be used to indicate the action of a landlord by adding “out” to it. So the sentence “Peter is renting out a house in London” would refer to Peter as the landlord.
HMO
An HMO (House in Multiple Occupations), also called a multi-let, refers to a letting type where a property is inhabited by three or more individuals. In an HMO more than three people will be sharing amenities like a kitchen, living room and bathroom amongst them.
In letting terminology, a household consists of people from the same family, such as relatives, step-relatives and couples. Friends, colleagues, and students living together would constitute a different household, therefore the property would be an HMO.
If there are five tenants or more living together forming more than one household, a property will be considered a “large HMO”. While the concept of HMOs brings about the thought of chaotic and careless kids in their 20s, the HMO market nowadays is often dominated by young students and professionals trying to find affordable housing solutions.
Landlords seek out HMOs because the rental income can statistically be higher compared to properties rented to a single household. This is because oftentimes, multiple tenants are paying which also by extension means that there is less worry about rent arrears. It is unlikely for all tenants to fall behind on paying rent at the same time.
HMOs also carry the advantage of the limited brunt of rental void periods. Even with one of the renters moving out, the property is still let to other tenants and keeps producing income. An important advantage of HMOs is the rising trend of demand for affordable accommodation as the population increases and, especially in big cities such as London or Manchester, every property usually has multiple potential tenants enquiring about the rooms.
In contrast, HMOs involve increased legal complexities for landlords and there are many requirements (keep reading this article to know more) to fulfil for a property to be legally eligible as HMO.
This legislation process is usually expensive and time-consuming. The multitude of requirements also means that there are limited properties suited to be used as HMOs. After Covid, and with the relative increase in demand, these limited properties are becoming more and more expensive and hard to find.
The further effort of securing a licence can therefore deter some landlords from buying and operating HMOs. The specific layout of HMOs can even make them harder to sell because only a certain niche of the housing market will be a prospective buyer and property capital growth can be lower than the one of traditional properties.
There are also additional costs of furniture or amenities to consider. Kitchens and bathrooms are shared spaces, hence used more frequently, and you may end up with mostly young people occupying HMOs who may not spend much of their time taking care of the property. This can lead to high maintenance costs if compared to single lets properties.
More importantly, HMOs can have high tenant turnover since young people are typically looking for short-term lets and increase both the void period of the property and the time and effort of managing contracts and new tenants settling in.
HMO Requirements
There are a number of HMO Requirements that must be met by law. A large HMO implies securing a license for this type of property from your local council. If a landlord does not comply with such a licence there is the risk of receiving a penalty that could possibly be as hefty as a year’s worth of rent.
Some local housing authorities may even require small HMOs to be licenced. The local authority regularly inspects HMOs when it has been reported about an HMO’s living conditions. The licence of an HMO is a validation of requirements and standards set by the local authorities.
HMOs have to be purpose-built and if they are not, these need to be converted to match the layout required. There has to be strict compliance with an HMO not being overcrowded and having enough space for the tenants to live comfortably.
As per the rule, for this letting type, the living space for each individual over the age of 10 should be no less than 6.5 square metres. HMOs also have to provide all basic amenities, furniture, and appliances required by the tenants.
Single Lets
Single let essentially means renting out a property to a single household where a household can refer to one person, a couple, relatives or a step-family. These are generally 1 to 4-bedroom accommodations.
Single lets are the good old-fashioned yet timeless piece of real estate that may not be trendy at the moment but never go out of demand amongst specific demographic targets. For landlords, single lets are preferable for their first property since they are easiest to deal with in every single aspect.
Single-let properties are widely available countrywide since they don’t need to follow certain requirements like an HMO. In this letting type, there is significantly less paperwork involved due to easier legislative work and tenants being easier to find and vet.
Since single lets can be very small properties, little capital investment is needed and, when needed, finance is slightly easy to secure than for HMOs. Single lets also require little managerial effort since single households often have their own furniture and appliances. More importantly, utility bills are directly paid for by the tenant in most cases and the landlord is not responsible for the provision of basic amenities.
This letting type also proves to be easier to sell since their demand is not limited to niche and specialist buyers. Single lettings also see a considerably low tenant turnover since most households put down their roots and renew their contracts to save themselves from the hassle of constantly relocating.
However, single lets generate lower returns on property investment since there is only one household paying. This letting type also carries the risk of longer void periods and sudden loss of income since there are no other tenants to backup on the payment.
Sublets
A Sublet is the act of a tenant renting out all or part of their rental property to someone else (who is then called a subtenant). The original tenant is then called a subletter.
Tenants of course require permission from their landlord before they can sublet and need to have tenancy agreements drawn up so that subletting is specifically allowed.
Subletting is a good choice to make for tenants who would like to move on from a property for whatever reasons but can neither break their rental agreements negatively affecting their records nor afford to keep paying money for property no longer in their use.
However, subletting is a risky business since the original landlord is not concerned with the doings of a subtenant and holds the original tenant accountable. This means the subletter is the one with their reputation, rental history, and security deposit at risk. This is perhaps why a landlord may allow subletting on their property since they do not have to deal with any hassle while their property remains occupied and cash keeps rolling in.
Allowing subletting also often increases rental income making it more lucrative for the landlord to consider. However, short-term subletting such as setting up Airbnbs can be damaging to the property for a landlord, with new people coming in and leaving who may pay little regard to care for it.
Moreover, illegal subletting in the dark is on the rise and landlords have been warned to watch out. <click here to learn more>
DSS lets
A DSS tenant is someone who pays all or some part of their rent from the allowance they receive by claiming benefits. Benefits are government allowances provided to cover the living costs of people in need. DSS (Department of Social Security) is now called DWP (Department for Work and Pensions) since 2001 but the term DSS tenant still continues to be the most familiar jargon around.
DSS Tenants are easy and free to find if the landlord is aware of the ins and outs of the system compared to other tenants that may require the hiring services of a letting agent for other letting types.
DSS tenants are also preferred sometimes because they have a reliable source paying their rent i.e. the UK government.
This is, however, an extremely problematic pattern in the letting market where landlords discriminate against DSS tenants considering them dubious without sparing a thought for whatever unfortunate circumstances in life could have brought them to this point and knowingly or unknowingly forcing homelessness on vulnerable people.
Nonetheless, trends are starting to change with more advocacy, awareness, and representation. available for DSS tenants, even in legal spaces. <learn more>
However, the negative connotations attached to DSS tenants can often be rooted in past experiences and are an unfortunate reality as documented in news outlets. Since the councils have stopped paying rent to landlords and instead hand it over to tenants to teach them financial responsibility, rent can often delay if the tenant chooses to use the allowance on other things.
Moreover,
some blame also falls on local councils that randomly stop providing allowances without giving notice periods to landlords. Landlords again have no choice but to wait for the agreement to allow eviction legally and until then, in this letting type, they have to deal with a non-paying tenant.
Conclusion
At the end of the day, the individual tenant and landlord situation will always remain the biggest factors when determining the net benefit that each variation of letting holds.
For a large proportion of landlords, usage of a letting agent is often advised which allows for a hassle-free & efficient relationship between the tenant & the landlord as a letting agent will be shouldering the responsibility of procuring rent and new tenants for letting purposes concerning all letting types.
Letting stands as a great way for tenants to procure living space while allowing landlords the flexibility in income that they desire in a given period of time.
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