A guide on guaranteed rent
Guaranteed rent is a type of agreement between a landlord and tenant in which the landlord agrees to pay the tenant a set amount of rent each month, regardless of whether the property is occupied or not.
This type of arrangement is becoming increasingly popular among landlords and tenants alike, as it provides a sense of financial security and predictability for both parties.
In this article, we will explore the benefits and drawbacks of guaranteed rent agreements, as well as the different types of guaranteed rent options available to landlords and tenants.
We will also provide some tips and advice for those who are considering entering into a guaranteed rent agreement.
What does guaranteed rent mean?
During the process of guaranteed rent, a landlord signs the management of a property over to someone like an institution, company, letting agent or even an individual.
They will collect the monthly income from the property and then guarantee a set amount of rent to the landlord whose property it is.
The person supplying this form of guaranteed rent then becomes known as the middle tenant and they have a relationship with both the tenants of the property and the landlord or owner of the property.
However, the tenants and the landlord do not have a relationship with each other.
Are rent guarantee schemes worth it?
Whether a rent guarantee scheme is worth it or not is up to the landlord and the type of terms that are in place for the guaranteed rent.
For example, if a landlord values their time and they no longer have to manage a property but are able to achieve a guaranteed and consistent rent every month, then they may consider it worth it.
On the other hand, if a landlord is looking to use guaranteed rent to increase their income, then an example like this would not work and they may end up not weaning to achieve guaranteed rent and continuing to manage a property themself is probably a better option
Are guaranteed rent schemes also attractive to letting agents?
Letting agents, like self managing landlords, often look to reduce the amount of work they have to do and outsource the most time invasive and low responsibility tasks concerning property management to those who want to focus on any side of the management business.
However, this has its pros and cons.
On the good side, if a letting agent is able to find a rent guarantor, they may be able to become more efficient and find more time to spend on managing other aspects of the property aside from the distribution of rent.
Are there any legal issues to consider with guaranteed rent?
The landlord and Renter should enter into a commercial lease for the duration of the rental period and clearly define the terms of the agreement, including the amount of rent to be paid.
Also, the responsibilities of each party for managing the property and complying with relevant rental laws and regulations.
Why are guaranteed rent schemes on the rise?
In the long term, the government’s regulations surrounding guaranteed rent schemes are changing because a recent low in economic activity has slowed down growth in the area anyway.
This means there is less of a margin between the rents years ago for example and the rents now.
This lack of difference in price means it is hard for rent guarantee companies to come in and make a true difference by increasing the income of the property. Because the rent prices are high and stagnant, it forces people to buy.
What are the different ways of achieving guaranteed rent
Guaranteed rent can be done in a few ways and it doesn’t have to be through a guaranteed rent company or a guaranteed rent scheme.
This is because you can also use rent guarantee insurance or allow the council to manage a property for you.
Guaranteed rent insurance
Rent guarantee insurance is there as a backup because it is only there in the event that rent does not get paid by the tenant every month.
This means there is no additional margin on the rents like in other methods such as a rent guarantee scheme.
This makes it an alternative way to produce guaranteed rent but at the same time, a landlord still has to manage the property and deal
- You will be covered no matter what – even if a tenant fails to pay
- Premiums aren’t as expensive as other methods like councils
- You get to keep control of the tenants in the property
- The need for strong financial stability to handle extended delays in claim resolution.
- The likelihood of legal action for landlords in case of a claim.
- Lack of coverage for vacant rental periods.
- Rigorous limitations and requirements aimed at reducing risk for the insurance provider.
Guaranteed rent schemes
The general idea of a guaranteed rent scheme is that a company or an individual in the public sector will approach a landlord and their property with the intention of renting out the property for them above market value.
- Consistent rental income, including during vacancy periods.
- Ideal for those looking for ease of management or to delegate responsibilities.
- Minimal stress and hassle.
- Total control is provided by letting agents, including handling repairs and administrative tasks.
- Agents who share a common language and are aware of landlords’ time constraints.
- Limited ability to influence the property’s design, upkeep, or tenant selection.
- Possibility of long-term agreements, depending on the arrangements.
- Risks remain with the landlord if regulations are not followed or if the agency is unable to fulfil its responsibilities.
- The property’s location should be desirable to ensure consistent demand for renting.
Council guaranteed rent
The private sector is becoming an increasingly popular choice for landlords who wish to bring in new clients to their rental portfolio.
One of the most popular ways of doing this is by handing over the income from the property in terms of guaranteed rent to the council. This has advantages and drawbacks as you can imagine.
- Contribute to society
- Reliable income in areas with low economic prospects
- Regularly scheduled income
- Advantages provided by the local government such as complimentary certification and waived fees
- Minimal effort is required due to council oversight (depending on the specific agreement)
- Some schemes offer a lower monthly income when they are run through the council
- Landlords may not have a say over who the tenants are as the council have their own independent tenant referencing process
What are the advantages of guaranteed rent?
In general, guaranteed rent, no matter what the method, there are some key advantages you should be aware of below. The most obvious ones being the certainty you have over the cash flow you have and not having to deal with the property’s maintenance.
There is certainty about the amount of cash flow you receive
The cash flow you receive in any type of business is dependent on there being tenants actively paying rent in the property.
Also, void periods where there is time in between new tenants moving in to the property and periods where perhaps tenants may fall into rent arrears are all avoided in a rent guarantee scheme.
Therefore, while the rental income may be subsidised, the guaranteed rent is predictable and certain, allowing the landlord to make better business decisions and plan ahead for the future.
In particular, safeguarding themself over the years where the economy is suffering from inflation and a lack of spending can bring peace of mind.
Some companies will charge as little as 0% commission
One of the biggest reasons for landlords avoiding any scheme to do with guaranteed rent is that they don’t want to pay a commission on the rental income they are already receiving.
However, by finding a wide range of companies, it is possible to find someone who charges a flat fee rather than charging on a commission basis.
For example, if someone offers guaranteed rent, they may charge a flat fee of £100 rather than charging 20% of the rent every month as an example. This means guaranteed rent may actually be more affordable than it is
You will not have to deal with the maintenance of a property
Not only is property maintenance sometimes expensive, but there is a good chance you don’t enjoy doing it.
Dealing with broken boilers, clogged pipes and the drains of a property is something that must be done but isn;t the most exciting and o after what always has to be done every year.
For landlords, it is therefore a task that has little return on investment if they do it themself.
As a result, it is likely that most landlords would benefit from outsourcing this to a company and at the same time benefiting from some form of guaranteed rent.
Rental payments will always come on time
Not only will the landlord have certainty on how much rent is coming in every month, they will also never have to consider that rent will be paid late.
This allows landlords to plan their cash flow in their business to a greater extent and take on less risk in their business.
For larger portfolio landlords where there is less of a return on investment on a large amount of equity, this could be appealing and something they want to implement over a larger scale.
What is the process of signing up for guaranteed rent?
The exact process of signing up depends on the method of guaranteed rent you want. For example, a guaranteed rent scheme will have a far different process involved than taking our rent guarantee insurance.
However, most people would want to go with some form of guaranteed rent scheme which they can do by following the below steps.
Arrange a property valuation
If you are a landlord and want guaranteed rent, the first step would be to get a rent to rent agency to have an idea of what the value of your property is so they can get an idea of what to charge for rent.
Make an offer & send an agreement
After the previous step has been done and the agency is sure that they can manage your property and make a profit, this is where you can start negotiating offers.
It may be that the agency wants to charge a commission where they take any profit above a certain amount of rent or they may just pay you a flat guaranteed rent every month.
Getting the paperwork ready
Paperwork must be signed in order to finalise the terms of guaranteed rent.
In this document, there should be a series of details including the amount of rent that must be guaranteed, the property that is being signed for and its details and the personal information of the landlord and agency.
On top of this, the management requirements for the landlord must be written down as it may be the case the landlord still has some responsibility for the management of the premises.
Sign the lease & get rent every month!
In this step, all the paperwork must be finished, the lease will be signed including all of the figures for the agency, landlord and the tenants involved in the build. Documents can be signed digitally or on paper.
Guaranteed rent is the process of having rent paid every month from an agency or council to a landlord based on a predetermined agreement. Guaranteed rent can also be achieved by using rent guarantee insurance.
After this article, you should be clued up on how to achieve guaranteed rent by following our steps as well as deciding whether this is the right thing for you by weighing up the pros and cons.