Can guaranteed rental schemes save struggling landlords?
Letting agents promise to take the hassle and worry off the backs of landlords but it comes at a cost, discover Alessia Horwich and Julian Knight
Sunday 23 August 2009
Alot has been written about the travails of the UK property market. But the private rental sector has received less attention despite the difficulties faced by many buy-to-let landlords over the past two years.
Because of oversupply, many of those who have entered buy-to-let or been tempted to move their homes on to the rental market can struggle to secure a tenant. But there is a potential safety net for landlords called guaranteed rental schemes. Under this arrangement, the landlord signs over the property to a letting agent for a specified period of time in return for a guaranteed monthly income. It is then up to the agent to let the property and any profits they make after what they have paid to the landlord are theirs to keep. But although these schemes provide peace of mind, it's unlikely that you will be getting the property's full earning potential.
Guaranteed rental schemes usually pay a fixed rental income to landlords for a fixed term, regardless of whether or not the property is occupied. The income the landlord receives will be less than the rent the property could potentially achieve on the open market as they are paying the scheme provider to take on the risk of not being able to fill the property.
Although someone else is filling the property, you can't hand over all the responsibility and will still have some obligations as a landlord. It is up to you to ensure the property complies with all landlord health and safety regulations, and if the property is leasehold, you also have to pay the ground rents and any service charges. However, the provider of the scheme will usually cover the costs of maintenance on the property. But the normal agent's fee as well as maintenance costs and the insurance premium for the guarantee will all be factored into the amount of the guaranteed monthly income, so even though you aren't paying up front, the money is probably still coming out of your pocket through a lower guaranteed pay-out.
The length of the term of these schemes can vary from 12 months to as long as five years. However, Chris Town from the Residential Landlords Association recommends you don't sign up for a long-term contract straight away. "Initially, you should opt for a shorter contract term," he says. "Then if the agents are not pulling their weight you can switch and you aren't tied to that specific income for too long if your circumstances change."
Guaranteed rental schemes have traditionally been offered by new-build developers looking for another way to market their properties. However, recently there has been an increase in uptake of these schemes by "accidental landlords". Homeowners who are frustrated at not being able to sell are moving into the rental market. As a result, rents have been pushed down and it's been much more of a challenge to get a tenant, so guaranteed rental income begins to look a lot more attractive. However, Andrew Smith, the head of research for property website primelocation.com suggests that guaranteed rental incomes have taken a hit because of oversupply. "In the current market, it's much more of a challenge to fill the property," he says. "So returns on the guaranteed schemes are not as attractive as they may have been previously."
Nevertheless, a steady fixed income in tough times sounds good. Indeed, Ian Potter, operations manager for the Association of Residential Letting Agents (ARLA), says: "There's nothing wrong with guaranteed rental schemes, especially if a landlord is convinced the market is not there for his type of property. However, if a landlord was to work out the rent that he would achieve against being prepared to put the property on the open market, the chances are that he will find that he is receiving less in income." According to Mr Town, landlords signing up to guaranteed rental schemes can expect to be paid 20 to 25 per cent less than they could achieve in the open market. If landlords are trying to maximise the income they can make from the property, they are better off letting the property themselves. As Mr Smith says: "What it comes down to is whether or not the guaranteed income is enough for the landlord."
Before signing up to a scheme, do your research and find out about the provider, as well as the details of the scheme, making sure there are no extra charges automatically deducted from the guaranteed income. You must know in advance the kind of tenants the provider is planning to place in your property. "You've got to be careful about where the company may be sourcing the tenants from," says Mr Potter. "And also ask what measures they are taking to ensure that those tenants are being adequately checked." You should also ask local estate agents what level of rental income you could achieve on the open market. If there is too big a difference, think again.
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