Being a landlord can be hard work. You have to find tenants, collect rent and sort out repairs. And if a tenant does a moonlight flit or simply refuses to pay, it can be a costly and drawn- out process to recover what is due to you. As a result, many landlords are turning to guaranteed rent schemes.
With these, a letting agent will guarantee the landlord a specified rent for a set period – usually a year. It is up to the agents to find tenants and the profit lies in any money they make above what is owed to their client. Landlords can benefit because they know exactly how much they will earn and do not have to budget for any "void" periods – the time a property is left un-let. In addition, they do not have the hassle of finding and vetting new tenants, and the agents will sort out repairs – although they will charge for this service.
"Instead of getting the letting agent to find tenants and manage the property for you, with guaranteed rent schemes you're in effect letting your property to the agent, who in turn sub-lets to the tenant," says Robert Jordan, president of the Association of Residential Letting Agents (Arla).
But there is a price to be paid for the guarantee of steady rental payments. "You can expect to get between 30 and 40 per cent less than the open market rate," he adds, "yet right now the letting sector is on fire and there's many more tenants than properties."
London agency Homelink, which offers guaranteed schemes, refutes Mr Jordan's claim of low returns for landlords. It adds that rents are 5 to 7 per cent below the market rate.
Nick Cooper, managing director of property agency Northwood, says that even with traditional property letting – where the agent simply acts as a middleman between tenant and landlord – there's no free lunch. "You've got to deduct agents' fees of around 12 to 15 per cent to cover the property management, and factor in the potential cost of void periods."
He adds that all types of landlord – people with just a single buy-to-let or those with big property portfolios – go for guaranteed schemes.
Whatever the mathematics, one thing is certain with guaranteed rental schemes: landlords lose a great deal of control when they sign over their property.
"Instead of having an assured shorthold tenancy in place, you have a contractual tenancy between owner and agent, which means you can't get the property back for the duration of the contract," says Mr Jordan. Most companies offering guaranteed rent plans specify a minimum one-year deal.
Critics of the schemes argue that agents don't vet tenants properly as they're desperate to ensure the money keeps coming in, but Mr Cooper disagrees: "Because in effect we're the tenants and must return the property to the owner in the state it was handed over, it's in our best interest to find decent tenants who will leave the property in good condition. That means we won't have to pay out to clean it up or redecorate'."
Nevertheless, Mr Jordan reckons property investment should be hands-on. "The only people I'd recommend taking up these schemes are those with very little confidence in the letting market," he says. "But naturally that begs the question as to why they're in the market in the first place."Reuse content