If you are a landlord you may have heard of ‘guaranteed rent schemes’ and wondered exactly what they are and if they are a good idea. In this article, I will take a look at guaranteed rent schemes, their pros and cons as well as who exactly they are for.
Overview: Guaranteed Rent Schemes
A guaranteed rent scheme is where a local council, letting agent or investor takes over the management of a property from a landlord in exchange for guaranteed rent. This means that the landlord does not need to manage the property, deal with tenants or worry about voids. The landlord also often does not have to pay for minor maintenance issues during the term of the contract, although they might have to cover larger maintenance depending on the conditions of the specific scheme.
These schemes allow landlords to keep their properties as passive investments rather than a business that they need to manage. If the house cannot be filled, the rent is still paid to the landlord by those operating the programme.
Council vs Private Guaranteed Rent Schemes
There are two main types of guaranteed rent schemes: those run by local councils and those run by letting agents/investors.
Local council schemes are set up to provide social housing. This means that the tenants may be on housing benefit or Universal Credit. The council guarantees the rent payments as some landlords are concerned about taking on these tenants. Whether this arrangement would suit you will depend upon the type and location of your property. Because of the nature of this kind of scheme you may not be able to command as high a rental income as you would from private guaranteed rent companies.
Private schemes will normally take on a property and either rent it out by the room (HMO/multi-let) or offer the property for short-lets. They may even conduct a light refurbishment of the property, either for free or by splitting the costs with you. Often you will find that you make the same or similar amounts to what you would get from having your property managed by a traditional letting agent on a single-let basis, once you consider fees and voids. The only difference is you have the stability of receiving a guaranteed amount each month.
Who A Guaranteed Rent Scheme Isn’t For
If you are an active landlord who enjoys managing tenants and has enough time to deal with the number of properties you own, these schemes probably won’t suit you. If you have the time, you can do up your properties, turn single-lets into HMOs or put them on Airbnb and advertise them as short-lets yourself.
If you see property as running a business, and you have the time and expertise, then this type of scheme will not suit you. Obviously, guaranteed rent schemes need to make a profit, so you can certainly make more money by managing everything yourself.
Who Guaranteed Rent Schemes Are For
If you would like to see your property as an investment rather than a business, this type of scheme is for you. Many people would prefer not to deal with all the headaches of maintenance, voids and tenant complaints. Guaranteed rent allows a property owner to enjoy passive income and focus their time on other things. You may choose to view your property this way because you simply don’t have time to focus on it because of your other business activities or you might be retiring and simply don’t want the hassle.
Another, less obvious, reason you might choose this option is to focus your time on growing your property portfolio, rather than managing it. If you are in the process of growing a portfolio of 10’s or even 100’s of houses, problems will soon start mounting up. This type of scheme allows you to get a stable income from your properties, without the hassles of management, meaning you can build your portfolio as large as you like!
Similar Benefits To Owning Commerical Property
With commercial real estate, the property is taken on for a period of years by the business and maintenance is taken on by them as well. With residential properties, the tenant is not tied in for as long and it is your responsibility to maintain the property. Some investors choose to stay away from residential properties and buy commercial real estate for this exact reason.
A guaranteed rent scheme offers many of the same benefits, but with residential properties! Your property is taken on for a period of years and maintenance is generally handled by the operator of the scheme.
Downsides of Guaranteed Rent Schemes
There are some potential downsides. Because of the popularity of these schemes, there are rogue operators out there. Some operators attempt to take on properties under a short-hold tenancy agreement (AST) rather than a commercial lease or a management agreement. Make sure to deal with knowledgable companies that have an appropriate understanding of this type of scheme.
Some people will recommend avoiding small companies or individual investors, however they can often offer a more personal service and take the time to understand your needs. You will need to use your judgment in assessing which scheme, if any, is right for you and your properties.
Guaranteed rent schemes can work for some landlords. They turn what is normally an active business into a passive investment. They are not suited to landlords who prefer to do the work of running a business and keep the associated profits however. If you do decide to go for a guaranteed rent, make sure you deal with a company with the requisite knowledge of this area of property investment.