HMOs, or Houses in Multiple Occupation, are seen by some as being an easy way to make money in the lettings business. It is true that the profits made on HMOs tend to be higher than the profits made on other types of property. The average rental yield on HMOs is around 11%, compared to an average of around 6-7% for standard lettings. That doesn’t mean, however, that HMO letting is easy.
It is every landlord’s nightmare: a previously reliable tenant fails to pay their rent on time. This can leave landlords struggling to meet their mortgage repayments, and causes a huge amount of stress. Most landlords will have to deal with arrears at some stage, with around 9% of rent unpaid or late.
Rising rents are good news for landlords who want to grow their business, but combined with relatively high unemployment and growth in inflation outstripping growth in wages, they can mean that tenants struggle to meet payments. The percentage of late or unpaid rent fell slightly in August, but had been steadily growing for several months before that.
As always, prevention is better than cure when it comes to rent arrears. Carrying out full credit and referencing checks on tenants can help eliminate those with a history of non-payment of rent or other credit difficulties. However, it can’t predict whether conscientious and financially stable tenants will suddenly experience financial problems due to illness or redundancy.
Landlords should encourage an open and honest relationship with their tenants, so that if the worst does happen, they will be able to work with them to deal with the problem before it escalates. Many tenants who lose their jobs will be able to access housing benefit to help them pay rent, and landlords should encourage them to do this. Tenants should also be encouraged to contact landlords before a rent payment is due if they think they are going to struggle to pay. Rather than missing the whole payment, they may be able to negotiate a part payment that will allow the landlord to pay their mortgage, with full payments being met once the tenant is solvent again. Sometimes, landlords may be able to negotiate a payment holiday with their mortgage company to allow tenants to clear the arrears.
While landlords should always do everything they can to help tenants before moving to legal threats and eviction, it will sometimes be necessary. Eviction does take time, however, and landlords need to be able to meet their mortgage payments in the meantime. Some landlord insurance includes arrears protection, which can give landlords some breathing space while they deal with the legal processes. Landlords should issues tenants notice of possession under Section 8 of the housing act. They are allowed two weeks to respond, after which a court will hear the case if the tenant has not either paid or moved out.
Arrears are stressful for everyone involved, and many tenants who find themselves unable to pay rent would rather work with their landlord to clear the arrears than against them. Where they can’t or won’t do so, landlords should move to use the legal system to protect themselves against financial difficulties of their own.
In the current economic climate everyone is feeling the pinch! With people all over the country being made redundant and the cost of bills going up, people are struggling more than ever to get by. In fact the housing charity Shelter recently announced that in the last year there has been a massive 50% rise in the amount of people paying their rent with credit cards as they just don’t have the physical cash or stable income.
With more and more people taking out personal loans, secured loans and credit cards to pay their bills and rent, there is the ever growing risk that soon many people won’t be able to pay their bills at all. This could be a devastating situation for any family but it could also be incredibly damaging for landlords.
The problem for landlords
The fact of the matter is, if your tenants can’t afford to pay their rent you may be left with a void in your income. Even if you can get the tenants out swiftly and new ones in this will rack up administrative costs and there will likely be a substantial gap during which rent is lost.
How to protect yourself
The obvious advice is to make sure before you rent out any property you ask for multiple references, a credit check and a rent guarantor from your prospective tenants. However, even with all this there is no guarantee that your tenants will not face hard times and be unable to pay the rent, especially in the current economic climate.
The other, more reliable way to protect yourself from this situation is to cover yourself with comprehensive landlord insurance or rent guarantee Insurance. Rather than running the risk of missing out on any rent, cover yourself with a good landlord insurance policy and in the event your tenants can’t pay the rent the costs will be covered.
Rent policy cover should be considered if you are leasing out one of your properties to protect you from any threat that may affect your property. Below, we have provided a simple explanation on the types of cover options available.
Rent Loss Insurance Explained
Rent loss insurance refers to the loss of rental income or rental value due to property damage caused by an external hazard that leaves the property unsuitable for habitation.
Rent Guarantee Insurance Explained
Rent guarantee insrance is a type of insurance cover that protects landlords against the threat of losing rental income whereby the tenants default on their rental payments.
When a policy is taken out, a premium is paid which is approximately 3-5% of the total rental income received. There is usually an excess that will need to be paid on most claims. Some policies also offer cover for any expenses associated with eviction.
The majority of insurers will only let you obtain rental guarantee insurance once the tenant is comprehensively verified.
Why Is It Important To Take Out A Rent Insurance Policy?
If you have a mortgage on a property whereby the primary source of paying off the mortgage is from your rental income, it might be in your best interest to have ’Rent Guarantee’ insurance. This policy protects you against the loss of rent from tenants that refuse or are unable to pay the rent as agreed in your rental contract.
Landlords should also consider taking out a ‘Rent Loss’ insurance on their property to protect the landlord against the threat of rent loss due to the property being left in an uninhabitable state from external hazards. Some policies can cover the landlord for up to six months if their property is subject to uninhabitable living conditions. Examples of potential causes include:- Malicious damage - Flooding - Nuisances or Tresspassers - Civil action events that cause damage to the property
Who Is Entitled To Apply For These Types Of Policies?
1. An Individual
2. Property Owning companies
3. Property Management Companies
4. Residents Associations
What Are Some Of The Factors That Affect the Price of Your Premiums?
Typical factors that would affect the premium for the rental insurance policies include:
The postcode for your property will affect the premium you pay based on the amount of risk that is associated with the area. (For example, flooding.)
The premium amount for the property will be based on the rebuild cost associated with the structural rebuild cost of the property. Furthermore, other things to consider when insuring your property is whether your property is a part of a block, conservatory area or a listed/heritage building.
Types of tenants
If the property is being used for sharing options such as a house share (HMO’s) or for those claiming Housing Benefits, the price of your premium will generally be higher.
If you as the landlord have a history in large or multiple insurance claims, the price of your premium will be affected.
How often is the property vacant within the area and for how long?
What Are Some Precautionary Measures That I Can Take Against My Property Whilst Letting It?
Some measures that landlords can take include:
- Reference Checks – Check up on the references that are provided and find out about the credibility of your tenant and their tenancy history.
- Sizeable deposit – Get a suitable deposit to cover for any loss of rent or damage to the property.
- Payment facilities – Set up a payment account in the form of a direct debit.
- Set expectations – Let your tenants know what you expect from them and the guidelines that they need to follow whilst they are letting out your property. Furthermore, let them know the consequences that they face if they fail to abide by the guidelines that have been stated.