Jun

Want a truly passive investment where you can sleep soundly at night, given these testing times?

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Landlords wanting to remove some of the hassle connected with the do-it-yourself letting process, or even using a letting agent, could consider “guaranteed rent”, renting their property to the local authority to rent out on their behalf. But exercise caution.

This is known in the industry as rent-to-rent or guaranteed rent: the property is let to the council, or sometimes to a private managing agent, who may rent to tenants or in turn to a local authority, for them to rent out.

This is done on a fixed term, usually 3 to 5 years, the monthly rent is guaranteed for that period whether the council has a tenant in the property or not, and the council is obliged to make sure the property meets all the necessary letting standards. It then returns the property in its original tenantable state at the end of the term.

Sounds a little too good to be true doesn’t it! Well, it can work out really well but from the landlord’s point of view there can be some pluses and some decidedly nasty minuses.

Yes, for the landlord the process gives peace of mind, its a let-it-and-forget it process where the landlord does not need to think about it for 5 years or so, and simply watches the rent pop into their bank account every month.

The first slight negative is that the rent will be slightly less than they would get on the open market, simply because of the trade off between having no hassle, no letting fees, and none of the expense of re-letting when tenants come and go – often this a very acceptable trade-off.

The second negative is that the whole process can become a legal minefield if things go wrong; even with a council this can happen, but more so with a private company or individual.

There have been some real horror stories with rent-to-rent when unsavoury characters or inexperienced individuals – talked into this by so called property gurus – rent properties from unsuspecting landlords and play fast a loose with their property: properties divided into multi-housing units (HMOs), overcrowding, letting without a licence, non-payment of rent and either handing the property back with expensive damage or refusing to hand it back at all.

Of course, renting to a council or a reputable agency reduces this risk to a minimum, but even so there can be problems. The legalities of this are complicated: it’s a lot more complicated legally that simply renting between a landlord and tenant because another legal entity is sandwiched between the two: ( The Landlord – > The Renter – Agency or Council) < – The Occupier (The Tenant)

Some agents will rent from you or act as an agent between you and the council, who in turn will let to their own tenants, usually low income/welfare individuals or families.

It is therefore vital for your own sanity that in this case you choose an agency that is well-established and with a track-record of successfully managing private rented accommodation. They should be members of at lease one of the main professional associations, preferably ARLA Propertymark, the National Approved Lettings Scheme’ (NALS), the ‘Ombudsman Services’ scheme, the UK Association of Letting Agents (UKALA) and the National Residential Landlords Association (NRLA).

I suggest you do your due diligence thoroughly by checking out the agency, and requesting to speak with other landlords who have used their services long-term. With councils this is less important but still worth doing. We’ve come across many landlords who have had problems when they let directly to councils.

You need to do checks with your mortgage lender, your landlord policy insurers and the freeholder of your rental property if it is leasehold. Get permission in writing in each case, otherwise your guaranteed rent arrangement may breach the terms of one of these. The last thing you need is for your insurer to refuse a claim because of this, or your mortgage lender demands immediate re-payment.

Having a valid contract between you and the council (or the agency) is key to a trouble-free and a pleasant experience. This is a commercial arrangement and therefore a million miles away from the Housing Act Assured shorthold tenancy – you leave that side to the agent. You need a commercial (business) (Landlord & Tenant Act 1954) tenancy between yourself and the council or the agent. You also need a detailed schedule of condition / inventory, ideally from an independent surveyor or inventory clerk.

These rental bodies will often provide their own contracts for you to sign, but you should resist doing this, at least until you have had expert legal advice, and when I say expert I don’t mean your family solicitor, I mean an experienced property lawyer familiar with this type of arrangement.

You would expect a council or a reputable agency to honour their contract and return the property back on time and in its original or better condition, but unfortunately that’s not always the case. Number one because the Housing Laws are such that the council or the agency will not necessarily be in a position to gain vacant possession just when it’s needed. Secondly, agreeing what is original condition is open to interpretation, hence the importance of a good schedule of condition.

Landlords are often drawn into the trap of thinking that renting to the local authority or a good agent is going to be trouble free and there will be no arguments as to what’s right and wrong: not always to case.

Don’t get me wrong when I’m pointing out all what can go wrong. Don’t let this put you off using guaranteed rent arrangements; it has many advantages not least of which should be a nice passive investment return. What I am saying is that preparation is the key to a successful outcome, so bear in mind the points I’ve mentioned above.

Coronavirus could wipe out the UK’s smaller Guaranteed Rent operators

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