Are Rent Guarantee Schemes Worth It?
ARE RENT GUARANTEED SCHEMES WORTH IT?
A Guaranteed Rent Scheme (sometimes also known as Rent-to-Rent) entails a contractual agreement between a landlord and a company, an institution, a letting agent, or an individual. For a specified term, the landlord agrees to relinquish their control and management over their property (with conditions & clauses for opt-out) in exchange for a guaranteed monthly rental income.
WHAT IS A GUARANTEED RENT SCHEME?
A Guaranteed Rent Scheme (sometimes also known as Rent-to-Rent) entails a contractual agreement between a landlord and a company, an institution, a letting agent, or an individual. For a specified term, the landlord agrees to relinquish their control and management over their property (with conditions & clauses for opt-out) in exchange for a guaranteed monthly rental income.
Thus, that company / institution / letting agent or individual rents the property from you, the landlord, and then sub-lets it to tenants while managing the full process. The tenants have no direct relationship with the landlord, and everything is handled by
the ‘main tenant’. It alleviates some of the overwhelming set of responsibilities a landlord has and works very well for:
- new landlords with little or no experience.
- landlords that are far from their investments.
- or investors that own several properties, estates, or HMOs where management can become overwhelming.
Most private companies running Guaranteed Rent schemes charge 0% commission and state there are no up-front payments. Their profits come from the difference between the guaranteed payment agreed with the landlord and the monthly rent they achieve on the property, minus time, and expenses.
It’s not a secret, as most companies are quite transparent in telling you that you are trading some potential profit in exchange for stability and guaranteed payments. They are talking about all the risks.
HOW DO GUARANTEED RENT SCHEMES WORK?
Here are 5 high-level steps:
- Potential ‘main tenant’ evaluates the property at its current market value.
- Landlord and ‘main tenant’ negotiate the guaranteed monthly rent and term.
- Landlord temporarily relinquishes control over the property with a contractual agreement in return for consistent income.
- Pre-agreed monthly rent will come in advance, whether the property is tenanted or vacant.
- Landlord is hands-off in the lettings process and has their property returned to them in the same or improved condition at the end of the term.
what are the benefits for landlords, investors or property developers?
During the term of the lease, an agent can agree to be responsible for the end-to-end process when it comes to property management. From maintenance, and compliance, to complementary services such as interior design and redecoration. Here are additional top benefits, Guaranteed Rent Schemes provide:
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- Guaranteed rent tenanted or not: Based on your contract your rental income is guaranteed regardless of whether there are tenants in the property or not, and whether they have paid their rent or not.
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- Regular, stable, cash flow: This ensures regular, predictable cash flow that can be re-invested, and less risk of dealing with arrears, especially in today’s economy where tenant affordability is low.
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- Long-term security: If you want long-term security, you can negotiate longer-term contractual agreements.
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- Low damage risk: The ‘main tenant’ generally takes care of any damage to the property and needs to ensure to return it in the same condition as when they took it.
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- No fees: You do not incur any letting, management, or renewal fees.
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- Low eviction risk: You are also less exposed to the risk of entering eviction proceedings.
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- Hassle-free: It’s the most hands-off option for landlords that have no time or inclination to be involved in the letting process.
what are the disadvantages?
Though there are significant benefits and providers promise to spare landlords the trouble of dealing with voids, arrears, and eviction, you need to be informed of what significant pitfalls remain for any landlord entering a commercial rent-to-rent arrangement.
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- Not aimed at highest profitability: The main purpose of a Guaranteed Rent Scheme is a stable income stream that is guaranteed. It’s not aimed at achieving the highest retail yield from your investment.
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- You relinquish control: Under a Guaranteed Rent agreement, you are required to sign over the property for a period, in return for guaranteed monthly income.
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- Not risk-free: As with anything, you are not risk-free. Things can go wrong if the Guaranteed Rent operators don’t have the financial backing to cover void periods or if they go bankrupt.
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- Mortgage conditions: Often buy-to-let mortgage conditions restrict the type of tenants the property could be rented to, so lack of contractual control in the agreement with the ‘main tenant’ can be a problem. For example, sub-letting to housing benefits tenants might result in a breach of mortgage conditions and companies insisting that their loans are repaid.
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- Ongoing legal liability: Regardless of whether compliance has been signed off to a third party or not, the property owner is still often the one responsible. For instance, if the property lacks fire and gas safety certifications or an HMO becomes overcrowded or unlicensed, the landlord would be on the hook for hefty fines.
ARE GUARANTEED RENT SCHEMES WORTH IT?
Guaranteed Rent Schemes are not for everyone, and their viability depends totally on your circumstances and objectives.
This is a fantastic option if you have no inclination to be hands-on, don’t have a mortgage to pay or the monthly rent isn’t a primary source of income, or you’re just interested in paying your mortgage off, then a stable cash flow is a worthwhile trade-off. However, if your aim is collecting the best possible return on your investment then you may not achieve your objectives with guaranteed rent. To get the most out of your asset, you will need to let your property directly to the occupying tenants while finding alternative ways to cut costs and mitigate risks.
If your objective is to maximize revenue, minimize the risk of voids and arrears, and keep a healthy distance from day-to-day operations, consider a combination of rent guarantee insurance and property management.
If you think a Guaranteed Rent Scheme works for you, or you’d like to find out more we offer guaranteed rent in London.
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Guaranteed rent, guaranteed Insurance, rental income protection… which one is which?
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See what’s inside the guidebook:
- What Is Guaranteed Rent
- What are the benefits?
- What are the disadvantages?
- What should you consider?
- Is Guaranteed Rent right for HMOs?
- Is Guaranteed Rent right for you?
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