'Guaranteed rent' - there's no such thing!
Updated: Apr 2, 2020
If like me you have any licensed HMOs (houses in multiple occupation – i.e. professional house shares or student house shares), you are likely to be targeted with letters from companies offering you a ‘guaranteed rent’ or other hassle-free solutions, where you hand over your property for anything between 3-7 years in return for a fixed rent. This rent is said to be ‘guaranteed’ because it is apparently paid each month regardless of whether the property is occupied by tenants or not. Some companies even offer to take care of all maintenance and/or improve your property by fitting new carpets, carrying out decoration and other jobs that may have been neglected.
As a landlord, this sounds like heaven – somebody paying me every month to take over my property, so that I am not responsible for dealing with tenants, managing maintenance jobs and contractors, doing viewings, filling rooms and sorting out paperwork etc. And if the rent is ‘guaranteed’, then what could go wrong?!
I have received countless of these letters over the years since I purchased my first HMO in 2016. As a responsible landlord, I would never enter into such an arrangement with a rent-to-rent operator, despite how appealing it may sound. The reasons why?
No trading history or experience
Rent-to-Rent companies are generally newly formed companies with no real trading history or accounts, and have been set up by one or two individuals who are fresh off a property course. There are numerous property ‘education’ or ‘training’ providers encouraging people who have never run a business, never owned an investment property before, never managed properties or tenants before, and who have no real finances behind them, to start a rent-to-rent business as a low cost entry into property. These individuals operating the rent-to-rent company have quite often parted with thousands of pounds undertaking these training courses, and are told to write to actual landlords (i.e. people who have worked hard to save up in order to purchase properties!) to tell them/us that they can offer us a peace of mind and pay a guaranteed rent, come rain or shine, for 3-7 years. They claim to deal with all management and maintenance, so that we can relax knowing that we will get paid on time and in full each month, whether the property is occupied or not. But if they have no trading history, and no experience of owning or managing properties (let alone HMOs, which are a level up from your typical buy to let), why would I hand over an asset worth hundreds of thousands of ££ to them?!
There's no such thing as 'guaranteed rent'
Is it really ‘guaranteed rent’? As Benjamin Franklin famously said, the only thing that is certain in life is death and taxes. A rent-to-rent company offering a ‘guaranteed rent’ is really no different to a tenant’s promise (obligation) to pay rent under the tenancy agreement, unless it is backed up by sufficient security. Individuals running rent-to-rent companies proudly claim to ‘guarantee’ the rent for 3-7 years, but anything can happen in that time. The rental market can turn (if there are no tenants in the property then how will the company generate the income required to pay the ‘guaranteed’ rent?), individual circumstances can change, licensing/planning regulations can change. All these things can affect the rent-to-rent company’s ability to pay the ‘guaranteed rent'. It’s far too easy to make bold claims when you are selling your services. In order to really guarantee the rent, the rent-to-rent company should have enough money in a ring-fenced bank account to cover every single rental payment for the 3-7 years that they take over the property! Will they have such funds? It’s highly unlikely. In reality, the individuals operating the rent-to-rent company may offer a personal guarantee, which is neither here nor there – after all their circumstances and finances may fluctuate, and I don’t really want to sue a rent-to-rent company any more than I want to sue a tenant for rent arrears! There have been plenty of high profile rent-to-rent companies going bust and failing to pay their landlords – see https://thenegotiator.co.uk/three-estate-agencies-expelled-from-the-property-ombudsman-scheme/
It's never hassle-free or hands-off
Check the small-print on any document that the rent-to-rent company is asking you to sign – the devil is in the detail. Whilst rent-to-rent companies will often claim they will take care of all maintenance, often they will:
(a) limit any repair costs to a certain amount per month, to ensure they keep their profit margins; and/or
(b) exclude liability for any structural (e.g. roof/windows) or boiler related problems, as they are the most expensive things to repair and maintain. In such cases, the landlord would then have to fork out from their own pocket, even though they expected that such maintenance would be dealt with by the rent-to-rent company. In addition, the rent-to-rent company will often place the obligation to obtain or renew a HMO licence on the shoulders of the landlord, and will skirt around the issue of whether the landlord has the consent of the buildings insurance company or the landlord’s mortgage lender for the rent-to-rent arrangement. Many landlords will be caught out if they haven’t got the correct insurance policy, or mortgage product, which allows a rent-to-rent arrangement to exist.
In the case of the HMO licence, if the landlord remains the HMO licence holder, then he/she could be in serious trouble if the rent-to-rent company mis-manages the house, or fails to keep up with maintenance and repairs.
I will acknowledge that some rent-to-rent companies are genuinely decent, and are run by landlords who have plenty of properties themselves which they own and manage. They therefore have lots of experience in managing properties, dealing with tenants, and are more likely to have sufficient financial resources behind them to offer ‘guaranteed rent’ (although please bear in mind that I don’t believe anything is ‘guaranteed’ if there is no security or insufficient security to support that claim). However, the vast majority of rent-to-rent companies, in my experience, will be newly incorporated companies and be run by wannabe property investors who have just come off a training course and have probably never bought an investment property themselves. Other than the basic ‘education’ they have been taught on such courses, they will have little to no experience in dealing with day-to-day property management or tenancy issues, and they may even still be working in their job for somebody else! For these reasons, and taking into account the fact that I may have spent tens of thousands of £pounds (if not hundreds of thousands of £pounds) in buying and renovating my property, I will certainly not be handing it over on the basis of a promise of ‘guaranteed rent’ and/or a ‘hassle-free’ property solution!