A rent guarantee sounds like a great idea for buy to let landlords – but the concept may not offer the expected rewards.
The arrangement is simple – a landlord signs over a buy to let home or shared house to a letting agency, council or housing association in return for a fixed rent paid every month regardless of whether the property has a tenant.
The organisation taking on the property manages the property, finding tenants, collecting rents and dealing with repairs.
For many landlords, the idea of a rent guarantee seems a perfect solution, but disaster is often lurking just around the corner.
First, the landlord is giving away control of the property and has no say in the type of tenant the sub-letting organisation moves in.
Then, most buy to let mortgages and insurance policies explicitly forbid sub-letting, which means entering into a rent guarantee can breach the contracts. In a worst case scenario, the lender could call in the loan or the insurer could void cover.
Another issue is the financial strength of the rent-to-rent firm offering the guarantee.
They make money on the margin between what they charge the tenant and how much the landlord is paid. If they go under with a tenant in the home, the property owner faces all sorts of issues in going through the courts to regain possession while no rent is coming in.
Lawyers suggest the biggest problem with rent guarantee schemes is the underlying contract between the landlord and managing agent.
These should be commercial contracts and not assured shorthold tenancies, while the tenants should have an assured shorthold tenancy agreement.
Landlords should also consider taking personal guarantees from directors of limited companies offering rent-to-rent.
Limited liability means the company can collect rents and shut up shop without paying landlords or carrying out property repairs, leaving the landlord with little or no chance of regaining any loss.
So, rent guarantee may seem a good idea, but lift the bonnet and instead of a smooth-running business, landlords may find the firm has a thoroughbred body with a clapped out engine.