Q: I am just about to find new tenants but am wary of rent defaults in the credit crisis - how can I protect myself?
Buy-to-let landlords anxious about the effect of the credit crunch on their tenants’ ability to keep up with rent payments can take six simple steps to minimise their exposure to possible tenant rent default, says ludlowthompson.com, London’s lettings agent.
Says Stephen Ludlow, Director of ludlowthompson.com: “It’s very rare to see serious tenant rent default, but buy-to-let landlords who want to play it safe can protect themselves in a number of ways. These include due diligence, automated payment for rent and rental warranty insurance.”
Recommendations for landlords by ludlowthompson:
1. Robust credit reference
Buy-to-let landlords should ensure that prospective tenants will be able to pay the rent for the term of their contract. Landlords can perform a credit check on any possible tenant to make sure they are solvent and don’t have a history of bad debts.
2. Employment and personal referencing
Buy-to-let landlords should ensure the prospective tenant has been asked for an employment reference to show that they will be able to afford the rent and a reference from their previous landlord to make sure they are reliable tenants.
Landlords should remain wary as prospective tenants might use their friends to provide false references. To reduce the risk of this happening the landlord should ask for a central switchboard number when calling an employer.
Tenants with poor track records sometimes provide the landlord with prepared references and try to rush the landlord into signing the tenancy agreement. Landlords should avoid the temptation to sign up the tenant until they have had a chance to check that the references provided are genuine.
Letting agents and industry referencing services are used to vetting tenants and dealing with multiple simultaneous lettings so buy-to-let landlords, particularly those with less experience, should consider using their services.
3. Direct debit mandates
Landlords should get their tenants to set up direct debit mandates at the beginning of the tenancy to ensure timely rent payments. When tenants pay by cheque, the buy-to-let landlord doesn’t know whether a late payment is just a one-off or something more serious. If a direct debit is cancelled by a tenant, on the other hand, the landlord can be sure that there is a serious problem with the tenant’s ability to pay the rent and can react accordingly.
4. Rapid response to rent arrears
Buy-to-let landlords need to keep a close eye on late-paying tenants, particularly when they have a portfolio of properties and arrears are hard to spot. Landlords should decide on a course of action in the event of rent arrears and stick to it. This prevents the landlord from being tempted to extend too much credit to their tenant.
Buy-to-let landlords can take out cheap insurance that covers both tenant rent default after 60 days of arrears and court fees in the event that the landlord has to evict the tenant to recover vacant possession of the property. The insurance costs as little as £300 per year and covers tenant rent defaults of up to £10,000 and the legal fees for evicting a tenant of up to £50,000.
Buy-to-let landlords concerned that rising unemployment might see their tenants default on their rent should consider buying a rental warranty, says ludlowthompson.com, London’s lettings agent.
The warranty covers both lost rent from the tenant defaulting and the cost of legal fees associated with regaining vacant possession of the landlord’s property.
ludlowthompson.com explains that although the warranty has been available for a number of years the cost of the warranty has been getting much cheaper over the last five years.
Says Stephen Ludlow, Director of ludlowthompson.com: “Tenant rent defaults are still quite rare and the vast majority are cleared up within 60 days. Even so, buy-to-let landlords might want to protect themselves by buying what is still a relatively underused warranty. Its low cost won’t have much of an impact on your net income and it is tax deductible.”
ludlowthompson.com says that the cost of the rental warranty that they purchase for landlords has halved over the last five years as insurers have become more comfortable with the risks of offering the cover. However, the warranty is normally only available through letting agents, as insurers require that a proper credit check on the tenant has taken place.
Ludlowthompson.com says that the typical policy:
• costs as little as £300 per year
• covers tenant defaults of up to £10,000 of rent
• covers legal fees for evicting the tenant of up to £50,000
• is underwritten by a major insurer, such as Axa
• pays out for rents in arrears after a 60-day period. ludlowthompson.com point out that most landlords will have protection for much of that period by holding a month’s rent as deposit.
ludlowthompson.com explains that cover for the legal costs of evicting a tenant can also be bought as a stand alone product for around £6.50 per month.
Adds Stephen Ludlow: “No matter how rigorous your credit and reference checking of a tenant is, there is always the small chance that if they are made redundant they won’t be able to pay the rent. Rental warranty offers an affordable way for buy-to-let landlords to cover themselves against that problem and despite the economic downturn the premiums are still very competitive.”
6. Mortgage savings
Many landlords on variable and tracker rate mortgages have saved hundreds of pounds on their mortgages. Keeping this money to cover any rental voids could be a good strategy until the rental warranty insurance cover kicks in.