In the UK property market, rent guaranteed agreements have gained significant traction in recent years. These agreements offer landlords a stable income stream, even if the property remains vacant or tenants default on their rent payments.
This article will delve into the mechanics of rent guaranteed agreements and give you and idea as to whether an agreement like this is the right choice for you as a landlord.
What is a rent-guaranteed agreement?
A rent guaranteed agreement is just a contract between a landlord and a company that will guarantee the landlord rent.
The contract is usually between a landlord and a property management company or individual, wherein the latter guarantees to pay the landlord a fixed monthly rent, regardless of whether the property is occupied or not.
This is usually a long term contract that is between 1 – 5 years and makes sense for landlords with a large number of investment who want to secure their income and remain largely excluded from the oversight of their investments,
According to a 2018 survey by the English Private Landlord Survey, 13% of UK landlords have a gross monthly rental income that is £50,000 or more. Property portfolios of this scale will usually seek services to make the management of this cash flow more predictable like a guaranteed rent company.
Is this the same thing as rent to rent?
The terms “rent guaranteed” and “rent to rent” are often used interchangeably in the property market. While they share similarities, there is a slight difference in their application.
Rent to rent typically refers to the practice of an individual or company renting a property from a landlord and then subletting it to tenants at a higher rate.
In contrast, rent guaranteed agreements focus more on the financial arrangement between the landlord and the property manager, ensuring a fixed rental income for the landlord.
How do companies produce guaranteed rent?
Companies that offer rent guaranteed agreements employ various strategies to generate a profit while ensuring a stable income for the landlord. Some of these methods include:
Offering you a discounted rent
One common approach is for the company to offer the landlord a rent that is slightly below the market rate. For example, if the market rent for a property is £1,000 per month, the company might offer the landlord a guaranteed rent of £900.
The company then lets out the property at the market rate, pocketing the difference as their profit margin.
Turning a property into a HMO
Another strategy of producing guaranteed rent is to convert the property into a House in Multiple Occupation (HMO).
By renting out individual rooms to multiple tenants, the company who is providing the guarantee of rent can generate a higher overall rental income compared to letting the property to a single tenant.
According to a 2023 study by the Ministry of Housing, Communities, and Local Government, HMOs account for 12% of the private rental sector in England. Despite their higher rental yields, the stock of houses in multiple occupation (HMOs) fell be 2.4% in 2023.
This is due to tighter rules around property planning and regulations and could lead to an increase in the number of landlords relying on Guaranteed rent companies if they cannot justify the cost of converting their investment into a HMO themselves.
Turning a property into a holiday let
Some companies may also choose to transform a property into a short-term holiday rental.
Platforms like Airbnb have made this an increasingly popular option, particularly in tourist hotspots in the UK.
The profitability of a holiday let in the UK is largely dependent on the season and the location of a property. It is important to understand that holiday lets may not always work as most properties will net a greater rental income on the standard rental market.
regulations must also be followed when dealing with holiday lets as there are planning permission laws that have to be followed and you can’t have a holiday let open all year, only for 210 days of the year. Seasonaliity and whether also plays a crucial role on how well a holiday let performs in a given year.
For instance, the average annual turnover of a UK holiday let was £21,000 in 2020, which was up 59% up versus 2019 for example – due to the pandemic.
This goes to show the risk associated with holiday lets and how landlords with properties that are located in areas that can benefit from listing their property as a holiday let may want to use a guaranteed rent company instead.
Should you look for guaranteed rent as a landlord?
As a landlord, deciding whether to opt for a guaranteed rent agreement requires careful consideration of the pros and cons.
While guaranteed rent can provide a stable income stream and reduce risks, it also comes with certain drawbacks. Let’s explore these advantages and disadvantages in more detail.
Pros of using guaranteed rent
Guaranteed rent can be advantageous for many landlords as it has the potential to produce a very stable income and it reduces the risk of investing.
There is the potential for stable income
One of the primary benefits of guaranteed rent is the assurance of a consistent monthly income. This predictable cash flow can help landlords better manage their finances and plan for the future.
You are reducing the risk you take on
With a guaranteed rent agreement, landlords can mitigate the risks associated with vacant periods and tenant defaults. Void periods can be the difference between a profit margin that works and a margin that produces a negative return.
A 2023 report by Goodlord found here said that in January 2023, the average void periods in England stood at 23 days. Currently, the East Midlands experiences the longest void periods at 28 days, while Greater London has the shortest at 18 days.
As you can imagine, void periods tat are upwards of a month long can cause worry for landlord who pay the monthly costs of a property including mortgage payments regardless of whether a tenant is in a property.
Cons of using guaranteed rent
There are some drawbacks to using guaranteed rent at the same time that you should consider before you use a guaranteed rent company.
You have to pay the guaranteed rent company
One of the main drawbacks of guaranteed rent is the fee charged by the property management company.
Typically, these companies take a percentage of the rental income as their commission. A 2023 industry report by smartproperty.co.uk revealed that the average fee for guaranteed rent services in the UK is 12% of the monthly rent.
This is a lot higher than what is would cost if you used a property management company to mange a proeprty or even a let only service that just finds tenants and leaves a landlord in charge of the management of their investments.
You have limited control over your property
Under a guaranteed rent agreement, the property management company assumes responsibility for managing the property, including tenant selection, maintenance, and repairs.
While this can be advantageous for landlords who prefer a hands-off approach, it also means relinquishing a certain level of control.
Landlords may have limited say in who occupies their property or how it is maintained, which can be a concern for those who prefer a more active role in property management.
If you are looking for more information on property management in London, please refer to our resources section for Cozee Properties.
Frequently asked questions
A rent guaranteed agreement is a contract between a landlord and a property management company or individual. The company or individual agrees to pay the landlord a fixed monthly rent regardless of whether the property is occupied or not.
Rent guaranteed agreements usually span from 1 to 5 years. This long-term commitment helps landlords secure a stable income while minimising their involvement in day-to-day property management.
Yes, aside from the management fees, landlords might incur other costs depending on the services provided by the company. It’s important to clarify all potential costs before entering into an agreement.
The terms for cancellation will be outlined in the agreement. Generally, breaking a long-term contract early might involve penalties or fees.
Last Updated on September 18, 2024