Whilst the majority of landlords are part-time, rather than professional, there is growing evidence to suggest that more people are becoming reliant on rental income to make a living, with some seeing their properties as their pension.
Although property prices remain flat, rental values, unlike low saving rates, have been increasing across some parts, fuelled by greater demand, with the typical cost of renting a home in England and Wales standing at £782 pcm in December 2012, up 4.7 per cent year-on-year, according to HomeLet. The rise in rents means that more landlords are getting higher rental yields – around six per cent – and there is unlikely to be any diminishment in them any time soon; an attractive proposition for investors.
CHALLENGES FOR TENANTS
The Census 2011 showed that the proportion of people renting from a private landlord in England and Wales rose from nine per cent in 2001 to 15 per cent in 2011, and the indications are that it will continue to rise, pushing rents higher in the process.
As rents continue upwards it is no surprise to see tenants requesting longer tenancies.”
“As rents continue upwards it is no surprise to see tenants requesting longer tenancies, as they attempt to ‘lock in’ to their properties for the maximum time on offer,” said James Thornett, Regional Lettings Director at Kinleigh Folkard & Hayward, “While this trend is an advantage to tenants, it is gaining popularity among landlords keen to avoid costly void periods.” While landlords have seen a rise in rental income, it should be noted that Homelet’s figures do not take into account the time when properties are vacant – which can impact on net yields – or indeed when rent has not been paid. Figures from Templeton LPA show that 86,000 tenants were in severe arrears of more than two months in the final quarter of 2012 – 2.2 per cent of tenancies in England and Wales. Furthermore, in the third quarter of 2012, 25,756 tenants faced eviction, a quarterly rise of 5.5 per cent. “Tenants’ finances have suffered a gruelling combination of rising living costs and rental inflation,” said Paul Jardine, Director at Templeton LPA, and with a triple-dip recession looming, there are signs that demand for tenant eviction services is growing.
Legal 4 Landlords report that there has been a sharp increase in demand for its eviction services in recent months. Sim Sekhon, Commercial Director (right), said, “A combination of spending cuts and high unemployment is creating financial problems for some tenants, resulting in a greater number of evictions.” “We have had to hire extra staff to cope with a rise in evictions, I estimate that eviction enquiries from landlords, agents, housing associations, the Citizens Advice Bureau, along with a host of charity organisations, have tripled to around 200 per day in the last few months.”
DOING THE HOMEWORK
It is therefore really important for investors in the market to do their homework, seek expert advice and reference their tenants properly, and that’s where the reputable specialist referencing company comes in. “The tenant’s ability to meet the rent consistently, as well as their past financial record, is vital in ensuring agents are presenting a suitable tenant to their client. In addition to their financial history, a reference from their previous landlord provides reliable information on how well they have met the obligations of their tenancy agreement,” said Brandon Hibben, Head of Property Management at the Guild of Professional Estate Agents, “Referencing from a reputable company is therefore the most important tool in an agent’s assessment of a tenant. Not only does it help to present the best tenants to clients, it minimises future issues that could have financial and legal consequences.”
There are various levels of referencing available to agents and landlords, from a very basic package to a fully comprehensive service. The level a landlord opts for will depend on the extent to which they want to minimise their exposure to risk.
Tenant referencing is an important tool for minimising a landlord’s exposure to potential financial and physical damage.”
Natasha Hart, Regional Manager at Endsleigh Insurance Services, said, “Tenant referencing is an important tool for minimising a landlord’s exposure to potential financial and physical damage. It’s not just the ability of a tenant to pay their rent on time, but also how they will treat the property that’s important.” She added, “A basic check may be sufficient, but a comprehensive check could reveal something that could be a key factor in the decision to rent out the property to the applicant. Some may question the need for checking someone’s financial security when a tenant could potentially lose their job at any time, in the current economic climate. But Hart insists that it is not just about job security. “It is also about credit history, which could identify, for example, that the applicant has a history of bankruptcy or sequestrations and so represent a greater risk,” she added. And landlords also need to ensure that their tenants are who they say they are, according to Rosalind Florence, Head of Rentals at Glentree International, tenant referencing is much the same as if you are taking out a mortgage, said Florence. “The reasons for taking out proper references are endless. It is in everyone’s interest, agent, landlord and tenant, to ensure that the tenant is bona fide and in a strong financial position to meet the ongoing rent. Taking tenant references helps to confirm this and provides a platform for a happy relationship between all three parties,” she added.
If the tenant provides a credit rating agency with acceptable references, the landlord can further safeguard his or her income by taking Rent and Legal Expenses insurance with the credit rating agency to safeguard against any change in the tenant’s circumstances. Various firms operate offer a range of rent guarantee or loss of rent and legal expenses insurance schemes but it is generally a condition of the insurance policy that the landlord obtains acceptable written references, often from a specialist tenant referencing company, prior to the tenancy commencing. Some specialist policies also cover a landlord’s property for accidental damage by tenants, and even malicious damage. Policies vary, generally it is a requirement to take a deposit, but no need to take out a reference. Landlord Assist recently launched a new deposit replacement warranty scheme, which allows tenants to pay an initial premium of between £100 and £150, rather than pay a traditional deposit of four to six weeks’ rent. This would provide guaranteed payment against damage and non-payment of rent at the end of the tenancy. “We think it’s a great alternative to the government approved deposit schemes, under which it can take over two months for disputed claims to be resolved,” said Stephen Parry, Commercial Director at Landlord Assist. “With the deposit replacement scheme all claims are guaranteed to be settled within seven days so that landlords can carry out any necessary repairs almost immediately.” However, the deposit replacement warranty scheme is currently only available to landlords and letting agents who sign up to Landlord Assist’s Tenant Referencing service, and the situation is similar with most firms.
Tenants referencing costs vary, with prices starting from £7 for basic credit check-only reports, while a more comprehensive package will cost more. Generally, market rates for direct landlords are around £25 +VAT per comprehensive check, while letting agent discounts apply according to the size of their portfolios. Whichever service a landlord or letting agent opts for, it could be money well- spent, especially if it results in a saving of thousands of pounds of lost rental income or property damage. Ultimately, “you get what you pay for”, according to Michael Portman, Managing Director, LetRisks. “We strongly believe that for only a few pounds more and a little extra effort, the landlord and agent should undertake the more robust check,” he added. “Be careful of promises of quick turnaround time and cheap prices – penny wise, pound foolish.”
“Tenant referencing is so important because it separates the wheat from the chaff and agents owe a duty of care to their landlord,” says Michael. “Professional bodies including ARLA and NALS have a code of practice which requires agents to take relevant references on an applicant. This includes the need to be diligent in identifying fraudulent applications.”
THE AGENT’S ROLE
Ultimately the referencing process is there to help the landlord and agent make an informed decision as to whether or not to let a property to the applicant. The reference not only verifies credit rating, employment information, and previous landlord’s details, but can also flag up other factors, such as the potential for fraud, based on links to previous addresses. A good tenant referencing service also goes a long way towards helping a letting agent prove their value by screening out poor applicants and reducing the risk to the landlord, helping to ensure a smooth tenancy, stable commission and potential tenancy renewal fees, as well as raise the potential for repeat business from landlord clients in years to come. LetRisks www.letrisks.com HomeLet www.homelet.co.uk Templeton LPA www.templetonlpa.co.uk Just Landlords www.justlandlords.co.uk Legal 4 Landlords www.legal4landlords.com Endsleigh Insurance www.endsleigh.co.uk JSW Insurance Services www.jswinsurance.co.uk Landlord Assist www.landlordassist.co.uk