What are rent guarantee schemes?

Posted: 5th Dec 2014

Just imagine, your property being let to tenants without you having to go through any advertising or selection process, the whole year round, without any voids – and, best off all, a guaranteed rental income. If that sounds too good to be true, you might want to beware of some rent guarantee schemes that promise rather more than they deliver.

Not all rent guarantee schemes offer the earth, but step in when major incidents occur or tenants fail to pay their rent, for instance. In other words, there are a number of different rent guarantee schemes, and it may be helpful to be able to tell them apart.

Insurance

Landlord insurance policies tend to fall into two broad categories when it comes to offering protection of your rental income:

Rent protection insurance

  • this is often an addition to your landlords insurance policy written specifically to cover the risk of your tenants defaulting on the rent that is due and provision for the legal costs involved in evicting and recovering the rent arrears;
  • this form of rent protection insurance typically covers periods of either six months or a year (depending on the particular tenancy agreement you have with your tenants) and provides compensation for rent that has not been paid, up to prescribed limits, either until the arrears have been recovered or until the tenant has been evicted;
  • it also usually covers the legal costs involved in recovering the arrears;
  • because of the cover it provides, rent protection insurance may appear to be relatively expensive – especially if you have selected your tenants carefully, taken up references and have every reason to believe that the rent is going to be paid as it falls due;

Loss of rental income

  • a much more common form of protection, therefore, may be included in the principal landlord insurance policy – such as the policies we provide here at Cover4LetProperty;
  • this, too, provides compensation to the landlord for loss of rental income, but only in the event of the property becoming unlettable following a major insured incident (such as a fire, for example);
  • in this form of insurance no compensation is typically paid simply because the tenant has not paid the rent – as a result, therefore, premiums tend to be less expensive than with rent protection insurance.

Guaranteed rent schemes

A number of such schemes are run by local authorities, housing associations and housing charities, with the specific aim of giving landlords a degree of confidence in letting to less financially secure tenants, as described by the housing charity Shelter.

Such schemes rely on the local authority, housing association or charity giving the landlord a written guarantee that any losses incurred as a result of the tenancy – whether through a failure to pay the rent or through damage to the property – are going to be covered by the guarantor.

The guarantee typically takes the form of a bond.

Management company schemes

There has been a relatively recent rash of rent guarantee schemes offered by property management companies promising landlords an end to every type of worry about rental income.

As the Telegraph newspaper for one has pointed out, however, such rent guarantee schemes are not without their pitfalls.

Such schemes rely upon the landlord of the property letting the entire premises to the property company which then sub-lets to tenants it finds. For the individual landlord, such loss of control over the tenants chosen, the recovery of costs for any damage done and the possible financial failure of the management company itself, are all reasons suggested by some critics to fight shy of such schemes.