How to pick the right type of tenant
From professional sharers to students, and HMOs to benefit claimants, there’s a wider than ever variety of tenants for landlords to choose from.
Look after your tenants and they’ll look after your property. But with different types of tenant come different needs, and some have more than others - something landlords are well aware of. A recent poll of over 400 landlords revealed which kinds of tenants landlords prefer, and which they don’t. 64% said they wouldn’t rent to tenants on benefits, while three quarters would not consider students.
But are landlords missing out on lucrative, untapped markets that, with a little work, could become attractive potential tenants in heavy supply?
Here’s a breakdown of the different types of tenants, including the risks, and steps you can take to protect yourself.
Renting to working professionals
Unsurprisingly, working professionals are landlords’ favourite tenants, with 98% of those surveyed saying they’d be happy to let their property to them. A regular, steady income means they have little chance of falling into arrears.
But no tenant comes without risks, and working professionals being in such high demand can mean competition between landlords to lure in such attractive renters. [There’s also the risk of invalidating your existing insurance policy if tenants become unemployed but fail to tell you.]
Renting to family or relatives
Renting to family members can be a convenient arrangement for both parties, with 85% of landlords saying they would consider it. It becomes even more attractive when considering the added bonus of sidestepping what can often be a lengthy hunt for an occupant.
However, there are a number of unique risk factors to consider, the majority of which can be prevented by following the standard procedures, like setting up a tenancy agreement. Tempting though it may be to forego the formalities, having things in writing is essential to prevent future disputes or confusion.
Additionally, bear in mind that even if you want to offer discounted rent to family members, it might be impossible given that most buy-to-let mortgages require landlords to charge rent that is at least 125% of the monthly mortgage costs.
Renting to families
The number of families in rented accommodation has skyrocketed recently, making it the most common household type in the private rented sector, a big change from five years ago when it was third, behind young singles and couples.
Family lets can be an easier ride than others, as their tenancies tend to last longer than average. Plus, flats that come unfurnished can be a selling point, providing families with a blank canvas. Yields can also be particularly high if your property is near schools, shops and transport links.
House of multiple occupancy
HMOs are properties with three or more people (who aren’t related) renting individual bedrooms, while sharing rooms like the kitchen and bathroom. Splitting up the property like this can offer a massive returns on investment, as long as landlords are prepared to put in more time and effort.
It’s no surprise that the popularity of cheap and flexible HMOs is on the rise - in 2016, some London landlords saw their HMOs generating double digit returns.
For most, being a HMO landlord boils down to time versus money. Dividing up a property is a serious undertaking that requires a good deal more work and rule-following than normal tenancies. Landlords will need to do a considerable amount of research beforehand, and invest much more time managing the property, plus maintenance and property upkeep costs will also be higher.
However, for those who are prepared to put in the extra hours, navigate the rules and keep a close eye on the condition of their property, HMOs can be a brilliant way to increase yields.
Renting to students
If your property is anywhere near a university, there’s no escaping students. Yet over 75% of landlords surveyed said they wouldn’t rent to them. It’s true that students are often deemed as “high risk” for reasons including lack of experience, financial instability and party-related damage.
But letting to students can be a lucrative option for landlords, and yields can be particularly high, with returns in some parts of the UK reaching up to 10 percent. Students are unfussy tenants, and there’ll be less pressure for your property to be on the best streets, with emphasis instead on good transport links.
Steps you can take to ensure a smooth tenancy include setting up a guarantor, taking a thorough inventory at the start and end of each tenancy, and following the same procedures for HMOs.
Renting to housing benefit tenants
Tenants on benefits are the least popular choice for landlords for a multitude of reasons, with only 30% surveyed saying they would rent to them. But don’t write them off straight off the bat!
The most obvious issue with housing benefit tenants is their financial instability, making them at higher risk of rent default. Your insurance company may refuse to offer some types of cover, such as rent guarantee, for this reason, and some buy-to-let mortgage providers won’t lend if your property will be let to tenants in receipt of housing benefits. There could also be a shortfall between the amount of benefits they receive and the total for the rent, which can be even more problematic given that Universal Credit payments are made every 4 weeks, not every calendar month. Plus, housing benefit is no longer paid directly to you by the council, which can make it even harder to stay on top of rent.
With all these downsides, it can seem hard to see why anyone should consider housing benefit tenants. But landlords who are prepared to put in the extra checks can hugely expand their pool of potential tenants. This can go quite some way to outweighing the cons: sometimes quantity over quality really is the best way!
To feel more secure, ensure you’re familiar with the setup, and establish procedures early on, like how your tenant will pay, if they have to cover a shortfall, and which date of the month they receive their benefits. If it makes sense to do so, consider changing your rent’s due date.
It’s a good idea to thoroughly vet potential occupants on their rental history, agree to take rent a month in advance, and have them provide a strong guarantor.
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