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Social Tenants: Opportunity or Liability?

Many prominent UK landlords (such as Fergus and Judith Wilson) have decided to stop renting their properties to tenants who receive Local Housing Allowance (LHA). With a fall in the level of LHA available because of government benefits cuts combined with increased red tape, they argue that it no longer makes economic sense to rent to social tenants. At the same time, rising house prices and a shortage of residential property mean that demand for rental homes is high among young professionals. Landlords can charge higher rents in the private rental market.

shutterstock_128408369Two Schools of Thought

There are two schools of thought on renting to social tenants: one side argues that many social tenants receive LHA though no fault of their own and offer long-term, guaranteed income for landlords who own property at the lower end of the market. The other side argues that social tenants are more likely to damage property or fall into rent arrears, especially since changes to the law mean that LHA is no longer paid directly to landlords.

So, should you rent your property to social tenants? Read on, and decide for yourself.

Recent Changes to the Law Have Deterred Private Landlords

Recent changes to the law have strongly deterred landlords from renting to social tenants, in particular the Housing and Regeneration Act 2008, which means that the LHA (formerly known as Housing Benefit) is now paid directly to tenants rather than to landlords. In addition, the introduction of Universal Credit and the Bedroom Tax in 2013 has meant that the level of LHA has been capped at £100 per week, with additional reductions applied for rooms that are deemed surplus to the tenants’ space requirements. The new rules can be confusing and mean that applications to let properties involve a lot of paperwork, which has proved off-putting for many landlords.

Another stumbling block for landlords is that the terms and conditions of their Buy to Let mortgage mean that they cannot let their property to social tenants. In addition some insurers will not provide building and contents insurance to properties rented to social tenants. Those insurers that do offer coverage do so at significantly higher premiums.

Landlords are also discouraged by the fact the payment of LHA to tenants can stop or start without warning, leaving them vulnerable to rent arrears. It is also possible that landlords may be contacted to recoup fraudulently claimed LHA if a tenant’s circumstances change.

Negative Perceptions Discourage Landlords

Another significant issue is the perception that social tenants are unlikely to look after properties and are more likely to cause damage. This is generally false; as most private landlords renting to those claiming LHA report that their tenants cause no more problems than working tenants. But coupled with insurance issues and mortgage restrictions, the number of homes available to social tenants looks set to fall.

There is a Positive Side

But there are reasons to take on social tenants if you are in a position to do so. With more landlords pulling out of this sector in the market, there will be increasing demand for rental homes. This can mean that you have the pick of social tenants in your area and market rents may rise to meet demand. With LHA set at the 30th percentile of market rents, those landlords who own properties at the lower end of the market may benefit from renting to social tenants.

shutterstock_45414955There is a false perception that tenants who receive LHA are more likely to default on their rent. While social tenants might face more challenges making ends meet, regular LHA payments mean that as long as their circumstances remain the same they should not fall into arrears. In fact, if a social tenant falls behind with their rent by two months, the landlord can apply to have the LHA paid directly to them. Added to this, many councils offer a rent guarantee scheme, a deposit scheme or offer to guarantee damage coverage for private landlords in order to mitigate any problems with insurance cover or rental arrears.

In fact, the right social tenants may offer landlords the opportunity to secure a long-term tenancy where the local council ensures rental income. Properly managed, with the right tenants, it may be possible for landlords to achieve an attractive 8% annual rental yield.

Ways to Have a Positive Letting Experience

If you are interested in letting to social tenants, there are a number of things you can do to ensure a positive experience. According to Steve Perrons of Perrons Davis, renting to social tenants requires extensive management and some market research. It is important to contact the local Housing Officer at the Council to find out about tenants who are in need of a stable home. Make sure that you understand how LHA is paid to social tenants in your area, and how often – you should charge monthly rent if LHA is paid monthly, and weekly rent if LHA is paid every two weeks.

Carry Out Extensive Checks

Once you have the names of prospective tenants, arrange a meeting and ask about their current circumstances. Trust your gut when deciding whether they are suitable tenants. If you can, arrange to view their current home to see its condition, as this can indicate how they will look after your property. If they seem trustworthy, ask them to nominate a guarantor who can cover rent and damage to property in the event that they are unable to pay. This person should be a relative who owns their own property and has passed the relevant credit checks. The guarantor should be involved in the rental from the very beginning, including during the signing of the tenancy agreement and at the inventory stage.

Involving a guarantor will mitigate any problems with insurance and will allow social tenants on little or no income to rent without having to provide a deposit. With regular LHA payments there should be little risk of rental arrears. At the same time, ensure that you maintain contact with your tenants, making regular property inspections and talking through any issues as they arise.

Offer Support But Be Professional

Offer to help your tenants to fill in the complex LHA forms, to ensure that they receive the level of support they are entitled to. Ask them about any time spent in hostels or rehabilitation centres, as this may qualify them for a higher rate of LHA and help avoid arrears. At the same time, be realistic about your choice of tenants. Don’t rent a property to someone simply because you feel sorry for them, and don’t rent your large family home to a couple, because the LHA they receive is only designed to cover a one-bedroom property.

So, are social tenants an opportunity or a liability? Now that you have more information, it is up to you to decide.

 

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