How to protect and prevent a tenant from defaulting on their rent
As buy-to-let landlords know, your property investment health and profitability is primarily based on your tenants paying their rent on time and keeping up to date with payments. Your bank won’t be too sympathetic if your buy-to-let mortgage payment is late.
With the devastating effect they can have on property investment cash flow and profits, it’s little wonder that late payments and rental arrears are among the most common fears voiced by property investors. In the worst case, you could be forced to sit on your hands helplessly while waiting for the courts to issue eviction notices. You’ll have no option but to abide by the rules for the buy-to-let landlord to evict nightmare tenants. If you have a tenant who falls into arrears, the next stop will be the complete default.
You don’t need the stress, financial problems, or costly legal process of reclaiming your property. Far better is to deal with rental arrears quickly before they get out of hand. Here, discover the most likely cause of rental arrears and how you can tackle them – better still, how successful buy to let landlords prevent them from ever happening.
Why do tenants fall into arrears?
Before I look at why rent is paid late or not at all, I want to give you a little peace of mind. In a 2013 study on the law on Access to Housing and Urban Renovation (ALUR), only around 2% to 2.5% of rents were unpaid throughout the year. In other words, only 2 out of every 100 tenants will cause you problems with late rent payment. Of these, most will retrieve the situation and make up any late payments.
Very few tenants default, and of those that do the majority do so for the same reason. The ALUR study found that 70% of all rental defaults were due to the tenant’s income falling. The most common grounds for this include:
- Long-term illness
These types of event are usually unforeseen by the tenant. It’s not like they want to shaft you, it’s simply circumstances overtake them. A lot of the reasons for a fall in income are difficult for people to discuss.
If a tenant loses their job, it’s natural for them to believe there’s a new opportunity around the corner. A few weeks go past, and a rent payment missed. No new opening is forthcoming. A bad situation slips, and, before they know it, the tenant is three or four months in arrears. It’s a hole that becomes increasingly difficult to climb out of. Unfortunately, as with all buy-to-let landlords, you get caught in the tenant’s problems. Their financial strife is transferred directly to you, via non-payment of rent.
How buy-to-let landlords deal with a tenant falling into rent arrears
If a tenant does get behind with their rent, it’s important to stay calm and take a structured approach to the situation:
· Track rental payments with a magnifying glass
The earlier you act, the more control, you’ll have over rental arrears. The key to this is putting a system in place that gives you an early warning of any problems.
When your rent is due to be paid by the tenant, check your bank account. Make sure the rent has been deposited. If 24 hours goes by without a sign of payment, get in touch with your tenant to make sure everything is okay. Timing helps tenants understand they’re important to you and you’re expecting their rent. Simple things really matter and set the tone for the relationship between buy to let landlords and tenants.
· Be a good communicator
Make sure you are a good communicator and keep in touch with your tenants. Your relationship is a business one, but that doesn’t mean to say that you can’t be friendly. If the tenant calls you, make sure you make time to listen to them. Return calls promptly. Always speak calmly, and never swear. If you treat your tenants with respect, they are more likely to reciprocate.
(You can read more about communication with tenants in our article series giving tips on how to be an excellent buy-to-let landlord.) If you need to call about a late rent payment, do so quickly and be amicable.
· Offer a solution
There is most likely a simple reason for a late payment. It could be that the tenant has been too busy, or just forgotten. They may have switched bank accounts and not transferred your payment instruction yet. A gentle prompt does the trick.
A common complaint from buy-to-let landlords is that their tenant is great in every way, except they’re always late in paying their rent. If this sounds familiar, speak to your tenant and ask why. Explain that you have a mortgage payment to make every month, and other regular costs to pay. The late payment screws up your budget and stresses you out a bit. If you’re empathetic to their situation, you’ll be surprised to see how accommodating and understanding they can be.
The most common reason for regular late payment is that the tenant’s pay date is after the rental due date. This is an easy fix, but one that many landlords fail to make:
- Change the rental due date to coincide with the tenant’s pay date.
- Speak to your mortgage provider (and any others to whom you make regular payments) to reschedule your payments for a couple of days after the new rent due date.
- Get your tenant to pay their rent by direct debit (“It’s easier for you and you won’t have to speak to me. It removes all your hassle etc.”).
What if the tenant really can’t pay?
It’s very unlikely that the tenant won’t have any funds to make a payment at all. After all, you’ve checked them out and done all you can to make sure you get the right tenant. If your tenant runs into a temporary cash flow problem, you could suggest an extension, or rescheduling of rent, or perhaps a short-term reduction of rent you charge. You won’t want to do this too often, but it’s my experience that a tenant who has fallen on hard times is more likely to pay something if the landlord shows some willingness – and something is better than nothing. When the tenant’s finances return to normal (for example, they get a new job after being made redundant from their previous position), the shortfall can be recouped under a scheduled overpayment.
These tactics should help you avoid a rent default and the need to evict your tenant. However, prevention is always better than cure.
How to prevent financial destruction because of rent default
While it’s difficult to predict if and when a tenant will fall into arrears because of the unpredictability of the events that lead to a tenant’s financial problems, there are steps you can take to reduce your risk.
· Tenant vetting
Know who it is that you are leasing to by vetting thoroughly. The more background you uncover, the more likely you are to detect a potential tenant from hell. You’ll want to:
- Run a credit check
- Contact their employer to check on their job and wages
- Contact previous employers to check on job history
- Contact previous landlords to check on their rental history
· Consider a guarantor
A guarantor is a third party who agrees to pay any shortfall of your tenant. It is standard practice when leasing to students or others that have no financial track record, or to someone that doesn’t have a rental history.
If you do decide to have a guarantor for a tenant, then make certain that the guarantor agreement is in writing. You should run checks on the guarantor too, and ensure that they live in the UK.
· Include a break clause in the tenancy agreement
You should, of course, ensure that your tenancy agreement is watertight. There are a number of conditions that you should include in the tenancy agreement, but you could also consider using a break clause. It will allow you to end the lease early under some conditions, and one of these could be a change in financial circumstances.
(Read more about break clauses in our article “To break or not to break, that is the buy-to-let landlord’s conundrum”.)
· Trust your gut instinct
Learn to trust your gut instinct. It won’t always be right, but if something feels wrong take notice of your concerns. They’re usually right and are trying to flag something to you. Ask a few more questions, and quiz references, employers, and previous landlords a little harder. You’ve got to be certain that the tenant is right for you and your property. If you aren’t, you’ll spend a lot of nights lying awake worrying.
I’m not suggesting you reject a tenant because of no more than a feeling, but to have that feeling and do nothing about it could be a big mistake.
· Insure yourself against tenant default
Sometimes you will wish you had taken landlord insurance. Insurance will reduce your risk by covering at least part of a rental default.
Not all landlord insurance is equal. Search the market to find the best policy for you: they vary in terms, conditions, and premiums. Read the small print, too – insurance companies are notorious for trying to avoid paying out on claims, no matter what type of insurance policy you hold.
Make rent arrears a concern of others
By following the above strategies, you’ll be able to cut that risk of rental arrears or default way below the minimal chance that statistics tell us is the default risk factor. However, as I’ve already said, the unexpected does happen. So, one final strategy: allow for the possibility of a couple of months’ late or defaulted payments in your cash flow projections. It will ensure that your finances are always prepared for a dip in your tenant’s financial wellbeing.
I’ll be examining some of the above strategies in more detail in future articles − keep your eye open for them, or contact me or one of the Ezytrac team on +44 1522 503 717 or more information as and when you need it.
Yours in effortless property management,
Brett Alegre-Wood MARLA MNAEA