Seven reasons buy-to-let landlords turn back on benefit tenancies
In my last article, I introduced you to a buy-to-let landlord who had lost a small fortune by taking on a tenant on housing benefits. Cheryl thought she had struck gold by securing what looked like a respectable tenant. She thought the housing benefit he received would guarantee her rental income. Instead, she found herself in the buy-to-let landlords nightmare: tenancies that never pay.
Before I’m accused of being politically incorrect and tarring all tenants on benefits with the same brush. I do know buy-to-let investors who have great tenants in this sector. But they work their portfolios hard, making sure they stay on top of their tenants, carrying out inspections at new regular intervals, and with a magnifying glass constantly over their finances.
In this article, you’ll learn the reasons why I never recommend benefit tenancies as a buy-to-let strategy.
Your cash flow position will probably suffer
Tenancies produce income and cash flow. As a buy-to-let investor, you have a range of charges, fees, costs, and expenses to pay. Your bank won’t let you pay your mortgage late. If you are known as a late payer, tradesmen might refuse to work for you. And you certainly don’t want to get on the wrong side of the taxman.
Despite knowing this, local authorities almost always make housing benefit payments in arrears. That’s bad for your cash flow. Most rental agreements include that rent is paid one month in advance. Housing benefits tenants aren’t able to comply with this. You benefit from better cash flow by not having tenants who receive benefits.
You could be waiting months for your money
If you have ever tried to do anything through the local authority, you’ll know that it is a big, cumbersome beast that appears to move at one of three speeds: slow, stop, and reverse. The process of application, passing, and administration of housing benefits usually runs at one of these three speeds, too. There is a significant amount of red tape to cut through, with reams of form filling to be done.
A council inspector may need to arrange a visit to your rental property, to check that it complies with regulations and that it is what the tenant applicant says it is. It is pretty much a guaranteed requirement if your tenant is the first in the property to claim housing benefits.
While in payment, the local authority could delay, cancel, stop and start payments when it wants and as it seems fit. Your tenant might be telling the truth when they say that there’s been a hold-up at the council, and that’s why the last two months’ rent is not yet paid.
You’re unlikely to get the same deposit
Let’s be honest, if you’re providing tenancies to benefits claimants you probably won’t get the same amount of deposit. That increases your risk when the tenant does finally leave your property – you’ll have less money in the pot to put any damage right or make good any rental arrears.
Buy-to-let landlord insurance might be affected
Insurers don’t like tenants on benefits, and this should give you a clue how you should view them. Insurance companies base their premiums on probabilities. Tenancies that paid with the aid of housing benefits tend to be higher risk. Contents are more likely to be damaged or ‘lost’, and the property is less likely to be respected by the tenant. Tenants on housing benefits are also more likely to get into rent arrears. The statistics tell us this is so.
Your landlord insurance premiums will probably be higher when you take on tenancies based on benefits tenants. Some insurance options may become unavailable, too. In 2014, buy-to-let landlords Fergus and Judith Wilson sent eviction notices to their 200 tenants on housing benefits. The reason? They could no longer secure insurance to protect them against unpaid rent on tenants receiving housing benefit.
Higher landlord insurance premiums and a reduced cover are not an appealing thought.
Tenancies affect buy-to-let mortgages
If you’re considering letting to housing benefit tenants, you had better check and recheck the terms of your mortgage. Many mortgage lenders include conditions that your investment property can’t be used to provide a home for a tenant on benefits or income support. Their experience is the same as that of insurance companies.
While some market watchers think this is absurd, remember that mortgage lenders have a vested interest in your investment. If it doesn’t make the rental income expected or suffers damage that reduces its value, your property ceases to be the valuable asset on which the lender agreed to extend financing.
Prepare to pay higher interest payments. And not be able to get the mortgage you need to secure your property investment if you let to people on housing benefits.
(When you are looking for finance for your investment, always access the benefits of using a buy-to-let mortgage broker.)
Housing benefit isn’t the rental guarantee you think it is
As Cheryl found out to her great expense, housing benefit doesn’t ensure payment of rent.
For a start, the tenant could have the housing benefit paid to them. You then trust them to pay you. If they don’t, that’s your lookout. Don’t expect the local authority to be on your side: they don’t care if your tenants pay or not.
But I’ll tell you what the local authority cares about. It will care about you if it finds out the tenant has acted fraudulently when making a claim for housing benefit. The council will be just as likely to come after you for repayment of overpaid benefits as it will be to go after the tenant. The onus will be on you to prove that the tenant didn’t pay their housing benefit to you as part of their rent. If you can’t do that, you might find yourself in a legal battle over thousands of pounds of wrongfully paid housing benefit.
Are you prepared for change you have no control over?
As if these six realities aren’t reason enough to decide not to let to tenants on benefits. Here’s one more: local authorities and the government are likely to move the goalposts at any time. Continual funding cuts from local authority budgets.
The government has already limited total benefits to claimants and looks likely to do so again in the future. At any point of time, there could be changes in the amount and method of payment for your tenant’s housing benefit.
By deciding not to let to benefits claimants, you remove a big slice of confusion and constant concern from your life as a buy-to-let landlord.
Please feel free to contact us by phone +44 1522 503 717, or use our online contact form for information about our services. We will make sure that you and your properties are prepared for any dispute over tenancy deposits.