It's hardly an advert for private landlords who rent to tenants on benefits. But the experiences of Nathan*, who lets properties to housing benefit tenants in Lancashire, are sadly far from unusual. Until now, the risks of property damage and rental arrears have been offset by the rewards of 'playing the system' and charging local councils above-market rents. Since the government declared war on Britain's £21bn annual housing benefit bill at , this loophole is set to be closed off.
Tabloid headlines have predictably focused on inner London landlords letting properties to large families on benefits, charging the taxpayer six-figure sums in rent. However, few reports have focused on savvy landlords who targeted areas in the north and Midlands where Local Housing Allowance (LHA) rates are high in comparison to rock-bottom house prices.
For the foolhardy investor, this adds up to hefty rental yields – you could buy a house in a bad area for £10,000 and rent it to a tenant on benefits for £2,000 a year. In the days of easy mortgage credit, buy-to-let property seminars were awash with these kinds of deals. Now, many landlords who clambered aboard what looked like a gravy train are set to hit the buffers.
Government cut backs
The Chancellor wants to slice £4.2bn off annual housing benefit spend within five years. Swingeing cuts to rents, levels of benefit and the introduction of caps will cause havoc for buy-to-let landlords and tenants alike.
Nathan is an experienced investor who bought a portfolio of five terraced houses in Burnley in Lancashire five years ago, paying around £35,000 in total. "The houses are well built. The problem is the tenants aren't," he says. "I didn't buy for capital gain, I bought for income. In this area, everyone is on housing benefit, and there are guaranteed rents of £65 a week."
In theory, this adds up to an astonishing gross rental yield of 48 per cent. In practice, Nathan has yet to make a penny of profit after five years. "Since the law was changed to pay benefits direct to tenants instead of landlords, rent arrears are my biggest problem," he says. Being based hundreds of miles away means Nathan has to rely on a managing agent to sort out problems – a system that's far from ideal.
"You don't know the tenant has moved out until the housing benefit stops, then you find out your property's been empty for 30 days and invalidated your insurance," he says. "If a tenant trashes the place, you have to fork out £3,000 on magnolia and new carpets."
Another of Nathan's properties in Eastbourne has been more profitable, let to a tenant on long-term sickness benefit. "He's been in the place for years, and is a regular payer. But if he gets a job, he wouldn't be able to afford this flat," he admits.
From April next year, housing benefit will be capped to a maximum of £400 a week for a four-bedroom house. This is forecast to displace as many as 14,000 households from expensive inner London boroughs such as Westminster to cheaper ones such as Newham and Barking, prompting comments from the British Property Federation that housing ghettoes will be created.
Next, the level of LHA rents across the whole country will be adjusted downwards. Currently, the median (middle figure) of private rents in a given area is used as the benchmark. From October 2011, it will change to the 30th percentile. Indicative figures published by the Valuation Office last week suggest average rent cuts of 6 per cent, rising to 15 per cent in London. If tenants can't make up the difference, the inference is that landlords will have to lower expectations.
Additionally, the long-term unemployed who have been receiving job seekers allowance for more than a year will see their housing benefit cut by a further 10 per cent. Critics including homelessness charities Shelter and Crisis have argued this makes tenants even more vulnerable to rent arrears. Importantly, the combination of these factors will discourage private landlords from accepting tenants on benefit.
Hidden benefits
But the reforms haven't put off every private landlord. Graham* owns a substantial portfolio of property in the north east, and says he's been letting to tenants on benefit for donkey's years. "It's like being a second hand car dealer," he says. "The mark-up is high, but it's the shitty end of the stick."
In problem neighbourhoods, it is possible to buy houses for as little as £6,000 from desperate sellers. Graham claims he can receive up to £3,000 a year in rent on these houses from local authorities - a 50 per cent return on equity.
"The problem is, the government have no idea what being on the dole in the north east is like," he says. "These tenants don't want the responsibility of having to budget and hand money over to the landlord every two weeks. Most can't read or write."
Graham adopts the unorthodox method of collecting rents in person every two weeks (LHA rents are paid to the tenant fortnightly, rather than monthly). "I will do this for the first four times. Then I'll send a letter to the council saying the tenant's eight weeks in arrears, which means they pay the rent direct to me. The tenant says, great, I don't have to worry. That's what they want."
Graham has targeted areas with high benefit dependency as he claims landlords get more from tenants on benefit that they would from the private sector. "All the landlords know how much LHA payments are in their area," he says. "If the maximum is £525 a month, we'll set the rent at that. But if you let the same house to a private tenant, you might only get £350 a month."
Local rates are published online, so it is easy for landlords and tenants to find out what is technically payable. Is it any surprise that rents have drifted up to the highest possible amount?
As LHA rates are set at the median level, in areas where housing benefit dependency is high, the system is effectively bidding up rents. The level of payout depends on which Broad Rental Market Areas a property falls in, but critics argue these are too large, and do not account for discrepancies in local housing markets. This creates pockets of extreme profitability for landlords owning property in the poorest areas.
Cheaper not better
"There is no underlying reform or improvement being made to the housing benefit system – it's just chopping out costs," says Vincenzo Rampulla, public affairs officer for the National Landlords Association. He believes London will be the most severely affected, as tenants will be forced to ship out en masse from more expensive areas.
"There is nothing to say there will be supply in other areas of London to meet this need," he adds. Creating a system that does not appeal to private landlords could backfire on the government. "If there aren't enough houses, the added demand will just raise rents in these areas," he predicts. "Local authorities I've spoken to are very worried about families presenting themselves as homeless. Then they're obliged to house them in temporary accommodation, which is much more expensive."
It seems certain that the quality of housing available to tenants on benefit will fall. "Ultimately, if landlords can't make the financial model stack up, they will reduce costs by cutting corners. That's what worries me," he adds.
Back in the north east, Graham accepts the new system will reduce his rents. So long as he manages voids and arrears aggressively, he's confident he will continue to have a very profitable investment. "If you don't rule with a stick, people will take advantage of you," he confesses. "If tenants don't pay up, they're gone within the hour."
He feels no remorse for playing the system, as that's exactly what he feels his tenants are doing. "It doesn't pay for tenants to get a job and pay their own way," he says. "Private landlords want a month's rent in advance, and a month's deposit as a bond. People round here just haven't got it. I will say to benefit tenants, forget about the rental bond, but the place is a bit rough so you'll have to decorate it yourself. Of course, they're never going to decorate it! It's just a polite excuse."
Graham lives locally, and manages his empire himself. However, he has noticed large numbers of houses in the north of England being bought by amateur buy-to-let landlords over the years. "They're living hundreds of miles away, and expect managing agents will sort out all the problems for 10 per cent of the rent," he says. "Ridiculous. When the rent is £65 a week, that hardly covers the petrol for driving to the property. So that's why these landlords are getting hit for huge repair fees, bogus admin charges, mark ups on changing the locks, and checking the gas safety."
London boost
Back down south, London landlords with properties in outer lying boroughs could see a rental boost. "I've got several properties in Lewisham which I rent out for nearly £900 a month privately," says David Lawrenson, landlord and founder of buy-to-let consultancy lettingfocus.co.uk. "I could get £1,040 a month if I went down the LHA route, but here's why I haven't. Paying benefit direct to the tenant makes it more risky, there is loads of form filling, and you have to wait ages for the money to come through. It has its upsides; tenants tend to stay for ages once they’re in. But in my experience, dealing with properly referenced private tenants is much easier."
The last tenant on housing benefit Mr Lawrenson let a property to was called Sarah. "I never met her, but she smoked so much she wrote her name with her finger on the stains in the ceiling before she moved out," he recalls.
Readers can rightly question the morality of the methods employed by the 'slum landlords' of today. The repercussions of selling off the nation's council housing stock have alarming social consequences, but as with every other public sector function that has been outsourced, the private sector has to make a profit to stay in the game. Are the landlords really to blame for playing the system, or is it the culture of dependency that spawned the opportunity in the first place? Like it or not, with no spare capacity in the system to take up the slack, the taxpayer will be forced to pick up the bill if these landlords disappear.
*Some names have been changed in this article.
