"A recent survey of landlords showed that almost two-thirds are questioning whether they will continue letting to people on local housing allowance once the cuts come in," says Campbell Robb, Shelter's chief executive.
London is the obvious problem zone, but Shelter’s research shows that outside of the capital, there are 780,000 households renting privately who are in receipt of housing benefit. A third of these claimants stand to lose £50 a month or more in benefits when the cuts are applied. Coupled with a change in the law which means benefits are no longer paid direct to landlords, the fear of arrears is too great for many.
Shelter is campaigning for tenants to be able to choose to have rents paid direct to landlords to help manage their finances, and incentivise landlords to stay in the market. But other investors see greater investment potential in housing low-income tenants, and despite the looming cuts, have found ways of making the model work. Some landlords are confident enough to buy whole blocks of flats from the hands of administrators specifically to house tenants on benefit. Additionally, a crop of private tenant management companies have appeared to assist landlords in the search for reliable housing benefit tenants.
No room at the inn
"Landlords can get better returns by renting to social tenants as they stay in properties for longer," argues Damon Thomas, managing director of FastTrak, a social tenant vetting service established three years ago which works with landlord clients across the UK.
"The UK rental market is very transient, and 60 per cent of tenancies last for 12 months or less," he says. The void periods that occur between tenancies erode rental returns. However, in the social rented sector, tenants stay for much longer. "Sixty per cent stay in the same property for more than five years, which eradicates voids and protects rental returns," he says.
So find a good tenant, and your returns - and your property - will be in good order. The problem is, how can landlords tell? How FastTrak and other firms work to minimise the risks of letting to a bad tenant makes very interesting reading for landlords.
“There are lots of letting agents up here who have signs in the windows saying ‘No DSS’ as landlords think the risks of letting to housing benefit tenants are too great,” says Steve Perrons, managing director of Perrons Davis, which owns and manages privately rented properties in Hull.
Unusually, the firm exclusively caters for housing benefit and low-income tenants, as it believes there is a gap in the market for providing properly managed property lettings in this area. And before you ask, they’re not a charity – Mr Perrons is an experienced property investor, and targets double-digit returns on such lettings.
Previously in the Investors Chronicle, we have heard from housing benefit landlords who have lost tens of thousands of pounds through unpaid rent and property damage (see our article , 09 July 2010).
“Firstly, I should say that I’ve learned everything I know by making a lot of mistakes in the 15 years I’ve been a landlord,” Mr Perrons says frankly. He was tempted into becoming a landlord by the low prices of property in Nottingham in the early 1990s. “Houses in certain areas could be bought for less than £20,000 and let to tenants on benefits or low incomes,” he says. He later went on to target Doncaster and Hull, both areas of high rental demand where property prices have remained relatively low, meaning income yields are attractive. "The best aspect of this market is that tenants tend to stay put for a long time, meaning reliable long-term income for landlords," he says. But he is the first to admit, investing in this sector has not been plain sailing.
“Over the last 15 years, we’ve had murders in properties, dead bodies being found, properties being completely trashed, rents not being paid, you name it,” he says. The most horrific incident involved a tenant who tried to blow up his property for the contents insurance, but didn’t get out in time. “These are the extreme examples from a long time in the sector, but you learn from every one.”
Unaffordable housing
The key to both FastTrak and Perrons Davis's approach is assessing affordability. "The main problem is that local authorities don't calculate housing benefit until a tenant has actually moved into a property," Mr Thomas says. "Local housing allowance is a backwards system. Tenants don't know how much they'll get, and how much they'll have to spend from their own income." With the impending cuts, working out if they can afford the commitment they're taking on is much harder to judge, upping the risk of rental arrears and eviction.
FastTrak can predetermine levels of housing allowance for given properties, and shares data with government agencies in order to do so. Mr Perrons has a similar system, and his golden rule is that tenants will never be offered properties where the monthly rent is more than 5 per cent over their local housing allowance. This means that 95 per cent of the rent can be met by their benefit payment, with only a small shortfall coming from other funds, meaning there is less likelihood of arrears from day one.
His vetting of tenants includes checks for previous housing benefit arrears, plus the tenants’ family circumstances are taken into account. Couples and single parents with children are the lowest risk group, in Mr Perrons’s 15 years of experience. Surprisingly, two single girls sharing a property leads to the most problems (arguments, leading either to property damage or one moving out and the other being unable to manage the rent are both common). Single men under the age of 25 are also higher risk. None of these factors individually preclude a letting, but a combination could do.
Housing red tape
Once vetted, both firms manage the complex form-filling process. "Tenants aren't generally the problem, it's the local authorities," says Mr Thomas. "We do all the work to ensure the housing benefit application is pre-packaged, and will be rubber stamped." FastTrak will even guarantee payments to landlords who are fearful of local authority bureaucracy.
Mr Perrons adds that a high number of housing benefit tenants his office deals with are completely illiterate and stand little chance of filling out complex benefit forms. The firm also assists with this, and even makes tenants appointments with the local housing office. “This sounds like an awful lot of administration, but it’s worth it,” says Mr Perrons. On average, his rents are paid within 6 days, rather than the average 8 to12 week wait most private landlords experience. This also minimises the risk of the tenant getting a huge cheque for several week’s rental arrears, which they may be tempted to spend rather than pass on to the landlord.
Perrons Davis won't let to tenants who cannot provide a parental guarantor, and notes the advantages of involving parents in property management as they will check up on their children. A further advantage is that housing benefit can be paid directly to the guarantor, who in many cases is more likely to pass this onto the landlord than the tenant. “Many tenants do not even want the responsibility of having to handle rental payments and budget, but that's the system,” he says.
FastTrak has landlord clients who have purchased entire blocks of flats in Liverpool, Kent and East London to populate with benefit tenants. "Unemployment is rising," notes Mr Thomas. "Lots of the people we're letting to are yesterday's private tenants who are now on income support. There is a stereotype and prejudice against tenants on benefit, but those causing problems are the minority, not the majority."
