There are many questions residential landlords need to consider when they are thinking about letting a property. Crucially, these include how, and to whom, the property will be let. In practice, the former often dictates the latter. These decisions will have significant implications for the landlord’s property owner’s insurance – implications that are well worth being aware of from the outset.
Letting options
Landlords have several options when deciding how to let a property. Each has its benefits and
drawbacks. So it is important for landlords to consider their individual circumstances and requirements carefully before deciding which path to take.
Among the most common letting options are:
Private rental agreements;
Rental via a letting agent;
Social housing placements.
Private rentals
Private rental agreements are tenancy agreements made directly between a landlord and
a tenant. Landlords who choose this approach retain full responsibility for the management of their property and the letting process – from marketing the property and creating tenancy agreements to carrying out maintenance and handling evictions.
Although this can create some extra work for landlords, retaining control of management
can provide greater confidence that their asset is being maintained to the standards they expect. Sourcing your own tenant and signing a tenancy agreement directly with them, also creates an opportunity to forge a long-lasting, trusting relationship.
Retaining control also allows landlords to use their own trusted contractors for any maintenance required. This allows greater quality control and avoids additional service fees that might be incurred when letting through a third party.
As well as avoiding third-party service fees, landlords who let privately can also pay less for their property owner’s insurance. Tenants who have signed an assured shorthold tenancy (AST) agreement directly with their landlord are typically viewed more favourably by insurers.
Letting through an agent
Landlords may opt to relieve themselves of some of the responsibilities of managing their
property by going through a letting agent. Letting agents typically offer three service options: tenant search, rent collection, or full management service.
The services of a letting agent can be valuable if landlords have neither the time nor the desire to handle every aspect of managing their property, as an agent will relieve them of some of this workload.
However, letting agents’ services come at a premium. This may take the form of a one-off
fee or a proportion of the monthly rent, ranging from 5 to 20%, depending on the
service.
Landlords should also carry out due diligence on prospective letting agents to ensure
they can be confident of getting an appropriate level of service. Poor service can result in extra work and costs further down the line.
Insurers may not view letting via an agent too differently to private letting. This will depend on the type of tenant occupying the property. So it is important for landlords to know exactly who the agent is placing into the property. For example, an agent might place a tenant who is claiming benefits, referred to by insurers as a Department of Social Security (DSS) tenant. Many insurers deem DSS tenants higher risk due to the potential complications that can arise if the tenant has difficulty paying their rent. For this reason, insurers are likely to require a higher premium and/or excess or to impose cover restrictions.
Social housing
Another alternative is for landlords to rent or lease their property to a social housing provider like a local council or a housing association. The housing provider effectively becomes the landlord’s tenant, and then sub-lets to the property occupants.
Letting a property to a social housing provider can be a great way for landlords to make an almost wholly passive income from their property. The housing provider will generally manage every aspect of the property and provide the landlord with guaranteed rent each month, even when the property is unoccupied. Most social housing providers will also provide an assurance that, when the contract ends, the property will be returned in the same condition as when it was handed over.
The prospect of guaranteed income, with someone else doing the work, is naturally very appealing for landlords, but this needs to be weighed up against some potential drawbacks to this approach.
The rent might be guaranteed, but the standard to which the housing provider manages a property may not be. Improper maintenance can result in long-term disadvantages for the landlord, particularly if they are tied into a long-term contract where obtaining a quick resolution is not feasible.
When entering into this kind of contract, landlords lose a great deal of control over the property, particularly when it comes to tenant placement. Social housing providers often place tenants who many insurers deem high risk, including asylum seekers, ex-offenders, and other members of society considered vulnerable by the state. Landlords may not always be fully aware who is in the property, which makes it difficult for them to evaluate the risk. Most insurers therefore calculate their exposure based on the highest potential risk, with
many simply declining to take on this exposure.
What is the best option for landlords?
There is no one-size-fits-all solution for landlords considering how to let their property. Individual landlords should consider their particular circumstances and make an informed decision based on their personal expectations, time constraints, and insurance requirements.
If you would like to know more about the various ways of letting a property and how insurers see them, we would be happy to hear from you and discuss these issues in more detail.
