20 years ago, roughly two-thirds of 25-34-year-olds in London and the Home Counties were homeowners. Today, that figure is halved. The sharp rise in house prices relative to incomes, particularly in the South East, has transformed the residential lettings market into a lucrative business.
Residential landlords now have a wide variety of eager tenants to choose from. But in order to serve their chosen market knowledgeably and effectively, it’s important to understand the particular needs, characteristics and level of risk associated with each group. Let’s take a look at the 6 major types of tenants.
Tenants that are also relatives can be a convenient arrangement for both sides and a highly attractive proposition for residential landlords. Renting to a family member has the advantage of doing away with the cumbersome business of having to search for and screen a suitable tenant. There is an implied greater level of trust based on the simple fact that a member of the family has already been vouched for.
In this situation, it is tempting to forego standard formalities such as tenancy agreements. However, the risk of not following formal procedures can be significant. Not all family relationships are harmonious and even family members can fall out. Having a written agreement in place should be an essential precaution to prevent confusion and disputes.
What’s more, many buy-to-let mortgages specifically forbid having a family member as a tenant, unless you choose a specialist family buy to let mortgage product. Finally, the desire to offer discounted rents to family members is at odds with lenders’ requirements to charge rents of 125% or more of the monthly mortgage payments.
Working professionals must surely be every residential landlord’s dream tenants. The appeal lies in the security of a steady, permanent job guaranteeing rental payments with little chance of arrears arising. With everyone out working every day, there’s less noise to contend with, less wear and tear on fixtures and fittings and less hassle all round.
Modern or newly built 2- bedroom houses and flats are most suitable for this market. Maintenance costs are low and they suit the profile of young, professional and reliable tenants who are renting while saving up for a place to buy.
Working professionals are highly sought after tenants, meaning they have greater bargaining power than other types of tenant – which could be a problem. What’s more, no tenant is risk-free. Would you be told if your tenants became unemployed? Would they still be able to afford the rent, and pay promptly? Would your existing insurance policy still be valid?
Families with children
The number of families renting their homes has increased dramatically in recent years. In contrast to 5 years ago when young single professionals and couples constituted the biggest tenant group, families are now the most common type of household in the residential private rented sector.
The advantage of renting property to families is stability. Their tenancies tend to last longer; they’re looking for a permanent home for settling down. Unable to afford to buy their own home, they find themselves trapped in the rental sector.
Family tenants look for unfurnished properties, preferably with some outdoor space for children to play. Close proximity to schools, shops and transport links are a bonus, driving up yields.
Properties shared by three or more unrelated tenants renting individual bedrooms, often on separate tenancies, are known as Houses of Multiple Occupancy (HMO). Recent changes in the legislation mean that properties with five or more occupants comprising two or more family units will also require an HMO licence.
For residential landlords, dividing up a property and renting it as an HMO requires the most admin work, navigation of regulation and property maintenance and upkeep. However, if you don’t mind putting in the extra work, the financial returns can be significant. Some London landlords reported double-digit returns on their HMO rentals in 2016.
On the basis of yield alone, assuming you can keep void periods to a minimum, this makes HMOs a highly attractive proposition for landlords, particularly those who are mortgage-free. It should be noted that many mortgage lenders are reluctant to lend on HMOs or rental properties that require major renovation.
For rental properties in or near university towns, the student market is an obvious choice. Students tend to be unfussy tenants, valuing the convenience of being close to campus (or at least have decent transport links) rather than prime residential areas.
No longer seen as irresponsible and high-risk occupants, today’s students are reliable tenants. Their accommodation costs are covered by student loans, while their parents typically act as guarantors. International students will often pay 6-12 months upfront for their accommodation, especially if they don’t have a UK based guarantor or they can secure companies like Housing Hand who can provide a UK guarantor service for these students.
As long as a guarantor is in place, and a comprehensive inventory is taken at the start and end of the tenancy, student lets can be a lucrative option, with rental yields in some parts of the UK reaching 10%.
Tenants claiming benefits
This is the least popular group of tenants, for all the obvious reasons: general financial instability, a higher risk of rent default, housing benefits no longer being paid directly to landlords by the council and recent irregularities with Universal Credit payments. What’s more, your insurance company may refuse certain types of cover while some BTL mortgage providers may not be interested in financing a rental property with tenants on benefits.
However, there is nothing intrinsically ‘bad’ about renting to people on benefits. And with around 20% of the 4.5 million households in rented accommodation being in receipt of housing benefit, it’s a big market residential landlords would do well not to ignore.
Establish clear ground rules and procedures right at the outset to safeguard your interests. Vet prospective tenants carefully to get an insight into their rental history, make sure you make a deposit of at least one month’s rent in advance and insist on a strong rent guarantor.
This article about “Residential landlords: What’s your favourite type of tenant?” was written for Housing Hand – the Award-Winning UK Rent Guarantor Service by Annie Button. For more information on how you can work with Housing Hand, visit housinghand.co.uk or call 02072052625 and select option 2.