Unemployment Amongst Tenants
As the credit crunch looms large, an increasing worry of mine is that one of my tenants loses their job and the potential ramifications for me as the landlord.
One thing that I can do to reduce the financial risks as a landlord is reference my tenants properly to ensure that I get the right tenant in the first place. From now on in particular landlords need to be paying more attention to a prospective tenants job. A couple of years ago a bank employee, mortgage broker or estate agent all might have seemed to a landlord as a pretty good catch. A reasonable income, a fairly secure job in turn allowing the tenant to pay a reasonable rent. Not anymore!
I now tend to agree with one of my fellow property investment commentators David Lawrenson in that an ideal tenant would have a nice safe job in the public sector, not necessary be a high flying executive. Give me a teacher, a nurse, a local authority bod; anything but a banker. The proposed merger of HBOS and Lloyds means that thousands of those tenants will be destined for the ‘scrap heap’ over the next couple of years.
What kind of tenant reference?
The nature of tenant referencing is that there are many levels. Bronze, silver….director……..professional landlord. In essence despite all the marketing spiel there are really only two levels.
The basic level of referencing is a reference using one of the major credit rating agencies such as Experian or Equifax. These agencies will either directly or through a credit reference company produce a tenant reference report on the following-
• Electoral roll to verify the tenants current and previous address
• County Court Judgements (CCJ), bankruptcy and any court based voluntary financial arrangements to ascertain whether the tenant has any poor credit history
• An affordability check to ensure that the tenant can afford the rent on their stated earnings
• Validate the bank address and sort code given by status to ensure it is legitimate
• Check the submitted details against any relevant stored data
The tenant reference report is also likely to contain a recommendation whether the tenant is likely to make a good tenant.
The most important information for landlords to come out of these type of credit checks is whether the prospective tenant has a County Court Judgement (CCJ). If they have a County Court Judgement (CCJ) it’s not good. It means that in the past a creditor has had to take the tenant to court because of non payment of debts. Often landlords find that some individuals are serial debtors and have a number of County Court Judgements (CCJ)’s against them which means that they are bad news for landlords.
This level of tenant reference will give a landlord a basic financial background on the tenant and should cost them around £10.
The next level of tenant referencing involves the taking of references. This means in reality that the tenant referencing company will contact the references in order to ascertain that the details given were not made up or related to non existent characters.
To get one of these references a landlord is looking at forking out approximately double the cost of a basic reference and slightly more if they want it done on the same day.
Tenant referencing backward looking
The reality however, is that all this information is backward looking. A banker, estate agent and mortgage broker may have an impeccable credit history. That was then, but the economic environment is changing fast. As a landlord you don’t necessary want to be ‘left holding the unemployed tenant baby’!
What happens if the tenant becomes unemployed?
What happens to the tenant if they lose their job depends largely on the tenant’s financial position. It should have no direct impact on the tenancy as long as the tenant continues to pay their rent. However, more frequently the sudden loss of employment could result in financial hardship for the tenant.
Something has got to give and this often means that the tenant stops paying their rent. Where an unemployed tenant wants to stay in a rental property and where a landlord is happy to retain them, this could mean a period of rental voids whilst the tenant applies for the local housing allowance.
The safe route for a landlord would be to serve the tenant with a section 21 notice or section 8 notice if the tenant is more than 2 months behind on rent ,seeking possession of their buy-to-let property. Then once a landlord has possession of their buy-to-let property to re-let to an employed tenant.
Can landlords take precautions?
The landlord is not completely powerless against the prevailing harsh economic winds. A landlord can take out rent guarantee insurance.
Rent guarantee insurance is available to landlords and is often offered to a landlord by the company that carries out the tenant referencing. Landlord insurance companies frequently offer a rent guarantee as an additional package. There are numerous companies that offer tenant rent guarantee insurance.
How much should it cost?
I recently sorted out a quote for tenant insurance on one of my properties. The cost for 12 months of cover using Endsleigh tenant guarantee insurance on a property with a monthly rent of £500 was £99. This equates to 3.3% of the gross rent. In my view, not bad value for money if a landlord is genuinely worried about receiving their rent.
What does a landlord get?
• Protection against rent arrears whilst Endsleigh handle the claim
• Legal cover – defence and prosecution
• Covers all types of tenants who have successfully completed the referencing
• Cover 50% of lost rent for 3 months in between a successful eviction and finding new tenants
In my view, in the current economic climate, even where a landlord finds a tenant that has an acceptable reference, a landlord needs to look very carefully at the nature of their employment. If they are unsure about their future employment prospects then tenant guarantee insurance offers a landlord a no risk solution to guarantee their future cashflow. Strong cashflow as any experienced landlord knows is essential for the long-term prospects of your rental business.