When tenants don’t pay up… don’t get a fiscal headache
The key to buy-to-let as a performing investment is that rental income should exceed mortgage costs and maintenance. It used to be that mortgage lenders required rental income to equate to at least 130% of the interest payment on the mortgage. Over the past year lenders have relaxed this stipulation, reducing the percentage to 125%, and in some cases to as low as 100%.
Whatever this equation and the level of loan value you achieve on the mortgage deal (some allow 90%), it could all dissolve into financial tears if there's no rent coming in. Lack of tenants can be rectified by advertising, which is usually successful if you've chosen your property and its location well. The real fiscal headache comes when you have a tenant who is disinclined to pay the rent. What do you do that stays within the law?
Prevention is the best solution
You could avoid the problem of non-paying tenants by handing over rental management to a letting agency (members of the Association of Residential Letting Agents or ARLA abide by a code of conduct and a complaints procedure). But there's a cost involved: usually around 10% of the first year's rent to find and install a tenant with all the necessary paperwork implemented and then, if ongoing replacement is required, a further fee, typically 15% of the monthly rental income.
If you plan on managing the property yourself then careful vetting of potential tenants becomes essential. Run a credit reference check, for instance with Experian (www.tenantverifier.com). When the tenant comes to view the property, ask to see photo identity such as a passport and bills giving evidence of their current address, income details and/or bank statements as well as references from their existing landlord.
Use the viewing process to ask the right questions
You need to know whether the potential tenant can pay the rent and how it will be paid. You also need to explain carefully how you deal with tenants if they do not pay their rent. If accepting a tenant who is in receipt of benefits, then stress it is still their responsibility to ensure the rent is paid on time.
Explain your strategy for non-payment such as the serving of notices, court action and eviction. Asking questions about affordability is crucial. If, for example, money has been borrowed to pay the deposit and initial rent, how are future rental commitments going to be met?
Make sure the tenancy agreement is fully understood, particularly regarding obligations, and don't sign them up until you have the deposit and the first term's rent, usually a month or the first quarter. Also if you want to be guaranteed this payment obtain cash or bankers draft.
Explain the exact details of how rent is to be paid; specify in writing the amount, the date it is due and the method of payment, standing order is a good way. Also detail in writing the consequences of not paying rent.
Your vetting procedure has failed
If, after taking these measures, the tenant can't or won't pay the rent, note that it is a criminal offence to evict tenants by any other means than court action. On the other hand, it is also probably best not to rely on promises to pay. If they are not kept your financial situation will only worsen.
What to do about it
Serve a possession notice and if no rent is forthcoming by the expiry of the notice period, commence legal proceedings. Seek professional advice on the grounds for possession stated on the notice, which these grounds can be relied upon in court. An accelerated possession procedure can also be used where an assured shorthold tenancy agreement (ASTA) is in place or where there is a written form of tenancy agreement.
The vast majority of private landlords use the ASTA (introduced in the 1988 Housing Act) albeit with various modifications. A valid form of section 21 needs to be served and notice expiry time (two months) allowed. Use the special accelerated possession procedure form and ensure all relevant documents are sent to the court. If successful in your action, you will receive an order for possession and an order for the tenant to pay fixed costs.
Where rent arrears exceed two months, compensation on rent arrears grounds should be sought. Following the serving and expiry of the appropriate notice (section 8), you then use normal possession proceedings, also known as fixed date action. You attend the court and give evidence of the rent arrears due at the time of the hearing.
A successful claim will bring an order for possession, a money judgement for the rent arrears owing, an order that the tenant pays you an occupation rent, and an order that he or she also pays your legal costs (the level of which will be assessed by the Judge).
Note that if the rent arrears are paid before the court hearing date you will not be able to obtain a possession order - bad news if you want rid of the tenant. A way round this is to serve a section 21 notice, wait for the longer notice period to expire and then use the accelerated possession procedure. Note also that it is difficult if not impossible to enforce a money judgement after the tenant has left your property, unless an attachment of earnings order can be obtained.
If you would like to discuss your specific property requirements with us please e-mail or contact us to arrange a meeting.
Your property may be repossessed if you do not keep up repayments on your mortgage.
For mortgage advice you can choose how we are paid: pay a fee, usually 0.5% of the loan amount, or we can accept commission from the lender.
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Prior Knowledge
Caxton Point
Caxton Way
Stevenage
Hertfordshire
SG1 2XU
Tel: 01438 726464 |
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