The likelihood of your tenant not paying their rent is low, especially if they’ve been referenced by Reeds Rains.
Our own tenant tracker showed that in Q1 2016, 86,200 tenants were more than two months behind with their rent, which is just 4% of let homes.
As a result, it’s wise for landlords to consider whether it’s worth taking out rent protection insurance, or whether to risk being one of the 4% or more who end up with tenants that don’t pay their rent. If 4% sounds like decent odds worth taking to save some money; then read on! Having tenants in arrears means not only losing rental income, but also incurring associated costs. And this rational assessment is only part of the story, Don’t underestimate the emotional impact of a tenant who is unable and unwilling to pay your rent.
What are the costs when a tenant doesn’t pay their rent?
Initially, the costs may be few and far between. For example, sometimes rent doesn’t get paid because of a short-term issue, such as a problem with the bank’s payment systems or the tenant being temporarily unable to work because of illness. This kind of short-term issue can often be fixed fairly easily, by the tenant either making up the arrears in full as soon as possible or paying extra for the next few months. In this case, the likelihood is that you as a landlord wouldn’t lose any money at all and therefore wouldn’t need to rely on any rent guarantee insurance.
However, for every month that a tenant goes into arrears, you not only lose their rental income, you also have to continue to pay out the property costs. For example, here are the cumulative costs over a three-month period if a tenant doesn’t pay their rent:
|Lost rent*||Costs without a mortgage**||Costs with a mortgage**||Total loss|
*Average rent in England and Wales was £798 in February according to our BTL index https://lsl-assets.s3.amazonaws.com/lslps/uploads/media_file/buy-to-let-index-feb17.pdf assuming 5% yield and a property value of £191,520.
**Estimated landlord insurance, maintenance and a 50% LTV mortgage as costs
If you need to take the tenant to court to evict them, you could have to pay court fees of around £355 and a bailiff’s fee of around £110. And if you hire an eviction company to do the work for you, the cost could end up being around £1,000.
Overall, the likely cost of 3 months’ rent arrears and evicting the tenant could be around £5,000. How would you feel if you had to sacrifice £5,000?
How does rent insurance work?
There are different ways to protect yourself against ending up with the costs outlined above. Most policies will include some form of rent payment if your tenant stops paying and cover for legal costs you might incur in both evicting the tenant and chasing them for rent after they’ve left the property.
At Reeds Rains, we offer a Rent Protection and Legal Expenses insurance, which is provided by Aviva, one of the largest insurers in the UK. The insurance offers:
- 100% of monthly rent for as long as 12 months (up to a maximum total of £35,000)
- Up to £15,000 of legal expenses to pay for regaining possession of your property from a tenant
- Up to £15,000 to evict squatters who are in your property unlawfully.
We can offer this insurance to those landlords who take advantage of our Rent Collection or Full Management service, as this reassures the insurance company that the tenant will have been correctly reference checked and, through our periodic checks, we will have uncovered any issues that could lead to rent arrears as early as possible.
Example of the cost of Rent Protection Insurance***
|Monthly Rent Protection Insurance:||£16.50|
***To note: price example shown is calculated at 2.5% of monthly rental income plus Insurance Premium Tax, current prices due for review 01 June 2017
As such, the consideration for you is weighing up the cost of this insurance, which we consider relatively low, against potentially losing anything from a thousand pounds to upwards of £5,000 if you have to evict a tenant.
For more information, visit https://www.reedsrains.co.uk/landlords/rent-protection-insurance and do call us on 01392 849 761 if you’d like to discuss taking out this cover.
** Terms and conditions apply. This information is a summary only. You will receive a full policy document upon application, which will set out the terms, conditions and limitations of this product.