Some landlords avoid tenants on benefits - others love them and actively seek to work in this corner of the market. Here we explore the pros and cons of renting to LHA tenants and offer some tips on how to handle the financial side of renting to benefit recipients.
The acronym LHA refers to Local Housing Allowance (Housing Benefit) which will cease to act as a standalone benefit, and will be merged into Universal Credit during 2013-2017. Other terms in common usage are DSS (the old Department of Social Security) and tenants in receipt of benefits.
So why would you choose to rent to tenants who rely on benefits to pay their rent? For most property investors and landlords this section of the market has only negative connotations. In fact at point of writing only 3% of all SpareRoom offered ads state "DSS OK".
LHA tenants are typically associated with higher than average maintenance costs (as unemployed tenants are likely to be home more) and late or non-existent payments. Weak relationships between landlords and councils can also have an negative impact.
But a good number of landlords find this niche an extremely profitable and worthwhile area to focus on. Not only are they providing necessary housing options to a chunk of the population who would otherwise struggle to put a roof over their heads, but they are making good money too. So what's their secret?
Before you invest in property to rent to LHA tenants
The first thing to consider is the location of a property. As ever it's location, location, location. If a property is in a less than desirable location for working tenants (i.e. not in easy reach of public transport, in a dowdier area, far from decent shops and entertainment facilities) it's likely to have a much lower capital value than a house of equivalent size in a more desirable location. This means you'll have a much lower outlay but you can still expect a good return. This is because LHA levels are set for a large area, and will take into account rent levels in the sought after streets as well as those on the wrong side of the tracks. Many professional landlords capitalise on these anomalies and are able to achieve as much as 40% higher yields than on properties with higher capital value in the same area.
Make sure you do your homework - understand the rates payable by local authorities and check updates and changes to benefits. Get to know your local authority contacts and build relationships, as these will be invaluable if there are issues later on with payment of rent. Don't forget that since January 2012, single claimants under 35 are now entitled to the standard room rate in shared accommodation, meaning there should be plenty of demand for rooms at the lower end of the market.
A good starting point for information is Shelter's Guide to Housing Benefit and Council Tax Benefit, available from Amazon.
When you're doing your calculations you'll want to factor in the increased cost of insurance. Most insurance companies charge high premiums for properties tenanted with benefits recipients, as the perceived risk of damage is high. These tend to be even higher than the premiums for student properties.
Finding the right LHA tenants
Not all tenants are the same, and LHA tenants can have many advantages. If you find the right ones they may stay long term, be less demanding than professional tenants, and be generally grateful to have a decent roof over their heads. Long term tenants of course mean less paperwork and fewer void periods. Before you accept any applicants, make sure you've undertaken comprehensive tenant referencing. It's also a good idea to meet tenants at their current residence to do the paperwork, as this will give you a good idea of how they'll look after your place. Make sure you do a full inventory a get a guarantor in place in case rent is not paid. You might find it useful to have a simple document explaining their key responsibilities within the AST, written in plain English, and get them to sign to acknowledge they've understood it.
LHA landlords are often prepared to go the extra mile - as they as well as their tenants will benefit. Help your tenants to fill out their claim forms and submit them as early as possible - this will help you to ensure you get your rent on time. Make sure they sign to say you can speak to the council about issues relating to the property with reference to them, otherwise the council may quote the Data Protection Act and refuse to discuss matters with you. Keep copies of everything and make a note in your diary of who you spoke to when and what was agreed.
Getting the rent paid
Get your LHA tenants to set up their rent payments as standing orders or direct debits. You may even need to help them set up a credit union account if they don't qualify for a bank account.
Whilst direct rent payments to landlords have not been the norm for some time, it has been possible to make a claim to request direct payments if you build up evidence showing that the tenant is vulnerable and likely to be left homeless through non payment of rent. It is unlikely that even these arrangements will be able to continue with the introduction of Universal Credit from October 2013, and likely to kick in for existing claimants from 2015. As Universal Credit will be provided through an online service, it is also expected to be more difficult for landlords to resolve payment issues by speaking directly with their contacts at the local authority. It has further been announced that in an effort to save money, the Government will increase LHA rates in line with CPI instead of market rents in each area, meaning that the connection with market rents will be lost.
One other thing to watch out for is overpayments, which can happen when the local authority makes a mistake and pays too much. Councils can try to claim back any overpayments they have made up to 6 years after a tenant has left the property. The best advice to avoid this situation seems to be getting a guarantor in place and making them liable for any overpayment debt. If a tenant leaves without notice and you receive an overpayment claim, it is possible to appeal.