Landlords, here's how to mitigate risk against tenants from hell

Landlords, here

By David Alexander, Managing Director

As millions of small investors in stocks and shares ISAs are aware, “past performance is not an indicator of future returns. The value of your investments can go down as well as up” – or words to that effect.

With investment in residential property, future returns are not guaranteed either. By choosing, first, the right location and then a suitable product the investor should be able to look forward to a reasonable level of overall return, based on rental income and capital growth, despite a government crackdown on tax incentives. But, as in life generally, nothing is certain.

The one uncertainty which, potentially, affects every landlord is being landed with a rogue tenant; someone who not only reneges on rental payments but who by playing the system is able to draw out the eviction process for a lengthy period – often from six to nine months, during which time, of course, they are effectively living rent-free. In practice, properties let to low-earners with insecure jobs or to benefit claimants tend to be hit most but the problem is sometimes found even in high-end locations; in fact some expensive, luxury apartments are targeted by well-dressed, plausible fraudsters who move in with no intention of paying anything beyond the deposit and first month’s rental.

Of course, many tenants who get into arrears are genuinely down on their luck, perhaps through loss of a job or long-term sickness. However, sometimes priorities seem to be a bit skewed – as reality shows on television which record evictions indicate, some of the tenants claiming an inability to pay for the roof over their heads still seem to be able to afford broadband, laptops, smartphones and HD televisions.

And while it is natural to feel sorry for tenants in unfortunate circumstances, it is also worth giving a thought to the other victim – the landlord who, invariably, is not a wealthy investor/developer but an ordinary person holding down a full-time job and for whom loss of rental income makes a serious dent in his or her own household budget. While it is possible for landlords to insure themselves against accidental damage by tenants, or for loss of rental income as the result of a fire or water ingress, it is almost impossible to secure cover against a tenant trashing a place or loss of rental income through deliberately withholding payment.

While a guarantee of serious financial loss as a result of tenant travail is simply not available, taking steps to minimise the risk is an option. From the televised evidence, it would seem that most of the affected landlords let out their properties without using an agent – “the tenants seemed like nice people at first” is an oft-repeated phrase. Yes, there are poor-performing agencies but the more established and experienced firms will invariably offer a vetting service which aims to weed out, where possible, risky tenants before they are given the keys to the door. Clearly a big part of this involves obtaining references and making background checks (for example, relating to employment history and credit scores) but instinct – based on experience – also has a part to pay. On occasions we will interview someone who may tick all the boxes (the official ones at least) in terms of tenant suitability but something tells us that this person is not quite all that he or she seems and that it would be best not to proceed with the application. Now at this point I can almost hear some readers commenting that “well, he’s an agent himself so he would say that!” but it doesn’t make my remarks any less true.

Of course, landlords are quite at liberty to carry out DIY lettings but to those doing so, I would strongly advise them to engage in a bit of digging on the person or persons seeking to occupy their properties, no matter how “nice and responsible” they appear. And lastly, if you are really serious about a regular flow of income and ongoing capital appreciation – avoid letting out to family or friends.

This article originally appeared in The Scotsman on 31 May 2018 titled “Tenants from hell present a major sector pitfall”.