Reduce Rent Arrears By Following These 5 Strategies

In 2021, both property investors and tenants have entered an extremely challenging environment. Increases in rent arrears are being discussed in the UK media almost on an daily basis.

Astute property investors can adopt these five strategies, so they stay in control of rent arrears AND help their tenants by providing accurate and timely information about the financial aspects of their tenancy.

What does rent arrears mean?

When rent has not been paid by the agreed date, the overdue amount is referred to as rent arrears. Rent arrears are a breach of a tenancy agreement.  If the tenant fails to pay the rent arrears, the landlord can ask the courts to evict the tenant.

Track rent arrears: implement a proper accounting system

Historically property investors have tended to use spreadsheet to track rent arrears. Given that most landlords will not have had any spreadsheet training, this can become a time-consuming and potentially inaccurate process. 

By way of example it is not uncommon in the UK for a landlord to be receiving multiple housing benefit and universal credit payments in relation to a single property.  With such payments being made in arrears in practice this is extremely difficult to track accurately. Tenants, for many reasons, may choose to pay their monthly rent in multiple instalments. In a spreadsheet managed environment, this creates real challenges for a property investors.

We firmly believe that property investors are more successful and understand their business better when they use a proper accounting package. Accounting packages that work really well for UK landlords are Xero and QuickBooks. 

When set up properly, an accounts package can help:

  • identifying missing payments (aka rent arrears)

  • accurately track part payments made by Tenants

  • quickly generate Tenancy statements which can help tenants and landlords precisely understand any rent arrears

Managing rent arrears : always ask tenants for supporting evidence

Tenants will offer reasons why they’re unable to pay the rent. In the vast majority of cases the explanation provided will be truthful.

We recommend that landlords always ask for supporting evidence.  When a tenant provides supporting evidence, the landlord feels assured that the tenant remains trustworthy. Furthermore, the landlord is more likely to make the correct decision, as they have the correct facts.  

Trust is critically important in difficult situations.  Supporting evidence is a great way to build and maintain trust between landlords and their tenants.

Make better decisions by understanding tenancy law

Many of you will be familiar with the highly informative Channel 5 TV programme “Nightmare tenants, Slum landlords”. There are many cases on the show where the rent arrears have grown to very problematic amounts, sometimes with rent arrears exceeding £10,000! It appears to me that these problematic cases arise where the landlord initially lacks the right technical knowledge.  

In our opinion, self-managing landlords should ensure they have a strong understanding of the legal process to end a tenancy. In the UK, these are section 8 “fault-based possession claims” OR section 21 “No fault possessions”.

Knowledge of the actual tenancy agreement is critical – it is suggested that time should be invested in fully understanding critical elements such as the notice periods.

Having that basic legal knowledge of how to end a tenancy means that it is much more likely that you will act fairly, decisively and effectively. Where a tenancy has gone wrong, ending a tenancy will halt the build up of rent arrears and allow the landlord to relet the property.

Avoid rent arrears: ensure your applicant checks are robust

In the majority of cases tenancies are very successful for both landlord and tenant. Where are there has been a void period, it can be tempting for the Landlord to accept the first offer received. The adage “Act in haste, repent at leisure” is very appropriate. Experienced landlords know that robust pre-tenancy checks are critical risk management tool. 

So next time you have a void period don’t drop your tenant checks in order to get a tenant in the door quickly. High quality pre-tenancy checks include (but are not limited to):

  • Affordability checks

  • Credit checks

  • Employment checks

  • References from previous landlords

  • Credit checks on any guarantor

As regards affordability checks, ideally a tenant should NOT be spending more than 40% of their after-tax income on rent. Where a prospective tenant fails affordability checks, a potential solution may be to obtain a personal guarantee from a family member.

Remember that these checks will also benefit the tenant. If the tenant is not able to afford the monthly rent, then in the long run it may be much better for them to secure a property with a monthly rent that falls within their monthly budget. Essentially, robust referencing helps reduces the risk that rent arrears will occur in the future (though this is not absolutely guaranteed).

A major benefit of tenant checks is that it will aid you in obtaining rent guarantee insurance, which we cover in the next section.

Mitigate rent arrears by purchasing rent guarantee insurance

In the UK it is been possible to purchase rent guarantee insurance for many years. Where a landlord (or their agent) has performed robust pre-tenancy checks, he or she should be able to obtain insurance cover which will compensate them for any rent arrears. 

For example, where a tenant is unable to pay the rent due to a change in circumstances, rent guarantee insurance will recompense the landlord for unpaid rent for fixed number of months. 

It is possible to add on cover for legal costs. 

Generally, in the UK this type of insurance is very reasonably priced.  Specialist insurance brokers such as the Alan Boswell group are a great resource for researching and securing rent guarantee insurance.

Peter D Doherty

Peter D Doherty is the founder of the Property Investor Academy.

A Masters graduate in accounting and finance from Dublin City University, Pete worked in the City of London for 14 years. He held senior finance roles (Financial Controller) in several substantial UK commercial banks. He is a graduate of Macquarie University.

With over 10 years property investing experience, he is the owner of a London based lettings agency as well as proptech consultancy. He regularly contributes to online landlord forums such as Propertytribes and Reddit.  Peter is a member of National Residential Landlords Association (“NRLA”).

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