Buy to Let Negatives.


We at Landlord Mortgages have a new friend, a resident landlord called 'lurker' and would like to introduce him to you. We have decided to shield his identity because, as will become apparent, negativity can breed dislike.

'Lurker' is around every corner of our web space and like a virus he becomes very destructive and at times can be uncontrollable but we are, nevertheless, glad to have him on board. One thing he really does well and that is to derail the thought process of other Property Investors to at least consider some of the negatives associated with Buy to Let.

I’ve found a tenant, but he says he needs to get housing benefit. Is this a problem?

Unfortunately, tenants who are on or need to go on housing benefit always ring alarm bells with landlords. There are many reasons for this, but provided that you know them and can take steps to avoid the pitfalls, some housing benefit tenants can be most acceptable and become long term ones who look after and maintain your property. As they are long term, they tend to want to redecorate to suit their own tastes. As the right tenant’s tastes will be similar to yours (i.e they won’t want to paint the living room matt black with pink spots), then this is no bad thing.

So what are the problems? Well, firstly housing benefit is paid by local authorities, and despite the ones where my properties are asking for bank payment details, they always send a giro cheque every four weeks so I have to traipse down to the bank to pay this in whereas I would normally get my tenant to do it with my paying in book or on direct debit.

Secondly, despite all tenancy agreements requiring rental payment in advance, local authorities only pay four weeks in arrear, thus if a tenant has to apply for housing benefit, you have to wait an age before the local authority decide that the rent being charged is fair and then a few more weeks before either your tenant receives the housing benefit and gets around to paying you, or the giro arrives. Landlords have been known to evict tenants because their local authority took too long to sort out housing benefit payments. The L.A. has subsequently been heavily criticised and apologised, but the tenant had still lost his home.

Thirdly, note my references to “four weeks” I suppose that there are valid arguments for rents being paid on a four weekly basis. Historically, local authority tenants have probably been paid weekly and to get their rent the rent collectors have had to go around early on Friday evening to get it out of dad’s pay packet or it would all have been spent “up the pub.” On the other hand, us private landlords’ tenants are usually salaried individuals who are paid monthly, thus we always organise our rents to be paid on a calendar monthly basis. Thus rents are due by the same date every month which makes the book keeping much easier. Local authorities have no worries about this as the money they spend employing people who appear to do nothing important means that despite rent due and housing benefit payment dates changing every month, they can cope. (Yes I am joking!)

From this, I hope you note that if rent is paid on a four weekly basis, it should be paid slightly earlier each month and therefore during one month of the year you will receive two rental payments i.e 13 payments per year..

Of course, if the local authority eventually decide that the rent you are charging and your tenant(s) have happily been paying up to now is too high, they will only pay a lower figure and you will have to attempt to obtain the rest from your tenant himself. Getting him to understand how you have calculated this figure is one hurdle, getting it out of him is another as, if he is on benefit, he will have little if any spare cash available. On this point it is also important to watch it if the tenant is under about 25. Then the Local Authority will only pay for bed sit accommodation or an appropriate rent for this, so that bright young high flying executive with a salary to match who has happily been renting your city centre penthouse for the last year for, maybe, a four figure sum is going to have a bit of a shock – and so are you!

Fourthly, the biggest drawback to housing benefit is when a tenant changes his circumstances. Of course, he may be honest and keep both you and the local authority informed so that there is no problem, but some of them don’t! He may tell the local authority that he is moving, he may tell them that he has got another job, or they may find out. The reaction is immediate: his housing benefit payments to you are cancelled and the first thing you may know about it may well be when the giro doesn’t turn up. This means that your tenant is now one month behind with his rent and you have the problem of extracting this from him. These days, now we are no longer able to retain deposits, you may well find that obtaining this is virtually impossible despite the fact that you may be able to prevent your now ex-tenant from getting it refunded. What is even worse is that if the Local Authority finds out that said tenants circumstances changed before the last benefit cheque was sent to you, they will claim that you colluded with your tenant and attempt to claim this money back from you, as to do so is easier than trying to get it back from the tenant! To be fair, local authority rules were changed in about 2000 to stop this – they must prove that you colluded with the tenant, but surprisingly, seven years later some of them still have not heard of this and continue to try it on! .

Just about any landlord can get caught with a tenant on housing benefit. This is because, with the best will in the world the tenant you accepted two years ago with a good job and ample income suddenly looses it and has to go on housing benefit or he can’t afford to pay his rent. This can either sort itself out in the fullness of time when he gets another job, or his new job will involve him moving thus you loose a tenant. If you have managed to maintain good relations with your tenant then hopefully, the property will be left clean and tidy thus deposit refund can be quickly organised and new tenant installed as quickly as possible. If only all tenants were like that!

Another thing to bear in mind, is that mindful of the necessity of the need to make everyone responsible for their own finances, the government is insisting that all housing benefit is paid to tenants. What can therefore happen is that you receive nothing from your tenant until the housing benefit payment is agreed, then the tenant receives the giro which he doesn’t realise is his housing benefit to be forwarded to you but merely a windfall from our generous nanny state and goes and spends it! Only when he is two months in arrear are you allowed to insist the local authority sends the giro to you direct so you have now at least two months rent to try and claw back!

Excuse me from being cynical, but it has happened to me and I feel it is necessary to pass the information on!

To be fair, it is only a certain number of HB tenants who behave in this way, and by being very careful, landlords can keep their arrears from such individuals within manageable limits, but it is only for the experienced!

A good Housing Benefit tenant is one who can pass all the necessary credit checks, is financially responsible and has sufficient reserves to pay his rent in advance, in full and carry the time lag between his rent being due and the payment system insisted on you the Housing Benefit department. You will then not know the difference between him and an ordinary tenant. As I said above, if said tenant cannot work for some medical reason, then he is likely to be long term and will take care of your property in the way you would want. Such tenants are those who want decent properties located in nice areas, so this is a point to bear in mind when selecting properties to rent out! Decent, well located and maintained, nicely decorated properties attract good tenants.

One final point: If the Housing Benefit giro is paid direct to the tenant, then the Local Authority cannot chase you for it to be refunded if the tenant’s circumstances change.