Building up a portfolio of cheaper, high yielding buy to lets, invariably means that at some point you’re going to come across what we might colloquially call “DSS tenants” (or more accurately, tenants on benefits) and will have to make the decision whether to include these type of occupants into your strategy – or not.
Although there’s a perceived wisdom that benefits claimants make “worse” tenants than working or professional people, the truth is that in any group of individuals there will be good and bad. Some will make great tenants and some will be more troublesome – and no one group of individuals can be classed as “better” tenants than the other.
So would I recommend DSS tenants to other investors? Without hesitation I certainly would. In fact, most of my tenants claim benefits in some shape or form, and range from singles in part-time work, (those earning below a certain threshold are eligible for assistance), unmarried mothers and families where both parents are unemployed, to individuals with health problems or disabilities. Some admittedly give me a few headaches, but others are model tenants.
As with working professionals, I would certainly advise that you carry out a thorough vetting process to minimise the potential risks that could harm your investment. Unfortunately though, with DSS occupants this can be slightly tricky.
Those that are have been out of work for sometime will probably be difficult to credit check, and many will find it hard to get a guarantor, making the proper vetting process somewhat more complicated.
So how can you ensure you are taking on a “quality” tenant?
If references can be provided, follow them up as you would with any other type of occupant. However, bear in mind that this may not provide a true reflection of them as a tenant. It’s hard to tell if the “referencer” is doing them a favour or if the current landlord is bending the truth in order to get their property back.
Spending some time with a prospective tenant can also prove insightful. Meeting with them in person helps you to find out about their current situation and by asking direct (sometimes tough) questions, you might gain a rough idea of how they might behave in your property. Trust your instincts and if in doubt, say no.
You could also go one step further and ask to see their existing property. Because while mess can be cleared away, disrepair or damage to a property cannot be so easily hidden.
What’s important to remember is that although a DSS tenant will receive assistance from the government to pay their rent (known as Local Housing Allowance or LHA), you still have to take measures to ensure you get paid.
Over the next few years the Government is slowly phasing out the way that the benefits will be paid and this is having an impact across the board with regard to claimants renting from private landlords. All benefits are being merged into Universal Credit and whereas Housing Benefit and Local Housing Allowance were administered locally by the local council, all benefits will soon be paid direct by central Government. Here’s what will happen.
Universal Credit will merge together a number of benefits into one single payment. In a bid to see tenants take on more financial responsibility and to be able to shop around for housing, under normal conditions the portion allocated for housing will now almost always be paid direct to the tenant as part of the lump sum that comprises all the benefits the claimant is eligible for.
This isn’t entirely new. When LHA (Local Housing Allowance) replaced Housing Benefit (HB) it was decided that the tenant would be given a sum of money and would be able to negotiate with landlords until they found a property they could afford. But then they’d have to budget their money to pay for it.
In the past, as a private landlord you could request that HB or LHA be paid directly to you.
In theory, with LHA, there are circumstances in which we can have the payments sent to us – if we can prove that a tenant is 8 weeks or more in arrears with the rent, or has incurred rent arrears through deductions from other benefits.
The intention is that the benefit will go with the claimant rather than the property. A new claim will need to be made each time a tenant moves, and will be assessed according to the rental value of the property.
But with Universal Credit it will now be harder to get direct payment, and it’s harder to make the case for direct payment. Having said this, the Department for Work & Pensions can decide to make payments direct to a landlord if a tenant has a history of defaulting with payments or trouble managing their money. They will effectively work to ensure that the tenant keeps their home.
As we speak, this new system is being trialled in several areas and it will be interesting to see if it works out. Hopefully common sense will prevail, but even if it doesn’t, there is still a way that you can help protect your investment.
But where does this leave the buy to let investors?
If Universal Credit is already in place in your area, you could make it a requirement that prospective tenants pay through a credit union or a payment service provider such as Tasker Payment Services. This way, the amount for rent would be ring-fenced and sent straight on to you.
Also, most credit unions won’t allow the claimant to cancel the account or the standing order without a long notice period. And if this was to happen, they’re likely warn the landlord what they are up to in advance anyway.
Those who are yet to experience Universal Credit may still have some time to get paid through the council – so long as they ensure the direct payment form is filled in correctly and the tenant doesn’t go back on their word to have the rent paid in this way. In this case, landlords will usually receive payments every four weeks in arrears.
Whatever your individual situation with DSS tenants, certainly do your best to vet your tenants as best you can; and trust your instincts. In my case, Universal Credit or no Universal Credit, I have no plans to abandon this sector of the market any time soon. I keep my properties in good condition, which means there is a steady stream of quality tenants, and so hopefully I will be able to pick and choose the more reliable ones.
Peter Jones B.Sc FRICS
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