The Rising Risk of Rent Arrears with Paul Shamplina
The one good thing about landlording at the moment is healthy rents – but actually, they are putting you at more risk of rent arrears.
Landlording can be a tough gig. But, when the rent is coming in, your mortgage is paid and you can provide someone with a safe and comfortable home, that makes it worth all the stress, right? You might even have a bit left over for a pint at the end of the week. Cheers!
But, what about when the rent ISN’T coming in? Your tenant is sitting pretty in their safe, comfortable, compliant home, YOUR safe, comfortable, compliant home, and you’re the one left out of pocket, feeling taken advantage of and wondering what the hell to do next.
It can feel like the legislation is all geared towards protecting the tenant in this situation, but never fear, we’ve put together a trio of experts to take you through this frustrating problem, and help you banish rent arrear fear.
In this episode:
- We catch up with eviction specialist and founder of Landlord Action, Paul Shamplina, to talk about why rent arrears are on the up
- He talks us through how to recognise the issues before they become unmanageable, and the steps you can take to make the process as simple (and least financially painful) as possible, for everyone involved
- Mashroom’s Emi Steadman discusses how insurance could just be the safety net you need to catch you is rent arrears pull the rug out from underneath your feet
- Insurance guru Chris Potts gives us the low down on why keeping on top of your building insurance is key in case of a communication breakdown between you and your tenant
Spotting the signs of potential rent arrears
Rent arrears are one of the biggest issues landlords can face. So what are the sure-fire ways we can spot how issues are starting to build up in the first place, and what can landlords do if arrears raise their ugly head?
‘As landlords we have a gut feeling’, explained Paul.
‘Firstly, let’s look at the referencing – how do you reference a tenant? Do you use a referencing provider, like Mashroom, do you have Rent Guarantee Insurance in place with legal expenses as a safety net? What’s the affordability? We know that rents are going through the roof. Tenants are spending the best part of 40% of their wages towards rent, there are affordability issues. Landlords are going to have to be much more stringent now when it comes to referencing, but they do have a bigger pool of tenants.’
‘The first thing is obviously communication. Your rent day is the first day of a month, you get a month’s rent and month’s deposit, so the first month is paid. Second month, obviously the rent should be paid – but if they don’t pay on the second month, that is a big red flag. Most tenants are truthful, they’ll have a conversation. Of course, you do have tenants that bury their head in the sand and they won’t want to take your call. So, then what’s really important is a bit of mediation.’
So, a big part of covering yourself is understanding as much as possible about your tenants before you start?
‘Yes’, agreed Paul. ‘Are they working? Are they not working? Are they receiving Universal Credit? What can be really useful, and this is where landlords have really got to be savvy and streetwise, is social media. Have a look on LinkedIn, have a look at Instagram and Facebook – you can build a picture and make that they’re not in the Caribbean spending your rent, taking pictures on a beach!
‘I think you’ve got to just look at it, manage the situation and take a view. But really, if the rent doesn’t come in, you have to build up a picture.’
Overstepping the landlord line
A quick peep on social media when you’re going through referencing is one thing, but would any social stalking actually stick when it comes to rent collection? Would it not just serve to wind you up further and potentially cause the red mist to descend irrationally if you saw them on a (probably pre-booked and pre-paid for before any issues arose) holiday?
‘You can’t get a disease called landlord rage – that’s what I call it – so, if the tenant doesn’t pay the rent, you can’t go around and start banging the door down. That’s harassment’, stressed Paul.
There’s a fine line. Sometimes, trying to speak to a tenant can be quite tricky, and it can be really frustrating. You might have a landlord that used to live in that property, so they’re emotionally attached to it, and of course, mortgage rates have gone up, so landlords are feeling the pinch as well.
‘You need to make sure that you can call them. Maybe try and call them outside work hours, maybe try on a different telephone number, and actually just say “Look, we can work this out. You can do a payment plan, just to try and catch up”. You should always give the tenant one chance, and I firmly believe that.’
Changing tenant circumstances
Over the past few years there aren’t many of us who haven’t experienced changes in our circumstances. If the pandemic taught us anything it’s that life can flip and change in the blink of an eye.
How would you suggest landlords support tenants who may have been perfect for a long period, then hit a bump in the road and suddenly go through a sticky patch financially? Should we help them ride it out, or take a more businesslike view and cover our own financial backs from the get-go?
‘I’ve always said it’s really important that tenants’ rent payment should be linked to their credit file,’ said Paul. ‘A lot of these tenants eventually want to own their own property, so that’s something that should actually happen, and I know there have been organisations talking about that.’
A good tenant doesn’t turn into a bad tenant overnight, so really what you should be doing is working with them and trying to understand the circumstances. If they’re genuine and transparent, then it will work its way out.
‘But if it then comes to a point where tenants can’t catch up – they feel embarrassed, they feel ashamed, they can’t speak to the landlord – then of course, landlords have just got to treat this as well “I need my property back”, because at the end of the day, a landlord is not a bank.’
‘I can give you numerous case studies where we’ve got two years rent arrears. And I think, how the hell have you allowed it to get to two years? You do get tenants that can manipulate landlords and they can play on their on their good nature, that happens a lot. This is a business. So by the time you’re instructing someone like us at Landlord Action to serve a notice you’re going to be owed another six months before we’ve even started. To try and be able to collect the money is very, very, very difficult.’
When should a landlord start getting serious about rent arrears?
Ok, so you’ve done all you can to be as accommodating as possible regarding your tenants’ potentially tricky circumstances, but there does come a point where you need to act for the good of your own finances. But when does that point happen? Is there a tipping point at which rent arrears become more serious from a legal perspective?
‘I think when there’s a three month rent arrears’, said Paul. ‘Don’t forget, every tenancy agreement is rent in advance, so if the rent is due on the first of the month, the second of the next month is a month and a day, two month rent arrears. So, you’ve got a whole month to try and mediate, do a deal, see if they’re genuine. If there’s a will there is a way. Tenants need to stay in properties because no other properties. All the rents have gone up, we have a rental stock crisis, so they should be doing everything they can to show some goodwill, then that obviously is important. But if he’s got to the point where the tenant says, “I can’t pay anything and I’ll show you the reason why”, then that’s fair enough, but at the end of the day, this is a business.’
And what process would you follow once you get to that point?
‘So, before you do anything, you should try to call the tenants, you should try to mediate with the tenant and you should send them some text messages, some letters, some emails to try and collect your money. You should try to get some sort of arrangement,’ explained Paul. ‘When it comes to a month and a day, that’s two months’ rent arrears and under the common grounds under Section 8, two months’ rent arrears are a mandatory ground when you’re serving the Section 8 notice.’
‘At the moment, we are pre-Renters Reform, so it’s a fourteen-day notice to serve the notice on ground 8. You serve the notice, which gives the tenants fourteen days to pay up and leave or come to some sort of arrangement with you, and that shows that you’re starting the legal process.’
‘Now 60% of the time, the tenant will pay up or come to some sort of arrangement. If the tenant doesn’t pay up or leave, or you get radio silence, then of course the next stage is that the landlord has to issue a possession claim at court and get a hearing date.’
Silence CAN be golden, but silence from a tenant in this instance doesn’t sound like a positive. If that happens, is the process a painful one for landlords?
‘It can be’, admits Paul. ‘I issued my first possession claim in 1991, we’re now in 2023. It’s the hardest I’ve ever seen it for a landlord to try and issue a possession claim, because there are so many different hoops you have to go through, and the forms are more difficult.’
‘You have a five-minute hearing, and the courts are going to get busier and there’s going to be busier lists. And of course, the courts in London especially are really busy. So, you know, you could be waiting two/three months for a hearing date, which means another two/three months’ lost rent.’
Keeping clear of court
With those sorts of timeframes, it’s clear that court is something to be avoided at all costs, wherever possible! So, what are the best ways to keep the process out of the courtroom and on your terms?
‘During the pandemic, obviously the court system stopped. There were six-months’ notice periods and landlords couldn’t enforce rent and possession. What we at Landlord Action did, along with our sister company the property Redress Scheme, was start a mediation business. We have trained mediators that will try and mediate between landlord and tenant.’
‘What is going to happen, and this is mentioned in twelve points in the Renters Reform paper, is that there will be a process that once you serve a notice, the landlords will have to prove they’ve tried to carry out some sort of mediation.’
‘The issue is, you can’t mediate if the tenant doesn’t want to talk to you. It takes two to tango doesn’t it? So, you’ll have to show that you’ve tried mediation before you go to court and have a hearing date before the judge.’
Prevention is better than cure
Intrinsically, whichever way you turn, the process of managing rent arrears is a royal pain, for everyone involved. Are there any surefire ways to protect yourself as a landlord to try and avoid any of this drama and simplify the situation from the start? Rent guarantee insurance sees the obvious choice, but is it as simple as that?
‘Understandably after Covid, rent guarantee policies became more expensive. But you should still be taking them out. It’s a no brainer’, shrugs Paul. ‘You pass a reference with a referencing provider they will offer Rent guarantee – obviously Mashroom offer that as well – and then that insurance will cover you if the tenant does not pay the rent, your rent is paid every single month. Great peace of mind and your legal expenses to carry out eviction will be covered as well.’
‘I think now we’ve come to the point in the cost-of-living crisis and where we’re at in 2023 in the world of renting where, although it’s not mandatory, can you afford not to have it? Car insurance is mandatory, because if you have a car crash, you’re covered. With rent guarantee, if a tenant doesn’t pay the rent, you’re covered. It really provides peace of mind, a complete safety blanket for landlords.’
Everybody is feeling the pinch from the cost-of-living crisis, and it’s hardly a surprise that the PRS is also bearing the brunt of spiralling spending.
Mashroom’s own Emi Steadman speaks with landlords daily, all of whom are feeling the pinch from the nationwide changes. But is it as simple as higher costs meaning lower profits?
‘Landlords share concerns about this with me all the time,’ agreed Emi. ‘I think a lot of landlords are really wary with all the legislation changes, and there’s a lot going on at the moment in landlording in life and everything so it’s something that landlords want to talk about more and more, especially with Section 21, soon to be abolished. A lot of landlords are looking to sort of educate themselves more, get more insurance, get protected and have a chat.’
From the conversations you are having, would you say it is one of the main causes of rent arrears currently?
‘Definitely one of the biggest issues is the cost-of-living crisis, but also mortgage rates rising as well,’ said Emi. ‘With mortgage rates rising, rents are having to rise to sort of go alongside that because landlords need to still make profit on their investments. You’ve got the cost-of-living crisis with rent going up, bills going up, everything going up, but people’s wages aren’t – that’s the biggest thing I’m finding at the moment.’
All in all, the country is in a bit of a financial pinch, it isn’t exclusive to the PRS, but it is certainly trickling down and having a real impact on the sector. Is there anything landlords can do to protect themselves against the impact of this profit-pincer?
‘I do speak with loads of landlords that are just sort of packing up shop and leaving the sector which is totally fair enough. There’s a lot going on at the moment. But for the ones that are staying, when they’re putting properties on the market now, there are less properties, explained Emi.
‘The interest on most properties is going up tenfold, and the landlords who are looking to stay are also looking to invest in the right insurances at the start of their tenancy to make sure that they are protected throughout and I’d recommend that anyway.’
With regards to insurances, are there any specific options that offer the most comprehensive cover? After all, paying out additional costs for multiple policies right now is not high upmost people’s priority lists!
‘Of course I recommend Mashroom’! laughs Emi. ‘Our 5% package that we do, our Let and Protect package, offers you Rent Guarantee Insurance, Home Emergency Insurance, and the most important one at the moment is your £25,000 pounds of legal cover. So, with Section 21 being abolished, the only option that landlords are going to have to evict now is a Section 8. The main difference between the two is that Section 8 is breach of tenancy and it’s also contestable, meaning that you’ll be more likely to go to court with it, so that’s going to cost you and we’ll protect you. So come and chat with us at lettings if you need a hand!’
If you want to speak to Emi about how our insurances and packages can help you, be sure to book a call.
Covering all bases
Yes, yes, I know what you’re thinking – rent arrears and the need for Buildings Insurance don’t go hand-in-hand. However, as Paul mentioned earlier, if rent arrears raise their ugly head, typically one of the first things to fall by the wayside is communication with your tenant. And if that happens, it’s unlikely that they will be hugely on the ball when it comes to letting you know about any maintenance issues either… by the time you either get back on an even keel, or get your property back, you may find that you have a few hiccups to deal with, and that’s when having solid buildings insurance may well come into play.
With this in mind, we wanted to touch base with Chris Potts, who is the man in the know when it comes to Buildings Insurance. As with everything else, the costs of many building insurances are creeping up, but why?
‘It’s like everything at the moment, isn’t it!’ said Chris. ‘It’s more down to the cost of building materials that has increased significantly in the last twelve months.’
Are there still ways to find a good deal, and still get decent cover though?
‘Absolutely. I would always have a shop around, and I would always of course check the rebuild value of your building insurance now – that is what will determine your premium. Make sure that is correct and you’re insured for the right amount,’ said Chris. ‘Like anything, buildings insurance is a value thing – you need to check the product is sufficient and covers all your requirements and needs.’
We are all used to jumping on to the price comparison websites and sourcing our insurances through them… is this a safe way to find buildings insurance?
‘I would always check the small print and I would look for any high accesses or any legal expenses that might not be covered,’ explained Chris. If something’s too good to be true, there’s a reason behind it!’
‘I would recommend going and seeing a broker, they’re your friend in the marketplace, someone who knows the policy, knows the industry and can talk you through everything.’
Want some advice directly from our experts? You can book a call for a time that works best for you.
Latest Landlord News
Now, don’t be getting too excited, but this week might actually bring some positive news for the sector! Yes, can you believe it?
Council tax exemption on empty homes
A consultation has been opened looking into the possibility of landlords not shouldering the cost of hefty council tax bills when their properties are empty.
Council tax premiums charged on properties that sit empty for two years or more can really add to the costs when facing a void between tenants and can rack up to four times the normal amount of council tax payable.
The premium was introduced to encourage properties to be let quickly and not sit ‘idle’, but as all landlords know, sometimes things don’t always go to plan – and if you are facing major repairs, structural work, time can fly by and before you know it you could find yourself shouldering the extra cost.
The consultation is suggesting a reform to the current system, proposing that properties that are empty for long periods of time due to major structural or repair work should be exempt for up to six months. There is also talk of a total exception of up to a year if the landlord can prove that the delay is due to large scale works and is actively marketing for rental.
The consultation says:
The government believes that where owners are using their best endeavours to bring a property back into productive use, then they should not be penalised through the imposition of the long-term empty homes premium.
So, potentially positive news, but don’t hang your hopes on anything just yet. The consultation is due to end on 31st August, so keep your fingers crossed and your eyes peeled here for more news.
Following on from some potentially positive news, something a little less upbeat.
Leaseholds are a huge part of many landlords’ lives. Flats play a big role in the PRS, and leaseholds are of course par for the course when it comes to owning one.
However, recent research has revealed that 78% of agents believe that leasehold properties can struggle to sell… so where does that leave your investment in the long run?
The research dug a little deeper into the startling statistic, pointing the finger at a lack of government action for the leasehold slump, stressing that the introduction of the Leasehold Reform (Ground Rent) Act 2022, didn’t provide the change the market needed.
The Act effectively scrapped ground rent for new leases of flats and houses in England and Wales, which was positive however it didn’t make changes for the millions of existing leaseholders who are still at the mercy of spiralling costs, meaning in the eyes of the agents, the underlying issue remains unresolved.
Head of Policy and Campaigns at Propertymark, Timothy Douglas said:
Policymakers must do more to create a level playing field with those who already own a leasehold property – make enfranchisement easier – simplify the process for lease extensions, and where there is no managing agent, freeholders must sign up to a redress scheme. A whole sector approach is needed to further protect consumers and bring about positive change for leaseholders.
If you are a leaseholder and would like more information on what the act has changed for you, and how your leasehold property may impact your portfolio in time, make sure to tune into the upcoming Mashroom webinar on this very subject. It’ll be running in August, so make sure to pop along and really get a hold of this tricky topic.
The next episode of the Mashroom Show is airing on Friday the 28th July, and we’ll be looking at how you can secure and protect your rental income.
In the meantime, why not head on over to Facebook and join the Mashroom Landlord Community Facebook page. There are over 7,000 landlords regularly chatting, sharing queries and questions and engaging with industry experts, so it’s a great place to have a chat about what’s on your mind, and get some great advice.