What happens when your tenants can’t afford their rent?

Tenants have likely been impacted by the UK cost of living crisis which may result in issues surrounding rental payments.

Cost of living has been on the rise for the past few years. A 2022 (August) study stated that average food prices in the UK increased by 12.5% compared to the year prior. Whilst trying to cope with increasing cost of food, renters are receiving shockingly high bills for gas and electricity. The Gov.uk website states “Electricity prices in the UK rose by 65.4% and gas prices by 128.9% in the 12 months to December 2022”.

With prices for essential items and utilities rising to unforeseen amounts, tenants are struggling to keep on top of rental payments, through no fault of their own.

When entering their contracts, most renters would have factored living costs into their budgets. However, long-term renters, who have been in their property for 2+ years, are now finding their financial circumstances drastically changed, despite having stayed in the same property and still receiving the same salary.

The significant unforeseen increase in living costs has caused serious challenges for some renters, with knock-on consequences for landlords as tenants struggle to pay rent each month.

1. Screening new tenants
   • Landlords should now pay more attention than ever to their new potential tenant’s ability to pay the monthly rent of their property. Local cost of living, energy prices and the property’s energy efficiency rating should play a role in deciding tenant suitability for the lease. Ensuring that your potential new tenants can provide proof of income 3X the rental cost will create a safety-net which should guarantee timely rental payments each month, whilst leaving space for cost of living prices to increase further throughout the next year.
2. Shorter leases
   • Consider starting with shorter leases for new tenants if you are concerned about rising prices. This will give you a chance to review your tenant’s ability to pay rent after the first few months and decide whether extending to a longer term agreement is a sensible option given their financial situation
3. Rent guarantee schemes
   • The most effective way to ensure you receive rental payments from your tenants is to enter into a rental guarantee scheme. Rental guarantees usually charge a small monthly fee in exchange for the peace of mind that you will always receive rental payments whether or not your tenant pays their rent.

The cost of living crisis in the UK continues to create challenges for both tenants and landlords. However, by developing an informed plan, you can limit the impact these challenges have on your monthly profits and gain more security with your future buy-to-let investments.