By David Smith, partner at Anthony Gold Solicitors and policy director at the Residential Landlords association.
Buy-to-let, a specialised area of the property market, contains many further sub-specialisms. Landlords can focus on investment in specific assets and properties, on particular regions, or on certain tenant types. One area that deserves greater attention is renting property to tenants on benefits.
Some landlords can and do build successful portfolios with this as the sole focus, typically as part of a house of multiple occupation (HMO). However, for many others the perceived level of risk and stigma associated with these types of tenants is too great. In order for landlords to make more considered decisions about renting to tenants on benefits, it’s useful to separate facts from fears.
A specialised approach
Some media coverage of landlords’ prospects can amount to scaremongering. It is centred on ideas of unreliable tenants, unpredictable local authorities and prohibitive insurance costs or mortgage terms. The situation is not helped by the fact that many mainstream lenders avoid or ban buy-to-let lending directed at tenants of this type.
That’s why it’s so important that specialised lenders like Octopus Property are in the market with more inclusive criteria. Taking an unrestricted approach to lending can free up landlords to rent properties to a wider range of tenants. This helps to increase options for landlords as they build diversified portfolios, and to improve prospects for the tenants who need support most.
A key point to clarify is that housing benefits do not amount to rent paid by local authorities. The reality is that the state, in the form of the Department of Work and Pensions, makes the tenant an advance. The tenant is also personally liable for their rent, something that makes them no different from any other type of tenant.
It is also crucial for landlords to make clear distinctions between different types of benefits. These include housing benefits, tax credits, disability allowances, child support and maternity benefits.
While certain types of discrimination might be allowable in highly specific contexts (e.g. a listed building not having sufficient wheelchair access), most is not justifiable by law. This applies particularly to discrimination associated with maternity or benefits arising from it. With the continued rise of single parent families, landlords are likely to see more tenants on benefits, with support rather than discrimination being the appropriate response.
Alignment with legislation
This kind of approach chimes with how government legislation is evolving. There are clear moves by the Government to address and correct issues in this area, aimed at reducing stigma and increasing support for those on benefits. While much buy-to-let legislation is at odds with landlords’ aims, those renting to tenants on benefits can be assured of greater legislative alignment.
Last year’s Budget saw an increase in targeted affordability funding. This will increase local housing allowance rates, supporting tenants on benefits living in areas where private rents have been rising fast.
More recently, in July 2018, James Brokenshire, Secretary of State for Communities, announced plans for a minimum three-year tenancy term. This would include a six-month break clause. It’s an important measure, which will help to give both tenants and landlords more long-term security.
Similarly, in September 2018, Prime Minister Theresa May announced a pledge for social housing. £2 billion is to be handed out to housing associations with the goal of creating many thousands of affordable homes. May has called for a change in attitudes, stating that: “Our friends and neighbours who live in social housing are not second-rate citizens.”
The same attitude can be applied to those on benefits. It is clearly part of the government agenda to provide benefits as a form of support within an environment that encourages the use of the benefit system as a route to independence.
The route to successful letting
This reinforces the importance of landlords evolving their views on letting to tenants on benefits. And it applies beyond the theoretical level. Letting to tenants of this type can yield tangible results, particularly in areas outside London. Benefit levels in less desirable areas can often exceed market rents, meaning that with thought and effort landlords can secure reliable income streams.
Landlords arriving at this type of tenant generally get there in two ways. The first is through buying property in an area, as above, with a high number of tenants on benefits. The second is through incentive schemes for landlords, run by local authorities working to house people on waiting lists. These can range from discounts on services to cash payments, including for deposits. With a local authority as a good covenant, landlords can look at reliable returns.
Landlords can also make progress through working with organisations that specialise in HMO rentals and support landlords. These have direct relationships with local authorities and can help to facilitate and sustain the kind of rental scenarios that landlords are looking for. Steve Olejnik of Mortgages for Business operates across the country, working to support landlords in the face of draconian criteria imposed by some lenders.
Olejnik believes that for the market to progress further legislation must change. “Landlords should be able to have freedom of choice when it comes to finance. It is the landlord whom the lender is underwriting and the decision should be based on their credit profile and ability to pay along with the security. It is irrelevant whether the tenant is in receipt of benefits and should not add any bearing to the risk decision.”
A social service
Of course, letting to tenants on benefits is not simply about obtaining finance and seeing a profit. There is also a strong social aspect. This brings increased responsibilities, which some landlords may shy away from and others may embrace. These might range from supervising completion of paperwork, to taking a compassionate approach to tenants living disordered lives.
For this reason, local authorities offering incentives to landlords is perhaps not in the spirit of running an HMO that houses tenants on benefits. There is an argument for local authorities to instead offer support schemes for landlords. These could provide greater structure while attracting the kinds of landlords more suited to the work.
The combination of a landlord with the required skills and knowledge and a lender such as Octopus Property can result in successful letting to tenants on benefits. There is no doubt that this is a specialised area, so having experience, with an ability to consider all factors will always help. This includes not only an understanding of the benefits system but the needs of tenants themselves.
Ultimately, landlords who have benefited from a specialised approach to lending can help tenants with a specialised approach to letting. In this way, they can be true social landlords.
