Sliding scale of rents depending on tenant risk?

Hi Robert,

This sounds like a very reasonable idea to me as long as it is not considered "unPC".

You are lending your property to someone in the same way banks lend to borrowers in a round about kind of way. The cost of borrowing is clearly reflected in the level of risk the lender is taking and is generally understood as good business practice.

I've read this with interest. I've wondered about a system of starting all tenants on the market value level of rent and then after a period of time (say 12 months) applying a 'good tenant discount'. I wondered if this might be a way to raise rents on properties to keep them in line with market values but also enabling the rent for current tenants to effectively remain static.
By this I mean that if I had a good tenant that I wished to keep and for whom I wanted to keep the rent unchanged, I could perhaps increase the rent in line with the market and then apply a 'good tenant discount' to bring it back down to the origional level for the current tenant.
If this tenant moved out would it be accepted that the rent had been increased or would it legally be viewed that it had not? Not sure about this one.
This, I should ad is all hypothetical.

Reply to the comment left by "Lisa Notner" at "25/01/2017 - 09:09":

Hi Lisa

I've also considered setting rents at x, and then if tenant is good then give them a discount, e.g. x - £50 pcm, but my accountant says that if the contract is for x, then if you then agree to accept less than this, it would not be acceptable as it would be a falsity in the accounts (and if tenant is claiming Housing Benefit, then it could be viewed as a contrivance which could land you in a lot of trouble. - NOTE: you may not always know that the tenant is claiming Housing Benefit or Universal Credit Housing Element). Thus, rewarding good tenants with cash or a discount off the contractual rent does not seem to be workable (unless you set a new lower contractual rent).

It is also often the case that tenants are good tenants for years until something happens and changes this, e.g. new partner, relationship breakdown, change in household composition, kids growing older, loss of job, drug/alcohol/gambling dependency, mental health issue, etc, so you could end up rewarding (for years) what you think is a good tenant, only to find that they end up smashing up your house, and building up big rent arrears, just before abandoning it. Thus, giving rewards during the tenancy is perhaps not a good idea (though may be better at the end of tenancy if all is left clean and tidy and rent account is clear????).

Alternatively, (or additionally), work on the basis of protecting yourself against bad tenants by offering reduced rents to those tenants that can offer the most security (deposits, rent guarantors, etc), so that if things do go wrong then you have legal recourse to getting your money back from someone (e.g. deduction from deposit or suing the rent guarantor who has assets, etc).

Thanks for your reply Robert. I can see that discounts from the set rate could be problematic. Perhaps the sliding scale rent depending on risk is a better option.

By reducing how much rent we charge low risk tenants who are not on benefits we indirectly decrease the maximum rent housing benefit will cover….. Yet I think you are being very sensible. An additional charge of £50 pcm for any tenant without a home owning guarantor makes total since….

Setting a loss making rent is not sustainable.

I feel your pain, but having a sliding scale will invite derision from a tenant if they feel downgraded and that may result in vandalism and grief for you.

Set a profitable rent and if you can't get a tenant, sell if possible and steer clear of benefit tenants.

Section 24 hasn't bitten yet for individual landlords and many may now sell, reducing stock and offering higher rents for those left.

As your loss stems from arrears and damage, are you in the right market?

I have just sold a break even property in Leicester on similar lines and my ordeal with the lunatic fringe is nearly over.

HB tenants will not particularly care about the level of rent unless they are forced to "top-up" the rent, in which case by setting a higher rent you will probably lose that particular market.

I suspect that you are making it more complicated than it need be. I've never done it, but you could try putting "negotiable" against the rent in the advert. That way you could assess each applicant on their merits.

This is normally done by installing a nice kitchen and bathroom along with nice carpets then saying “NO DSS”, while asking for a rent that is no more than the housing benefit rate. So the landlord has had to spend close to £10K to get the same rent, but from someone that is less risk.

If you think that a prospective tenant is at risk of not paying the rent then asking for a higher rent will only increase that risk.

Reducing the risk would mean aligning the rent with the prospective tenant's income, i.e. reducing the rent.

I can see where you are coming from, but I don't think it's a good idea. From a marketing perspective, your tenants will feel cheated they didn't get the headline price - not a good way to start a positive relationship. I think you have a fundamental issue - your product isn't profitable. Unless you can reduce the costs of damage to you, by holding a bigger deposit - but I am guessing your tenants cannot muster this? You have two choices - hold the property in the hope of capital gains and accept you will struggle to grow your business, or find a better product i.e buy a property where yields are better.