Sliding scale of rents depending on tenant risk?

This is supply and demand. There is demand from landlords for tenants who display the qualities of being 'good tenants' and so they are prepared to pay a premium for them through lower rents.

There is a danger that if we all compete for the best tenants through price competition, it will be a race to the bottom, at a time when we can ill afford to drop rents because of section 24.

Good tenants should be rewarded through zero rent increases and a well-maintained property.

But all things considered a good tenant is worth their weight in gold. It is worth keeping rents as low as possible to keep them and to discourage them from moving on or buying. I've never had DSS, but I know that a bad tenant will not be put off by a high rent that he has no intention of paying.

Given that rents are flat to falling in my area, I intend to hang onto the best security I have - good tenants.

Reply to the comment left by "Gary Dully" at "25/01/2017 - 13:25":

Hi Gary

I'm not talking about setting a loss making rent, I'm talking about setting a rent that takes into account the varying degrees of risk for different tenants. I'm also not talking about excluding DSS tenants, in favour of just working tenants, as some DSS tenants are very responsible and some working tenants are irresponsible. What I'm aiming for is a way of reducing my risk without excluding any particular type of tenant, because if I can reduce my risk then I can keep my rents down.

I recently did a detailed costings exercise in relation to my HMO properties, and I worked out that if tenants did not cause damage and they left without owing arrears, then I would be able to offer the rooms at about 25% less than the current rent. However, I cannot reduce the rents for anyone when some tenants cause damage or don't pay the rent. To my mind this is unfair on the good tenants, as their rents are having to subsidise the losses from the bad tenants. Unfortunately, it has to be this way otherwise I go out of business and everyone becomes homeless! Thus, I want to find a way of preventing the losses caused by bad tenants, as that will then mean I can offer lower rents to everyone (which has the knock on effect of reducing the Housing Benefit bill to the taxpayers - a much more effective measure to reduce the government spend on welfare benefits).

Reply to the comment left by "Richard U" at "25/01/2017 - 20:18":

Hi Richard

These are Rent to Rent properties so there is no capital value gain for me, so I need to make it work purely from the income in - expenditure out, so this is why it is important to be able to increase the income (less rent arrears) and reduce the expenditure on damage repairs. If I could do this then I could afford to let the property at a lower rent. Getting employed tenants is no guarantee of their good behaviour, so it only decreases the risk slightly, and it is no good if the property's location is not attracting employed tenants.

In relation to the marketing and some tenants feeling cheated because they did not get the "headline" rate, I think this can be overcome be making the rent structure (scale) very clear in any advertising.

Hello Robert,

What about advertising them as POA? (price on application)

Find out the prospective tenant's circumstances and then price accordingly.

A letting agent in your town already does this on some of their properties.

Incidentally, I've just re-let a property there at 5% higher rent with no void and a choice of quality tenants. (I realise we don't operate in the same sector of the market)

Reply to the comment left by "Gary Dully" at "25/01/2017 - 13:25":

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

Suggest you read Robert's member profile.
A pity more landlords aren't like him.

This is the sort of ad I have in mind:

3 bedroom terraced house to rent from £425 pcm (£98pw)

Key Features

- Central Heating
- Garden
- Unfurnished
- Pets Allowed
- Double Glazing
- Decorating Permitted

Description

NOTE: Rent is £475 pcm, but could be reduced to £425 pcm in some circumstances. *Please note rent discount information at the end of the advert.

This is a 3 bedroom unfurnished terraced house on the &quotLittle London&quot estate in Maltby. The house has an entrance hall, a reasonable size lounge, and a kitchen diner on the ground floor, with two double bedrooms and one single bedroom, and the family bathroom (with shower over the bath) on the first floor. There are good sized lawned gardens to the front and rear of the house. (There is no driveway, but there is plenty of on-street parking outside the house).

The house comes with full double glazing, and gas central heating. External wall insulation was installed about 2 years ago to improve the energy efficiency and comfort of the home. EPC rating 67.

Applications accepted from working families, DSS/Benefit claimant families, and groups of sharers. All applications considered, but you will need to demonstrate that you can afford the rent (via Housing Benefit or otherwise).

Well behaved pets considered (a deposit and/or fee may be required for pets).

No deposit required (but a discount may be given if a large deposit is provided - see below). No application fees, or tenancy renewal fees. A rent guarantor will be required.

*RENTAL DISCOUNTS
£50 pcm discount if tenant can provide £1000 deposit plus two suitable rent/damage guarantors (home owners).
£25 pcm discount if tenant can provide £500 deposit plus two suitable rent/damage guarantors.
£nil discount if tenant can only provide one suitable rent/damage guarantor.
Discounts unlikely for other situations, or for other forms of security (e.g. paper bond from a council or other organisation), but always happy to consider each case on its own merits.

Applicants will need to have a rent/damage guarantor, e.g. a person (home owner) who guarantees to pay the rent and/or any charges for damage etc, if the tenant fails to do so.

Reply to the comment left by "Robert Mellors" at "27/01/2017 - 15:28":

Sorry I think you are making a mistake. Good tenants (generally) are attracted by higher rents not lower ones. Advertising the property at below market rate, I think would prompt the question - what's wrong with it?

I would ask myself different questions: How do I identify troublesome tenants, so that I don't rent to them and end-up with damage? Or, how to I ensure I have enough security that damage doesn't have a negative impact on my returns. I think it's great you want to reward good tenants - I do this by not increasing rents in-line with costs and making improvements to the property + accommodating reasonable requests - I am willing to bet undercharging would lead good tenants to value the property less (behavioral economics)

The way I attempt to screen tenants to try and get good ones is: 1 - If in doubt do not let, 2 - do they have good manners? 3 - do they have something to lose? 4 - have they shown ability to plan financially? 5 - do they have constructive hobbies? 6 - If in doubt do not let. Did I mention, if in doubt do not let?

Reply to the comment left by "Richard U" at "27/01/2017 - 16:52":

Hi Richard

It is the question you suggest "how to I ensure I have enough security that damage doesn’t have a negative impact on my returns" that I am trying to address. The aim is to have tenants offer me additional security, but in order to get the additional security I am trying to reward them with a discount off their on-going rent. What other methods would you suggest for getting additional security in a "hard to let" area?

I do fully understand the notion that better tenants will look for higher priced properties, and some tenants may de-value the property if it is at a lower rent, BUT the properties are not highly sought after, and if the mantra of "if in doubt, do not let" was applied as strictly as you infer it should be, then I would be left with an empty property which I have to pay out 150% Council Tax on. - Zero income and increased outgoings is not a good idea, hence the need to attract tenants (but with higher levels of security, e.g. deposits and rent guarantors etc).