Questions on working out rent affordability for tenants and rent guarantors

tallac

Okay, so what I've read is that (as a rough guideline) the combined gross income of the named tenants should be around 30x the rent.

E.g. if rent is £1,000 per month then the combined tenants gross income should be £30,000 per year.

If a rent guarantor is being listed, then they should have a gross income of 36x the rent (they need more because they may have their own financial commitments).

So far so good, but what about these unusual scenarios:

1. Tenant's salary is only 15x the rent but the rent guarantor salary is only 18x - does the fact they can each meet half the salary guidance mean it's the same level of risk as one coving the full guidance amount?
2. Tenant salary covers 10x the rent, guarantor 1's salary can cover 12x and guarantor 2's salary covers another 12x - is this also the same level of risk?

I'm just trying to understand if the risk level is the same or different when there are multiple people liable for the rent but neither party can completely cover the recommended salary amount.

Any help would be greatly appreciated. Thanks :-)

deannagone

Are you a LL or Tenant?

tallac

deannagone said:

Are you a LL or Tenant?

Landlord (although the actual LL is my father, I'm just helping him with the admin and organisation side of things).

deannagone

Can't you find a tenant who can meet the affordability criteria.  It would seem to be the easiest option.

MaryNB

In your scenario the tenant cannot afford it. If someone earns £15k a year their take home pay is £1,155. After rent they have £155 left over for everything else.

The point of a guarantor is to pay if something goes wrong like the tenant loses their job or refuses to pay. In your scenario the guarantor will have to contribute, unless the tenant has substantial savings.

The guarantor in your scenario will have to agree to help pay but since they'll be paying rent/mortgage elsewhere it's highly unlikely they'll be able to help the tenant if earning 18x the rent. If they pay half the tenant's rent that's £500 out of their take home pay of £1,324 a month. Down to £824 before they can pay their own living expenses.

Stick with 30x the rent. Even at that it's about half someone's take home pay which is fairly significant. General advice is not to spend more than a third of monthly income on rent. 

AdrianC

tallac said:

Okay, so what I've read is that (as a rough guideline) the combined gross income of the named tenants should be around 30x the rent.

E.g. if rent is £1,000 per month then the combined tenants gross income should be £30,000 per year.

If a rent guarantor is being listed, then they should have a gross income of 36x the rent (they need more because they may have their own financial commitments).

So far so good, but what about these unusual scenarios:

1. Tenant's salary is only 15x the rent but the rent guarantor salary is only 18x - does the fact they can each meet half the salary guidance mean it's the same level of risk as one coving the full guidance amount?
2. Tenant salary covers 10x the rent, guarantor 1's salary can cover 12x and guarantor 2's salary covers another 12x - is this also the same level of risk?

I'm just trying to understand if the risk level is the same or different when there are multiple people liable for the rent but neither party can completely cover the recommended salary amount.

Remember, you're comparing monthly rent with annual income. And there's twelve months in a year.

So if the tenant is earning 10x monthly rent per annum, they're earning less than the rent. I've always found tenants quite like eating, the same as "normal people"...

Do you understand the point of a guarantor? It's not to subsidise the tenant. It's to be a backstop for their debts.

If the tenant can't afford to pay the rent, you can't just expect the guarantor to top it up for them silently. What happens is that, when the tenant is eventually evicted over their debts, you can then pursue the guarantor through the courts to cover those debts... providing all your paperwork is scrupulous...

yksi

tallac said:

Okay, so what I've read is that (as a rough guideline) the combined gross income of the named tenants should be around 30x the rent.

E.g. if rent is £1,000 per month then the combined tenants gross income should be £30,000 per year.

If a rent guarantor is being listed, then they should have a gross income of 36x the rent (they need more because they may have their own financial commitments).

So far so good, but what about these unusual scenarios:

1. Tenant's salary is only 15x the rent but the rent guarantor salary is only 18x - does the fact they can each meet half the salary guidance mean it's the same level of risk as one coving the full guidance amount?

No.
Here's how a guarantor agreement works:
Your tenant has some unfortunate thing happen (or just decides to pay nothing).
You then turn around to the guarantor and say: hi you need to pay the whole rent.
Your risk then becomes that the guarantor, who only earns £18,000 a year, can't afford to pay your tenant's rent. In fact they can't afford to even help out with part of it. You end up with nothing, and the tenant is still in your property. 

As you can see, you need "someone" to have enough income to fund the entire rent. This is 30x the rent for a tenant, or, if it falls onto a guarantor, needs to be 36x the rent for the guarantor alone.

Tenant salary covers 10x the rent, guarantor 1's salary can cover 12x and guarantor 2's salary covers another 12x - is this also the same level of risk?

Still no. Again you need to play out the "what happens if the tenant pays me nothing" scenario. Both guarantors, who earn practically nothing, spend their entire £12k a year on just surviving. Even if they are a couple who live together, £24k isn't a big household income and it's not reasonable to think they have a spare £1000 a month for your tenant's rent. You get nothing and even if you chase them in court for the money, you can't get blood out of a stone. The court might even just laugh at you because you named people as guarantors who clearly couldn't afford to cover someone else's rent.

It is a landlord's market right now with many properties having dozens of applications and being snapped up the same day. You can afford to be choosy. While it might not seem very nice to those struggling to get a rental, you can probably completely skip anyone who needs a guarantor and just select someone who can cover the 30x in the first place.

tallac

Thanks for the advice, it certainly helps my understanding.

Another related question I have are those tenants who are justifying being able to afford the rent due to substantial savings which they say they can prove by showing bank statements. One particular tenant has said him and his wife are retired so they do not have any income. They have just moved to the UK. They are happy to pay rent in advance but they will not have any income.

This raises many red flags for me, I just wanted to confirm if this is the case:

1. Just because someone has substantial savings, this doesn't mean they have the money. For example, what if the money is just temporarily in their account or the very next day they have spent the money. A substantial savings balance isn't reassurance in the same way as a regular salary is.
2. A tenant wanting to pay rent in advance for say 6 months is not legal. I believe this constitutes as a deposit and the maximum deposit a landlord can take is only 5 weeks of rent. So, even if a tenant is willing to pay rent in advance, the landlord cannot take this.
3. If they have just moved to the UK then it is very unlikely I'll be able to get previous landlord references. Also, I would be unable to easily check they have any CCJ equivalents in the previous country.

Thoughts?

AdrianC

tallac said:

A tenant wanting to pay rent in advance for say 6 months is not legal. I believe this constitutes as a deposit and the maximum deposit a landlord can take is only 5 weeks of rent. So, even if a tenant is willing to pay rent in advance, the landlord cannot take this.

No, it's rent.

It's not being held as security against future damages, which is what a deposit is. It simply is rent... just paid up front.

Standard is to pay five weeks deposit plus a month's rent in advance - how come that doesn't similarly fall foul...?

If they have just moved to the UK then it is very unlikely I'll be able to get previous landlord references. Also, I would be unable to easily check they have any CCJ equivalents in the previous country.

Correct.

But have they recently moved to the country for the first time, or are they previous UK residents, probably UK nationals? "Brefugees"...?

tallac

AdrianC said:

tallac said:

A tenant wanting to pay rent in advance for say 6 months is not legal. I believe this constitutes as a deposit and the maximum deposit a landlord can take is only 5 weeks of rent. So, even if a tenant is willing to pay rent in advance, the landlord cannot take this.

No, it's rent.

It's not being held as security against future damages, which is what a deposit is. It simply is rent... just paid up front.

Standard is to pay five weeks deposit plus a month's rent in advance - how come that doesn't similarly fall foul...?

If they have just moved to the UK then it is very unlikely I'll be able to get previous landlord references. Also, I would be unable to easily check they have any CCJ equivalents in the previous country.

Correct.

But have they recently moved to the country for the first time, or are they previous UK residents, probably UK nationals? "Brefugees"...?

Understood... rent in advance does not count as deposit. Thanks for the clarification.

But say there is a 12 month contract. If they pay 6 months rent up front but after 1 month they want to leave (so tenants decision). Do they forfeit the remainder of the 6 months rent they paid in advance?

I don't want to leave myself exposed by taking 6 months rent up front, and 6 months into the contract they stop paying rent. It then takes me 6 months or more to evict them. Essentially, the 6 months rent up front gives a false sense of security. If they have low income, then the only way paying rent 6 months in advance gives security is if they are always paid up 6 months rent in advance. Is that a reasonable thing to ask for? Essentially, the tenants will pay 6 months rent in advance and each month after, they are paying another full months rent.

dimbo61

If they pay 6 months rent in advance and then pay the rent each and every month then you fall foul of the law as you have taken 6+ months rent as deposit !
All part of the fun of being a Landlord.