Paying 12 months rent up front

El_Torro

I am currently in a situation I haven't experienced before. It may be fairly common so just asking here for thoughts:

I rent out a flat in a large city in England (not London). The current tenants are moving out soon and I have two sharers lined up to move in soon. I use a letting agent to rent the property out and it's a fully managed service. This means (amongst other things) that they are responsible for finding tenants and vetting them. In exchange I pay a (pretty hefty!) percentage of the rent to them every month.

One of the two new tenants is working, the other one is currently looking for employment. The employed one will pay the rent monthly for the duration of the lease (as normal). The other one is paying the rent up front for the full 12 months, since they have no income. The letting agent is holding on to the full sum and will pay me the rent every month (minus their fee). 

So I was just wondering if others have done this, and if there are any pitfalls I don't currently see? Personally I don't see a major issue with this arrangement, just wondering if I'm missing anything. Some of my (minor) concerns:

The letting agent goes bust and I lose the remaining rent. Not a major concern for me as they are an established company with branches. They don't just do lettings, they are also an estate agent. I know this means I'm probably paying a lot for the management fee, on the plus side though they're not some two bit operation that is likely to disappear.

The tenant doesn't find a job in 12 months and then refuse to move out (or pay the rent) at the end of the lease. Again I'm not too concerned about this scenario. After all someone who's currently employed could also be unemployed in 12 months time. 


Thanks for any comments.

user1977

El_Torro said:

The letting agent is holding on to the full sum

Why? It's your money (minus their commission).

El_Torro

user1977 said:

El_Torro said:

The letting agent is holding on to the full sum

Why? It's your money (minus their commission).

A very good question, one I asked myself. I wasn't clever enough to ask it when I spoke to the letting agent though. I might give them a ring tomorrow. However I see two benefits to this arrangement:

1. Whenever there are costs (repairs, gas certificates, etc...) the letting agent pays them and deducts the money from what they give me. I'd rather it get deducted from money I haven't received yet than have to give some money back in a given month. Essentially doing it this way helps me to manage my own personal cashflow easier.

2. Taking the money monthly means I spread out the tax liability across two tax years. If I were to take it upfront it would all be liable in this tax year.

Sure, I could take it all now and stick it in a savings account. Earning an extra 1% or so on the money doesn't exactly fill me with excitement though.

user1977

El_Torro said:

user1977 said:

El_Torro said:

The letting agent is holding on to the full sum

Why? It's your money (minus their commission).

Taking the money monthly means I spread out the tax liability across two tax years. 

Are you sure about that? I would have thought for tax purposes you'll be deemed to have received it when your agent does.

starving_artist

Are you sure about that? I would have thought for tax purposes you'll be deemed to have received it when your agent does.

This.

You could let them retain an amount - say one month's rent - to cover extra costs which might arise during the tenancy but I would have the rest minus their fee paid out to you.

anselld

The last tenant I knew who paid 6 months up front then paid nothing for the next nine months and has just been evicted by bailiffs leaving the L with £5k+ debt and a trashed property.
Did you actually permit the Agent to make such an arrangement?

Stubod

..I would be wanting all "my" money (less fees), as soon as it is available...or is the agent re-paying you the interest you will lose?

El_Torro

anselld said:

The last tenant I knew who paid 6 months up front then paid nothing for the next nine months and has just been evicted by bailiffs leaving the L with £5k+ debt and a trashed property.
Did you actually permit the Agent to make such an arrangement?

I did, yes.

Just because somebody pays up front because they're unemployed doesn't necessarily mean that they will do this. The same can happen to someone who becomes unemployed during the course of the tenancy. And being unemployed doesn't necessarily mean that someone is predisposed to trashing the property they live in either. It's a risk that all landlords take, to a greater or lesser extent. 

canaldurhone

There are several issues.
1) 12 month payment held by the agent. It's your money not the agents, whether it is paid a month in advance or 12 months in advance. The only reason for the agent to keep it is to boost their cash flow and possibly earn interest on it
2) any money held by the agent. In a fully managed contract it is sometimes (not always) agreed that the agent can retain an agreed amount to cover expenses eg minor repairs, gas/EICR report etc, but this is totally unrelated to your original question regarding the 12 months rental
3) Alternatively to 2) above is that the contract requires your consent to make any payments (eg repairs, reports etc, and only then can the agent deduct from rent or request paymemt from you - what does your contract with the agent say? What are you happy with? Have you read:
Post 9: Letting agents: how should a landlord select or sack?
4) Are the tenants being offered separate tenancy agreements, or one 'joint and several' tenancy?
5) If the former, then should the unemployed tenant not pay month 13 you could start eviction of that tenant via a S8 Notice
6) If the latter, then you are not receiving one tenant's rent upfront, you are receiving half the rent for the tenancy upfront. Should the unemployed tenant not pay month 13 you could demand it from the other tenant. Eviction as an option would have to be of both joint tenants
7) Tax. The agent is just that - an 'agent' acting for you. When the agent receives the cash then for tax purposes, you have received it (and must declare it).
8) if the agent goes bust having received and held the rent then a) the tenant will have legally paid their rent (so you can't demand it again or evict for arrears) and b) you'll have to take your turn with the Official Receiver to claim from whatever assets the company has.

TripleH

Re receiving the money upfront. You can treat it as you would rent paid monthly.

The cash received up front is a balance sheet item and does not relate to the profit /loss you make in the year for your tax return.