Tenants not paying their rent and not finding a tenant. Your worst nightmares if you’re the owner of a rental property, especially if you’ve taken out a mortgage to buy the property and are using income from letting it out to cover the payments.
Non-payment of rent, an increasingly common phenomenon
Non-payment of rent is the main risk you’re taking with a buy-to-rent on a mortgage. How can you stretch to those monthly repayments if the rental income isn’t coming in anymore? Research shows that this phenomenon has increased since the early 2000’s. Figures released by the French Ministry of Justice indicate that the number of proceedings brought by landlords, public and private, shot up by 35% between 2001 and 2011, rising from 107,639 to 145,828.
Since then, every year over 150,000 cases have been brought before the French courts. Unpaid rent accounts for 3% of all rented property. In 2011, the ANIL (National Housing Information Agency) calculated that the average amount owed by tenants was €2,600 in cities and €1,770 elsewhere. So the first precaution is pretty obvious: take the utmost care when selecting your tenants. Go as far as you can within the limits of the law to check out their solvency and the guarantees they’re providing. In that respect, the nature of their work contract and salary level are the most important criteria.
But even if most incidences of non-payment of rent are down to the tenant having financial difficulties, they can also be due to disputes between tenants and owners. A survey published by the ANIL in 2014 showed that disputes with lessors came second on the list of reasons for non-payment of rent (12% of cases), after unemployment, which is the main factor in almost a third of non-payments (32%). The onus is also therefore on the owner to fend off legal proceedings, by maintaining a dialogue with tenants to avoid having to resort to administrative solutions which are by definition lengthy, uncertain and ultimately prejudicial for both parties.
Figures on turnover times between 2 tenants
More recent figures not being available, we’re turning to a study published by the Commission on Sustainable Development in 2013, according to which 60% of empty apartments find new occupants within one year and according to which “50% of the time, an apartment falling empty is quickly followed by a new long-term tenant moving in”. This same study confirmed the fact that location, quality and the size of the apartment are determining factors.
So, a beautiful apartment in a nice part of Paris, Lyon or Bordeaux is highly likely to find a new long-term tenant very quickly. Besides insurance against initial unoccupancy (before you find your first tenant) and vacancy (period between lets), it is in the owner’s interest to maintain good relations with their tenant(s) to minimise turnover and increase their chances of finding new tenants by word of mouth.
Is it worth taking out rent guarantee insurance ?
There are ways of guarding against the risks of unpaid rent and your property being vacant. A lessor has the right to request a security deposit from a tenant to cover unpaid rent or monthly charges, the amount of which must, without fail, appear on the lease agreement This safety net is, however, relative, since the said deposit cannot be higher than one month’s rent.
You should also be aware of the “Visale” scheme, put in place by the State and Action Logement to replace “GRL” insurance against rental risks. Its aim is to give those in precarious situations access to rented accommodation, i.e. those tenants who represent the greatest risk for lessors: the under 30’s and employees over 30 hired on non-permanent contracts within the last six months. It consists of a guarantee, covering the first three years of the lease, that, in the event of non-payment, sees the sums advanced to the lessor by Action Logement, then repaid by the tenant, with an upper limit on the monthly rent of €1,500 (including monthly charges) in Paris and €1,300 elsewhere. That means that the lessor is guaranteed to receive their rent during the first three years of the lease without having to pay an excess on their insurance.
When a tenant isn’t eligible for the “Visale scheme”, however, the only option for an owner is to take out a guarantee known as “unpaid rent insurance” (“GLI”). That’s all the more necessary when the owner is using the rental income to repay a mortgage on the property. A GLI can be taken out with an insurance company or a bank at a cost to the owner of between 2% and 4% of rent. Beware of terms and conditions, however (often extreme in relation to a tenant’s solvency) and their effects (waiting periods) vary enormously from one insurance policy to another! The GLI rental insurance also provides for indemnity in the event the apartment is vacant, whether you are looking for your first tenant or are between lets. With some insurance policies, you may receive up to 80% of the rent for a period of time determined in the policy.
In conclusion, unpaid rent is a real risk, but it represents only a very small drop in the ocean of the existing buy-to-rent market. What’s more, solutions exist to help you protect yourself and take maximum precautions to avoid problems.
If you would like more information or simply to discuss your buy-to-rent project, don’t hesitate to get in touch with us.