The Renters’ Rights Act went live in May, ending no-fault evictions and shifting tenancies to rolling contracts.
The reforms also ban landlords from requesting more than one month of rental payment upfront.
The one month advance payment can only be paid once a tenancy agreement is signed.
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This means tenants only need to pay a deposit when moving into a property and one month upfront if requested.
Before the changes, landlords could request large amounts in advance.
Requesting larger upfront rent payments was traditionally a way to reduce the risk of rent arrears, particularly when tenants failed to meet affordability criteria.
We reveal alternative ways to test tenant affordability and reduce the risk of rent arrears.
Tenant referencing
A key part of choosing a tenant is referencing.
Landlords can conduct credit checks, get employer references and assess affordability.
You can also talk to a tenant’s previous landlord to check if rent was paid on time and if the property was kept in a good condition.
Some of these checks can be done yourself but there are companies such as Goodlord and HomeLet who can do the work for you.
Nouran Moustafa, practice principal at Roxton Wealth, said: “Landlords need to stop seeing large upfront rent as the only form of security. It was never a perfect test of affordability anyway. Someone can have cash today and still be financially unstable three months later.
“The better approach is proper, evidence-led referencing, income checks, employment status, credit history, previous landlord references and whether the rent is genuinely affordable against the tenant’s wider commitments.”
Rent guarantors
Some analysts predict that landlords will become more reliant on guarantors.
This is where a family member is required to set aside funds in case a tenant fails to pay rent.
Analysis by property insurance technology firm Zero Deposit found the average renter in England is likely to fall short of standard affordability requirements of 2.5 times the annual rent.
With average rents currently standing at £1,438 per month, equivalent to £17,256 per year, tenants would typically need to earn at least £43,140 annually in order to pass affordability checks, Zero Deposit said.
However, average earnings across England currently sit at £41,859, leaving the average renter £1,281 below the required threshold.
Sam Reynolds, chief executive of Zero Deposit, said: “While the Renters’ Rights Act is designed to improve security for tenants, it also significantly changes the way landlords manage financial risk within the private rental sector. With restrictions on upfront rent payments and fewer traditional safeguards available, landlords and agents naturally place greater emphasis on affordability checks and income protection when assessing prospective tenants.
“As a result, we expect guarantors to become an increasingly common requirement for renters who fall outside standard affordability criteria, particularly younger tenants, overseas applicants, self-employed workers, and those moving to high-cost rental areas.”
Rent guarantee insurance
Landlords can also protect themselves with rent guarantee insurance.
In return for a premium, this type of insurance pays out the monthly rent amount for a set period if your tenant falls into arrears.
It may also cover the legal fees associated with serving notices and legally evicting tenants.
Michelle Lawson, director of Lawson Financial, said: “Rent guarantee insurance is now a must and is a low cost way of protecting your rental income against most adversities.”
Find a good lettings agent
A lettings agent should have a book of reliable tenants that they have already reference and recommend.
Using a lettings agent can also help keep up with ever-changing rental rules and regulations to ensure you are renting your property out legally.
Lawson added: “A good letting agent will be fully referencing prospective tenants.
“Self-managing landlords will be the ones potentially sleep-walking into disaster as so many are inexperienced and rely on social media to find tenants and for advice- they need to ensure that they use reputable channels.
“There are many industry backed resources that they can call upon but a number will still cut corners which, with the Renters Rights Act and subsequent council imposed fines, could prove costly. to avoid doubt, they should now be employing the services of a good letting agents who knows the new legislation as the buck stops with the landlord regardless.”