HOUSING BENEFIT TENANCIES : Will they work for you?

UPDATED DECEMBER 2013
In a rising housing market, ex Local Authority properties are becoming increasingly sought after by investors, due to higher returns and more reasonable purchase prices. It works differently to the regular private market though, so you need to understand this before you jump in.

We get asked by potential tenants if we have properties that will accept housing benefits on a daily basis. That’s because there’s huge demand for properties that will accept benefit claimants – Local Authorities in Northampton and Rugby have ‘waiting lists’ running into the thousands which continue to grow. These tenancies can work well, but it’s really important that the landlord understands in advance how these tenancies work, and what the pro’s and con’s are. I’ll go through these below.

Should I, Shouldn’t I?

The main question Landlords should ask is ‘do I need to accept Housing Benefit Tenants to rent my property’?, For the vast majority of Landlords, the answer to this question will be no – there will be a large enough supply of good quality private tenants happy to pay the rent you want. As such you’ll stick to the private market as it has fewer quirks. Landlords generally need to consider a tenant on benefits if:

1. their property is in an area where there’s low demand from private tenants, or
2. the local market is such that there’s a shortage of private tenants generally.

Essentially, if you buy a property in Blackthorn, you do so expecting a Housing Benefit tenant. 

What are the Advantages?

If your property isn't in the best area, there are many!

1. The main point is that statistically housing benefit tenancies cause no more problems than private tenancies. They just work differently and need a relaxed landlord. 
2. You can get a premium rent for your property – Local Authorities have a set ‘scale’ they pay against, based on the size of the property, and not based on the area. As such if you’ve got a property in one of the poorer areas of town, you’ll get more for it with a Housing Benefit tenancy than with a private one.
3. In many cases the Council will provide a guarantee bond instead of a deposit. This is usually capped at 1 months rent, but in certain instances can go as high as £6,000. The bond scheme with Northampton BC works well, and pays out.
4. Housing Benefit tenancies last longer – if you’re claiming benefit and you want somewhere nice to live, the world is by no means your oyster! As such when tenants get somewhere nice, they tend to stay longer.
5. In certain areas of town, a housing benefit tenant may be a safer bet than a private tenant – a single parent with children is always going to be entitled to funds, whereas a private tenant on low income and in / out of work, may struggle more to pay.
6. More often than not, we can arrange to receive direct payment from the Local Authority, which mitigates the likelyhood of the tenant not paying.

What are the disadvantages?

There are a few here also. It's important you understand these in advance.

1. Rent is paid in arrears, not in advance.
2. Local Authorities make 13 rental payments a year instead of 12. You still get the same amount of rent annually, only in smaller chunks.
3. Local Authority administration is pretty bad. When the tenant moves in, the first thing they do is apply for benefits. You won't get paid until the Council has processed this application. This can take 2 months if they are busy, and they don't apologise. They do backpay though, so you'll get your money eventually. 
4. Without wishing to over generalise, tenant often struggle to deal with issues that arise (such as their benefit entitlement being changed) and deal with this by ignoring it, or burying their head, rather than coming and telling you.
5. If the Local Authority overpays housing benefit, they will take it back from whoever they paid it to. As such if we’re getting direct payment for your tenant, and the LA subsequently decides the tenant wasn’t entitled to that money, they will deal with it by simply taking the money back – that's democracy for you! As such we're looking for tenants who clearly ARE entitled to full benefits.
6. If you want to / need to get rid of your tenant, you can bet the Local Authority won’t help you – you’ll very much have to rely on the court process unless your tenant is happy to play ball. You'll get paid rent in the interim though, assuming the tenant remains entitled to it. As such ending a tenancy can take longer and cost money. 
7. As an agent we lose a little bit of flexibility on which tenant we let to – the Council doesn’t like to see us making arbitrary decisions, and rejects any form of 'discrimination'. We don't lose control completely though, and can filter to an extent.

The secret to success is hence understanding the above and managing it. If you get a reliable tenant, and a relaxed landlord, it can work really well and deliver a great yield for the landlord. If you get an unreliable tenant and an inflexible landlord, problems can ensue! Is this any different to renting privately?

As such there can be problems with accepting tenants in receipt of housing benefit. It’s not a market that suits everyone and if you’re the sort of landlords that treats their rental properties as extensions of their own home, it’s not the market for you. That said, you can pick up a cheap property in one of the less upmarket areas of town and rent it for good money. We have a number of landlords who operate successfully in this market and I have a couple of places myself that I let out to tenants in receipt of benefit.