Do you opt for a non-inclusive or all-inclusive option?
When it comes to drafting lease agreements for tenants, landlords can opt between two main types: non-inclusive and all-inclusive. Choosing between offering all-inclusive or non-inclusive rental agreements is a significant decision for landlords, as both options come with their own set of advantages and disadvantages.
We’ve simplified the process by breaking down each type of rental agreement to assist you in making a more informed decision.
Non-inclusive agreements
A non-inclusive tenancy arrangement signifies that tenants are responsible for their own utility and service bills, separate from the rent. This includes payments for utilities such as gas and water, council tax and broadband services. In this setup, the landlord’s sole financial interaction with tenants involves collecting the monthly rent.
The primary benefit for landlords in adopting non-inclusive tenancies lies in the simplicity of handling a single payment. Tenants, on their part, take up the mantle of managing agreements with service providers and ensuring timely payments directly to them rather than through the landlord. This arrangement can significantly reduce the administrative burden on landlords, particularly those managing multiple properties, making it an attractive option for many.
However, non-inclusive tenancies may not be as appealing to a younger demographic, including students, who often prefer the predictability of a single, comprehensive payment covering all living costs. In scenarios such as Houses in Multiple Occupation (HMO), the desire for evenly split bills can make inclusive tenancies more desirable. Furthermore, non-payment of utility bills can indirectly affect landlords, leading to potential disputes and unwanted stress.
All-inclusive tenancies
Transitioning to the concept of all-inclusive tenancies, this model amalgamates rent and other household bills into one consolidated payment. Landlords have the discretion to decide which services are included, commonly covering utilities, broadband, council tax and TV licence fees.
All-inclusive tenancies are particularly appealing among younger tenants and those residing in HMO settings. They simplify budgeting and eliminate the hassle of bill splitting. Offering an all-inclusive package can enhance a property’s appeal to a broader audience, albeit introducing a greater degree of responsibility on the landlord’s part.
The all-inclusive model necessitates ongoing coordination with various service providers, a task that can become complex for landlords overseeing multiple properties. Variability in utility usage among tenants can lead to fluctuating costs and potential overuse, posing challenges in managing expenses effectively. Landlords can employ utility bill management services to streamline payments and maintain profitability despite these hurdles.
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Please note: this is a long term investment which you hope will generate rental income along the way and a profit when you sell the property, but bear in mind that if you need access to some cash, a property can take time to sell or remortgage. If house prices fall, you might not be able to sell for as much as you had hoped. You would have to make up the difference if the property sold for less than you owe – a risk that increases, the higher the percentage you borrow. If you sell for a profit, you may have to pay capital gains tax. Don’t forget that with a variable rate mortgage, your costs will rise if interest rates go up. This would eat into, or even wipe out, your income and profit. It is recommended that you also maintain access to emergency funds to cover your mortgage payments during ‘void periods’ that may arise whilst you have no tenant and the property is not let. Please also note: a mortgage is secured against your home or property. Your home or property may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.
