Why Every HMO Landlord Should Insist On Guarantors [Community Q&A]

In this episode, I’m going to talk about guarantors and why I think they can be a great solution to many of the challenges you might face when managing HMO properties. 

I know not everyone agrees with me but in this episode, I’ll be sharing some thoughts from our community, as well as my own opinion. I’ll also give you the information you need to make the best decision for your business. If you’re managing tenants or HMOs, this is definitely an episode you’ll want to stick around for. 

Topics covered in this episode:

• 03:31 – Understanding Guarantors
• 08:10 – Why Guarantors Are Often Required
• 19:10 – The Benefits of Having a Guarantor

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Transcript

Andy Graham (00:02.67)

Hey, I'm Andy and you're listening to the HMO Podcast. Over 10 years ago, I set myself the challenge of building my own property portfolio. And what began as a short-term investment plan soon became a long-term commitment to change the way young people live together. I've now built several successful businesses. I've raised millions of pounds of investment and I've managed thousands of tenants. Join me and some very special guests to discover the tips, tricks and hacks, the ups and the downs, the best practice and everything else you need to know to start, scale and systemise your very own HMO portfolio now.

Andy Graham (00:40.694)

In today's episode, I am going to be discussing guarantors and specifically why I think guarantors can be such a great solution to remove so many of the issues that you could have running HMO properties. Now, not everybody agrees with my opinion and I completely understand why, but today what I'm going to do is going to share some opinions from our community on this. I'm going to give you my opinion. I'm going to give you all the tools that you need to make a decision for yourself and your business so that you can figure out what's best for you, but if you are managing tenants, if you are managing HMOs, then this is definitely an episode you want to stick around for. Please sit back, relax, and enjoy today's episode of the HMO podcast.

Hey guys, it's Andy here. We're going to be getting back to the podcast in just a moment, but before we do, I want to tell you very quickly about the HMO roadmap. Now, if you're serious about replacing your income, or perhaps you've already got a HMO portfolio that you want to scale up, then the HMO roadmap really is your one-stop shop. Inside the roadmap, you'll find a full 60 lesson course delivered by me, teaching you how to find more deals, how to fund more deals and raise private finance, how to refurbish great properties, how to fill them with great tenants that stay for longer, and how to manage your properties and tenants for the future. 

We've also got guest workshops added every single month, we've got new videos added every single week about all sorts of topics, we've got downloadable resources, cheat sheets and swipe files to help you, we've got case studies from guests and community members who are doing incredible projects that you can learn from, and we've also built an application just for you that allows you to appraise and evaluate your deals, stack them side by side and track the key metrics that are most important to you. To find out more, head to thehmoroadmap.co.uk now and come and join our incredible community of HMO property investors.

Andy Graham (02:31.382)

Welcome back gang. So today I'm going to be talking about guarantors and specifically why I think that you should be taking a guarantor for all of your tenants. But look, I get it. This is potentially controversial. This could be a lot more work for you. This might not work for your business. You might be afraid of the repercussions of asking all of your tenants for guarantors. Perhaps you don't quite understand the value of having a guarantor in the first place. Maybe this would be loads more work for you. Maybe you're afraid of offending any of your tenants. Well, look.

Today, I'm going to break down a great discussion that we had inside the community recently when I posted about guarantors and why I think they can be such a great tool. I want to share some of the opinions and experience of our other members. I'm to give you mine too. And hopefully by the end of today's episode, you've got all of the tools that you need to make the right decision for you and your business. So to get today's episode kicked off, let's first of all remind ourselves what a guarantor is. Well, in the UK, especially when we're talking about tenancy agreements, a rental guarantor can often be required for a tenant who's got low income, perhaps a bad credit score, maybe a student who doesn't have any income or credit history at all. Maybe even someone who lacks rental history, but essentially a guarantor can sign the tenancy agreement alongside a tenant. And what they're essentially doing is promising to cover any damage costs, any missed rental payments and any of the other terms and conditions that are required to fulfill the tenancy agreement. 

So in a way it's essentially giving somebody else or asking somebody else to sign up to all of the responsibilities within a tenancy agreement and you're holding them and you have the ability to hold them to account if for example the tenant was to break any of the covenants on the tenancy agreement. Now many years ago, probably over 10 years ago, I made the decision to have a guarantor for every single one of our tenancy agreements. And today I'm going to share the reasons why and the benefits that I think that that provides. 

But I'm also going to share some very true and real and important reasons and opinions as to perhaps why you might not want to do that. And I'm going to try and give you a balanced argument here at the same time, sharing my opinion and my side of that argument as well. But I've been doing it for a long time. And when I post about this inside the community or wherever I might be talking about it, it does often get some unusual reactions in my opinion, at least, because for some people it's so unusual.

Andy Graham (04:50.2)

to ask for a guarantor in any scenario, in every scenario, which I actually do completely understand. So we're going to explore that in today's episode. So the question that I recently post to our community or a post that I recently put out was really just highlighting the fact that I do this and in my opinion, what the value and the real benefits of that are. But the main point of the post that I shared in the community was really just to ask our community members what they do. And I got some fantastic responses and we had a really great discussion.

As we often do when we post and share ideas in the community. So what I'm to do is I'm going to start just by sharing some of the opinions of our community members. Now, the very first comment I got in response to this post was from Julian, who's one of our great members in the community, a regular poster, somebody who's got a lot of experience in this industry. And Julian said, look, a guarantor needs to be a homeowner, otherwise it's a complete waste of time. C said.

Similarly, but not identically, no, unless they have a solid company, so they've got a good company behind them to support the tenancy agreement. Tim said actually that he always requires a guarantor, but if they can't find one, he considers using services like Housing Hand. And that's something I might circle back on in today's episode. Housing Hand is almost like a third party guarantor that our tenants can pay for the services off. Bit like an insurance premium for them, really. Ilande, one of our members, regular contributor, also a member of the HMO roadmap.

She said she finds guarantors useful and she actually shared a story of how involving a guarantor recently enabled her to solve a tenant issue really quickly. I've got lots of examples of that actually. Manny, one of my good friends and contacts from the industry, one of my long standing mentees of many, many years, I've advised Manny for a long, long time. He's got a great business and portfolio and huge amounts of experience. Manny says he and his tenants must all have guarantors and that he actually finds weekly rent payments also helped, now doesn't find issues early on as well. But Manny absolutely swears by this. And that is after I convinced Manny to do it himself after never really kind of insisting that his tenants were guaranteed. John, another, one of our regular community members said for student HMOs, he always requires a guarantor. Otherwise it's 12 months upfront. That's an interesting one, isn't it? Because with the renter's rights bill now on the horizon, we're not going to be able to take rents upfront. So I'll be interested, John, to find out.

Andy Graham (07:12.01)

what you think about the guarantor status and what you might do about this if and when that policy of taking rent upfront changes soon or early next year. Jane, one of our community members said, we don't require guarantors for professionals, but would for tenants who fail referencing and that we still want to work with. And I would say that actually Jane's opinion there is probably the standard. Like if you cut a line down the middle of the rental market, guarantors are generally required by agents who have vetted a tenant that has maybe not quite sort of come up to the bar. Like I said earlier, perhaps doesn't quite have the credit history or the employment requirements. Maybe just doesn't have what the landlord actually needs of them. And usually then they'll get a guarantor in place and that guarantor will be an individual who can tick those boxes. But as you can see, there are some very different opinions out there in our community. And I totally understand why some of those opinions are a little bit stronger than others. 

And it's interesting because I think where it's obvious that people do use guarantors, it's really clear that they understand why they use guarantors and where people don't. I'm not totally convinced that everybody understands why they don't. I think that they don't because it's just easier and because they're afraid of maybe the extra work that it might involve asking for it. And I definitely don't think that's the right thing. I think after today's episode, if with everything that I'm going to share with you, if you still don't think it's right for you or your business, then I totally get it.

But I really want to make sure that you have absolutely considered all the reasons why you might do it as well as the reasons why you might not do it. And I just think most people come at this from that point of view, the reasons why they might not do it as opposed to what the benefits could be. So look, here's my opinion for what it's worth. I think there are a few reasons. I'm going to share five of the main reasons really why I think having a guarantor is a really good idea.

The first thing is that obviously there is a legal obligation. So guarantors are legally required to cover unpaid rent or damages if there's an issue. So if you've got a tenant that signs up initially looks and sounds absolutely great on paper, maybe fantastic, lovely at the viewing, but for whatever reason just doesn't materialise into that great human that you want them to be. And they're difficult. They don't pay their rent. They make your lives really difficult. They upset other tenants and they just...

Andy Graham (09:32.258)

give you issues and they damage stuff in the house. And that is potentially quite an extreme example, all of that stuff. Usually it's just kind of unpaid rent and things like that. But if that is an issue and it's an issue that you cannot resolve despite mediation, despite best efforts, despite being fair, then that legal obligation is there for a guarantor to pick up that tab. So what it does is it gives you some financial reassurance that if anything is damaged and has to be paid for, if anything, or any rent does go unpaid, it will be paid for and you won't lose out. Your business won't be negatively impacted. There is someone on the end of the hook for that. And I think that that is incredibly important. Let's just think about this for a second in business. How many businesses are there where you've got that sort of reassurance? I guess it does to an extent depend on the caliber of your guarantor. I understand that, but how many industries is that the case? Usually if someone didn't pay or someone damaged something,

You'd have to take it up as a civil matter. You'd have to take them to court, pursue them. There are costs to that. Actually having a guarantor and having someone immediately on the hook for that is really, really, really important. Now that doesn't necessarily mean that they will just pay. They will just cough up the money. There is of course always the risk that even the guarantor doesn't fulfill their obligations on the tenancy agreement. But in my experience, it's incredibly unlikely. In fact, in all the years that I've been letting HMO rooms, I have never ever, ever

had a scenario where a tenant is defaulted or owed us money and the guarantor has not paid it and not picked up that tab. I can tell you though, before we had guarantors, there were some occasions where we had had issues with tenants, unpaid rent damages, and we were never able to collect that. Fortunately, we always managed to keep that relatively small in terms of an amount of money. But since we've had guarantors, we have never ever, ever had a rent arrears that went unpaid forever or damages that were both justified and went unpaid. We've always managed to get it sorted with a guarantor. And I think that speaks volumes. So first of all, simply just having that legal obligation in your tenancy agreement for somebody else to pick up the tab, I think is incredibly important. There are very few businesses in the UK where actually you can get that sort of strength in your contract. Okay. The second reason is that a guarantor is a little bit like a character reference for me.

Andy Graham (11:59.372)

And not having or not being able to produce a guarantor is a bit of a yellow flag. Now remember, guarantor doesn't have to be a parent. Usually that's what we think of younger adults and their parents will guarantor for them, but it doesn't have to be often. It'll be a grandparent. Sometimes it will be a sibling. Sometimes it will be an employer. Sometimes it will be a friend. And what's most important is actually that there is a guarantor there and that guarantor themselves is credible and worthy. Got to do a little bit of work to make sure that that is the case.

But I think not having a guarantor, not being able to produce a guarantor is a real yellow flag. Now I understand that there are some people who, for unfortunate reasons, may not have anybody that could provide any sort of guarantee support for them. Perhaps they don't have family, perhaps they don't have friends. It's rare. It's very unusual in my experience. And I've been doing this a long, long time, but of course there will be a scenario where that is the case.

Now I'm not saying that you have to do this 100 % of the time or nothing else will ever suit. I think you can always take a position, but I think it's highly, highly, highly unlikely that you're ever going to present it with this scenario where they genuinely do not have people around them, even in their extended network that could do this for them. In my experience, and I appreciate that I probably sound like a bit of, well, I'll let you forge your own opinion on this, but in my opinion,

People who tend not to want to produce a guarantor or say that they can't produce a guarantor are not able to do so for a particular reason. It is because they have already, in my experience, lost the trust and faith and support and friendship of the people willing to back them up, support them and take these sorts of risks and gambles. Maybe they've done this before and they've been stung and it's become an issue. How many times have you been contacted by a tenant who all of a sudden needs to move in?

Something has happened in their personal life and they suddenly need to move into a house. There are a myriad of reasons why that might be the case. But in my experience, it tends to be those sorts of people under those sorts of pressures who tend not to have or be able to or want to produce guarantors. It's yellow flaggy stuff. It's the sort of stuff you need to be very, very careful with. So look for me, having a guarantor, the second reason is basically someone sticking their neck out and saying, no, no, this is a good person. I trust this person so you can trust them too.

Andy Graham (14:23.702)

Of course it's all on face value, but I think that there's a huge amount of value in that nonetheless. I think not having it, not being able to produce it, I think in exceptional circumstances, there may be conditions where they simply are not able to produce a guarantor because that person or those people just do not exist in their life. But I think 99 % of the time when you ask for a guarantor and they don't want to, aren't able to produce one, if you probe, you'll probably find, or you'll probably see that they're up other little clues as to why they might be a tricky tenant. You can make a decision on that, but that for me is really, really important. The third reason is that actually having a guarantor is a huge incentive for a tenant to make sure that they stay within the framework of the tenancy agreements, that they actually look after the property and don't damage it and that they actually pay the rent and pay the rent on time and do it consistently.

I think that is so, so, so important. If you think about, for a second, the example with students, one of the reasons that we have guarantors and student tenancies is yes, because they don't have income and maybe they don't have good credit. So they haven't proved themselves as being responsible yet from a financial perspective. But actually as a student landlord and anybody listening to this, who is a student landlord themselves, they will know that it is very, very unusual for a tenant to disregard their obligations. 

They might push the boundaries a little bit. There's always a little bit of that with managing tenants, but actually getting to a point where they still dig their heels in and won't do anything, despite the fact that you are willing to refer to their parents as guarantors, that is very, very unlikely. And that is because the incentive is there to make sure that they don't upset their guarantor. They don't embarrass themselves in front of their guarantor or even embarrass their guarantor. They don't want to get in trouble. There are so many reasons, but I think that that incentive is another really, really good reason.

And it helps just ensure that before you have to refer it on or anything gets a bit messy or you're issuing notices that that rent gets paid or those damages or whatever it is gets paid for. The next reason is actually somewhere between that incentive and that legal obligation. And it's actually that guarantors just provide a support mechanism sometimes for really unfortunate reasons, but with the very best intentions or despite the very best intentions of tenants.

Andy Graham (16:44.27)

They fall on bad times, things change, maybe they get unwell, maybe the relationship that they were in breaks down and they're under a huge amount of additional pressure just outside of your arrangement with them. Maybe they're just going through a difficult time at work. Maybe they get made redundant. There are so many reasons as to why a tenant’s scenario and circumstances can change, it can change quite quickly. And I think that we as landlords should absolutely be sympathetic to that. I think we should absolutely make sure that we're willing to work with our tenants on that. 

And I'm not saying that we have to overlook the fact that the rent hasn't been paid and it ultimately must be paid. I think there are methods that we can work through. There's lots of different arrangements that we can come to. And I think actually as landlords, we really do have an obligation to help tenants when they do genuinely fall on more difficult times. But rather than have to shoulder that burden yourself and as a landlord, as a business owner, it isn't really your responsibility to do that.

And actually, if that happened to a lot of your tenants, that could really damage your business, even just temporarily. I think it's important that there is a support mechanism there for tenants and that support mechanism can be that guarantor, their parents, their friend, their family member, a colleague, an employer, whatever it is, that person might just be able to help them for one or two months or three months. And between you all, you can come to some sort of arrangement. I've worked with guarantors on a number of occasions where that has absolutely been the case.

And we've been able to smooth things out with absolutely no issues. Everybody's been really grateful. We've of course been really grateful that the guarantor has stepped on the mark. Tenant's been really grateful that everyone's been happy to kind of work and just be patient. And they've been really grateful to the guarantor. The guarantor has had no issues and actually has enjoyed helping that individual. So all for the right reasons. And I think just that support mechanism, I think it's a great thing to have in your business. I think it's a great thing for tenants to have as well. And I think that we should look at things that can happen to tenants with a degree of responsibility. So I think I've shared four reasons there, haven't I? I've shared the of the legal obligation, almost the character reference, by having one of the incentive just to follow the terms of the tenancy agreement and also just that support mechanism if things temporarily go sideways for a tenant. And then I think finally, and this is the real biggie for me, if you take all of those four things into consideration and think about the negatives and the downsides, for me, it's still just an

Andy Graham (19:10.462)

absolute no brainer. It's almost like this is all upside. So I can imagine there are some people sat there thinking, look, there's a bit more admin and there's a bit more paperwork. Yes, absolutely. There's a little bit more admin. There's a little bit more paperwork, maybe even the cost in doing a credit search on a guarantor. But if you take all of that into account and you potentially have the ability to reduce arrears and costs as close to zero, I would say that that's a pretty big win versus that time and cost commitment that you've got to put in. So I think sort of risk versus reward, that kind of cost benefit ratio, I think it's hugely favorable to have a guarantor. I think the idea, which I understand of asking a guarantor, who asking a tenant, sorry, who's an adult, who's got responsibility in life, who's got a job, I think it can feel a bit unusual and a bit uncomfortable asking a full grown adult who's paying rent, often a large amount of rent for a guarantor.

But I wouldn't worry too much about that. And look, here's my opinion on that. I think if someone can produce a guarantor, but just doesn't want to because they don't feel like they should have to, they're responsible enough. I think that's a bit of an ego thing. And actually that doesn't really serve you or your business. I think that having the guarantor actually serves them in case they're really good and well-paid job all of a sudden comes to an end. And I think actually it really suits you because you've got to take all of this stuff at face value. And unfortunately, as a business owner, you can't, somebody will slip through the cracks. 

If you do this enough, that will absolutely happen. So for me, a bit of an ego thing if people don't want to do it, sometimes I think it just needs a bit of explanation, just a very simple conversation. But I can assure you that I've been doing this for a long time, taking guarantors probably now for, well, I can't remember how many years, but years and years and years, and it's never been an issue. It's never actually been a sticking point. There have definitely been some tenants who haven't been able to produce a guarantor and they are those yellow flaggy characters that I mentioned earlier. I think actually asking for it has filtered them out. It's a really good point when you're about ground tours. Like I said, it's one of the reasons why you would do it. But actually I think for people who can produce it, but would just prefer not to because they feel responsible enough. I think you can always have a conversation in my experience. Everybody at the end of the day will be happy to do it. If they are too egotistical and don't want to.

Andy Graham (21:31.022)

then I would say that actually they don't want your room enough. They don't respect your business enough. Let them go somewhere else. If your accommodation is of a good standard, if your location is great, if you're a good service provider, you're doing all of that good stuff, then one or two tenants walking away, particularly for a reason like this, should absolutely not be something that you worry about. So look, there we go. That is why I feel that guarantors can be a great asset to your business. I think they can really reduce your risks. I think there's no kind of downside to it at all. I think it's all upside. I think it's easy to do. I think it's a complete no brainer. I completely understand some of the opinions. I respect those opinions. And at the end of the day, you've got to do what you think is right for your business. So I'm just sharing what I think is right for me and my business and the reasons I do it. But let me know what you think. If you missed this conversation, maybe search for it in the Facebook group, start another conversation on it.

Share your advice, share your opinion, share your experience. We wanna know the more that we know and share and do, the more that we can all learn as well. But that is about it for today's episode guys. Thank you for tuning in. If you are investing in HMOs, if you've got a portfolio that you're just getting off the ground, maybe you're an established portfolio owner and you're really scaling things up, then make sure you check out theHMOroadmap. Head to theHMOroadmap.co.uk. Honestly, all of my video lessons, 60, 70 video lessons 70, 80 maybe case studies from community members now that'll just blow your socks off. the before and after pictures, all the numbers, all of that's there waiting for you. All of my downloadable resources, templates, spreadsheets, cheat sheets, loan agreements, rent to rent agreements is all there waiting for you. Of course we've got the deal stacker. You can literally go to Rightmove. If you've got a link that you're looking at for a property, copy that link, paste it into the deal stacker and it'll pull through your property details and stack all of your deals side by side. It is the best tool that exists to stack up all of your deals. If you want to understand the performance of your deals, there is no greater tool and it is the easiest tool in the world to use. 

Plus we've got all of our master classes from Ellie, our mortgage broker, from Andrew and Mary, our architects, my planning consultants, from everybody that you need to listen to to help you build a really, really great and really successful HMO property business. If you have enjoyed today's episode useful, if you found it valuable, if you found it enjoyable, then please, please, please leave a really

Andy Graham (23:49.806)

quick review of the show. I know I ask regularly, but it does help more than you could possibly know. It helps us continue to spread the message about all the great work you guys out there in our community are doing. It helps us continue to bring bigger and better guests onto the show to share their stories. And it gives us that warm, fuzzy feeling inside, of course. But no, honestly, it really does help us guys. And we really do appreciate it. You can leave reviews on Apple podcasts and on Spotify. So if you have got 30 seconds, please, please, please share your opinion and just let us know how you feel about the show. That's it guys. Thanks once again. And don't forget that I'll be right back here in the very same place next week. So please join me then for another installment of the HMO podcast.