Many property owners share the concern on how to guarantee rental income from their property. This question is being asked on a regular basis, and that is not really strange, because when you decide to rent out your property, it comes with a certain amount of uncertainty.
This article will tell you about 10 ways to assess your tenant to make sure you feel comfortable when signing the contract.
1. Security deposit
The first step for every property owner that rents out his property, is asking for a security deposit. According to the Spanish Rental Law (Ley de Arrendamientos Urbanos or LAU), landlords are allowed to request a minimum of a month’s rental fee as a security deposit.
This security deposit is then collected by the official authorities of each Autonomous Community, in the case of Catalonia this is Incasòl, and in Madrid it is Ivima.
The LAU also states that, once the rental contract has ended, the security deposit must be returned within a maximum period of 30 days, provided that there are no damages to the apartment or unpaid utility fees.
2. Additional security deposit
An additional guarantee – so more than the legal minimum deposit according to the LAU – may be requested. The extra deposit is known in Spain as a “depósito de garantía” (guarantee deposit) or a “fianza complementaria” (supplementary deposit).
The law allows for an amount of two extra months worth of rent to be asked, in additional to the minimum legal deposit, and this is in case it concerns contracts of up to 5 years (or 7 years if the property owner is a legal entity).
If a tenant solvency report cannot convince the property owner, more deposit can be requested (even more than 4 months), but then the length of the rental contract must be at least for 6 years.
Be aware that, besides the first deposit, the extra deposit will be kept by the property owner, and not a government institution, although additional deposits could be safeguarded by these official authorities in the same way as the minimum deposit.
Most of the time a security deposit of three months (legal minimum additional) must be paid in advance to formalize the rental contract. Again, this is the case with rental contracts for 5 years, because when the property owner is a legal entity, the contract must be for 7 years.
3. Ask the tenant for a letter of guarantee
The property owner can also request a guarantee by the bank to ensure he will receive rent from his tenant every month. Normally this means the bank will keep an amount of two months worth of rent with rental contracts of 5 or 7 years long. If the rental agreement is for more than 6 years, this amount may be more than 2 months worth of rent.
We should specify that additional guarantees can be given either by transferring the extra amount, or by the bank giving the guarantee. So the property owner has to choose between these two options and cannot do both. When the 5 or 7 year rental contract ends, the property owner needs to refund the deposit worth 3 months of rent. One month of rent is for the initial legal security deposit, and the other two months are for the additional deposit.
More and more tenants make use of the possibility of providing a personal guarantor. This means a family member or other relative (who has income in the country) will sign the contract together with the tenant. If it happens that the tenant cannot pay rent anymore, the property owner is allowed to claim rent from the guarantor.
📌 The advantage of a guarantor is that this person must also provide his employment contract when signing the rental contract with the tenant. So if employment is in the public sector, the property owner is almost 100% guaranteed of rental income.
4. Tenant solvency report
Professional real estate agents are able to thoroughly analyse a tenant solvency status. Preparing a solvency report is a detailed process, but it does make sure each property owner finds the right tenant.
ShBarcelona requests several documents to base the solvency report on, and these must be presented by potential tenants. Different types of documents, however, are needed for different types of tenant profiles:
For workers with an employment contract
- Last three salary statements
- The employment contract
- Last income tax declaration
For self-employed workers
- Last income tax declaration
- Last three payments of IRPF
- Information from their gestoría or administrator
- University’s proof of admission
- Proof of payment of study program
- Proof of solvency and/or guarantee by third party
- Type of organisation
- Proof of power of the company’s legal representative
- Last year’s corporate tax declaration (modelo 200 in Spain)
For other profiles
- Guarantee by the bank
- Proof of income from outside of Spain
- Personal recommendations (signed and sealed) by an authorised agency
📌 The advantage of having a guarantor is that he/she must also provide an employment contract when signing the rental agreement. So if employment is in the public sector, the property owner is almost 100% guaranteed of rental income.
In case of a guarantor, it is advised to also carry out a solvency check on this guarantor. The same documents as with the tenant should be requested. As a result, the property owner has even more insurance his rental income is guaranteed.
5. Relocation clients
A relocation client is mostly an executive with no solvency issues. When your tenant is being relocated, he or she works at a company that is moving (part of) the company or department to another city or country, and the company then hires a relocation agency to smoothen the process.
The relocation agency is often given the task of more than just finding housing, it can also arrange transport, schools for children and sometimes a job for the spouse. These are not the potential tenants you should be worried about, as they have sufficient funds and guarantees by the company.
ShBarcelona works with several relocation agencies in Barcelona, guaranteeing risk-free rental agreements with tenants fitting this profile.
6. Arbitration clause in rental contracts
A lesser-known, but effective solution to settle disputes over payments, clauses and possible home evictions, is making use of arbitration.
With an arbitrator you will receive your rent quicker than through the usual route in court. This intermediary solves problems with both parties, and both the tenant and property owner should accept the outcome of the mediation process.
7. Take out rent protection insurance
Property owners may take out a policy that will cover in the event of non-paying tenants. This type of insurance usually also covers damages and legal actions (trial), when a tenant needs to be evicted from a property, if he is staying there illegally.
Rent protection insurance is getting more and more popular these days, as it provides property owners with the guarantee they will receive their rent.
8. Home insurance, home contents insurance and liability insurance
In addition to rent protection insurance, which provides financial coverage in case a tenant stops paying rent, a property owner can also opt for classic insurance options, like a home insurance, home contents insurance and civil liability insurance.
These policies can be included as additional clauses in the rental agreement. This means both the property owner and the tenant will take their responsibilities when needed.
If you decide to take out rent protection insurance, make sure you know what exactly is covered by the insurance. You must always read the small print in the policy to check if damages by normal wear and tear is covered or not.
It should therefore be mentioned that it may be wise for both parties (tenant and property owner) to arrange for insurances on the home itself, the contents, liability and rent protection. This is the maximum guarantee that will provide sufficient assurance for both parties.
ShBarcelona’s services also include these three types of insurances, which makes it easier to rent (or rent out) your property.
Related article: What is Rent Protection Insurance?
9. Stay in contact with your tenant
Covid-19 has had a negative impact on many households, with many people losing their jobs or savings, or having temporary payment issues. So we can all relate to that.
This makes it even more important to stay in touch with your tenant, so you know what is happening. You can even decide to renegotiate contract terms, even if only for a specific period of time.
10. Selecting the right tenant
ShBarcelona takes great pride in finding the right tenant for each property. Our extensive tenant solvency checks are a guarantee for property owners who decide to rent out their property.
After checking all documentation provided by a potential tenant and matching him with a property, we can even arrange for a meeting between the possible tenant and property owner. After the interview, the property owner can decide if this is the right tenant for his rental property.
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