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Assured Shorthold Tenancy (AST) is one of the most common forms of tenancies used in the UK - with 73% of private renters using it as their tenancy agreement. This type of tenancy agreement covers a period of 6 to 18 months. 60% of ASTs have a fixed term of 12 months while 28% are 6 months. Only 2% use 18 months in their agreement. Once the agreement ends, the landlord and the tenant can renegotiate the rental price and decide to continue the agreement or terminate it.
The average weekly rent for ASTs in the UK has a mean of £209 and a median of £173. In London, the median AST weekly rent is higher at £330.
If you have 10 properties being rented as ASTs in London, you can get up to £3,300 per week or £13,200 per month in gross rental revenue. What more if you have more than 50 rental properties?
ASTs have proven they can provide a stable rental income for multi-property investors. However, you have to fully understand it to maximise your property’s earning potential and improve portfolio returns.
In this article, you’ll get a better understanding of ASTs - including the pros and cons of using them as your main letting strategy. You’ll also discover another letting strategy you can consider if you want to maximise your rental property returns.
What is an Assured Shorthold Tenancy?
Although ASTs are the most common type of letting agreement in the UK, that doesn't always make it the perfect strategy for you. As a property investor, it’s important to deeply understand what this tenancy agreement is so you can determine if it’s the best strategy for you to reach your unique portfolio goals.
The first question you should ask is what type of tenancy classifies as an Assured Shorthold Tenancy?
The UK government defines an AST using the following conditions:
- For private landlords or housing associations
- For tenancy agreements starting January 15, 1989, and beyond
- For properties used by tenants as the main accommodation
- For properties not used by the owner as their main residence
- For properties with an annual rental fee that does not exceed £100,000 and goes below £250 (£1,000 in London)
- For properties not used in business or any licensed premises
- For properties not used as a holiday let
- For properties not owned by a local council
The AST Legal Framework
When using ASTs, it’s important to familiarise yourself with the Housing Act 1996. This is the main legal framework regulating ASTs in the UK. Failure to comply might compromise your rental property’s ability to operate. It can also lead to financial and legal issues.
Take note, even if the tenant signed an agreement, if certain details are prohibited by the law, it’s the law that takes precedence.
The laws surrounding AST agreements are not just there to protect the landlord’s rights to let their property. It also protects tenant rights against discrimination or unfair rental fees.
Make sure the shorthold tenancy agreement includes the rent amount, tenancy duration and specific conditions that could lead to the termination or renewal of the contract. As long as you have clear details of the agreement, don’t discriminate in choosing tenants and don’t enforce unnecessary fees like cleaning or credit check charges, then you should be fine. If in doubt, it’s always best to consult a professional.
Most landlords prefer ASTs because of the security they provide. However, there are still challenges that you should know before you decide to use this type of tenancy agreement.
Pros of ASTs
One of the main benefits of ASTs is security. It offers a structured tenancy agreement where landlord rights are upheld beside the tenant. A shorthold tenancy agreement is clear about the tenancy period, fixed rental fee, the responsibilities of landlords and tenants and many more.
Another benefit of ASTs is income stability. Each agreement is at least 6 months - with 12 months being the most popular option. This means landlords get 12 months of assured rental income. It’ll be easier to budget and manage the rental returns thanks to the monthly or weekly payments. This makes it easier for property investors to grow their portfolios and investments.
An AST also gives tenants more accountability when it comes to taking care of the property. Depending on what is specified in the shorthold tenancy agreement, tenants are responsible for cleaning the property and the basic maintenance expenses. This reduced the burden on landlords who are now only responsible for major repairs and upkeep.
Finally, landlords will enjoy minimal property management - at least compared to short-term rentals where they are in charge of cleaning the property in between guests. With an AST, tenants are responsible for all these. Landlords won’t have to oversee the day-to-day maintenance of the property after the tenant moves in.
Cons of ASTs
ASTs are not perfect and have some drawbacks that you should consider before you decide to use them as your letting strategy.
The first is limited flexibility. You can’t have the tenant evicted just because you need to use the property. That’s against the law. You have to wait for the agreement to end before you can decide to evict them - unless the tenant breached the contract.
Next is the fixed income. Although the fixed term of an AST agreement provides security and a consistent rental income, it limits your ability to raise rates in response to the dynamic rental market conditions. You can’t raise rates as the market rates increase because you’re tied to the agreement for 6 to 12 months. You can only change the rate once the current agreement expires - and even then, the increase can’t be too much.
Tenant vetting is another concern when you’re using ASTs. Since the tenant will stay in your property for a long time, you want to make sure they can pay the weekly or monthly rent. You also want to ensure they are responsible enough to take care of the property as their home.
Finally, ASTs have lower rental returns compared to short-term rentals. The longer stay assures a steady rental income so a higher rate won’t be justified. While you don’t have to make your rental fee too low, you’ll have to meet the market average so your property can stay competitive.
Impact on Property Returns
Despite the disadvantages of using ASTs, it still has a positive impact on property returns. With the current issues and limitations imposed on short-term letting, ASTs are bound to get more support from the government and the local community looking for long-term rental properties.
Not only that, the operation costs are lower since the tenant shoulders some of the maintenance expenses. This increases the profitability of ASTs.
With the rental rates continuing to rise, AST agreements offer a great opportunity to build wealth and expand one’s portfolio. The regular flow of rental income makes it easier to take on investment risks. This ensures growth potential and allows more room for portfolio growth.
ASTs VS Flexible Letting: What is the Better Option?
While ASTs offer a stable rental income for property owners, there’s another option that could increase the profitability of rental properties.
We call this flexible letting. It’s a type of letting strategy that combines the high-income potential of short-term rentals and the steady flow of rental returns of ASTs. This leaves property owners the flexibility to adjust their letting strategy in response to market conditions and demands - leading to a higher rental yield - thanks to the higher nightly rates of shortlets.
Flexible letting also allows property owners to cater to a wider tenant demographic. You can include tourists, digital nomads and even business travellers. This diversity can minimise the risk of long-term vacancies.
While these increase the property’s performance, flexible letting requires proper management skills. The dynamic letting approach requires experience in managing tenant/guest turnovers, cleaning and maintenance. Without proper manpower or systems to operate the rental property, it could lead to lower guest or tenant satisfaction.
To ensure that you’ll get the best results from flexible letting as a strategy, it’s best to partner with a property management company like Opago. We have a wealth of experience in using flexible letting to maximise the earning potential of rental properties. We also use property technology to analyse market trends to apply dynamic pricing strategies for higher rental returns. Our in-house cleaning and maintenance service also makes it easier to shift between short-term letting and ASTs.
Choose the Right Letting Strategy
Understanding the advantages and disadvantages of ASTs will help you decide which option will help you meet your unique portfolio goals. If you want security and lower vacancy rates, AST agreements are the best option for you.
However, if you want to increase your rental yields, consider trying flexible letting. Partner with a property management company like Opago to help make property operations seamless.
If you’re looking to maximise your portfolio’s growth, consider partnering with Opago. Contact us so we can discuss the services we offer to help you reach your goals.
