The Complete Guide to Property Investment

by Rob Dix

  The length of the lease isn’t the only factor that matters, because the lease document itself defines the entire relationship between you (the leaseholder) and the freeholder. If there are any onerous restrictions or obligations in there, it will affect your whole period of ownership – and may also cause trouble when you decide to sell the property.

  For example, when I was buying a flat once, my solicitor flagged up something in the lease that seemed so trivial I didn’t really understand what it meant (and I still don’t now), but he arranged a “deed of variation” with the freeholder to get it amended. The clause in question would have had no practical effect during my ownership, but could have caused major problems when I came to sell the property. This is why, when buying leasehold property, you want to make sure your solicitor is experienced in this type of transaction.

  Your solicitor will inspect the lease and ask the freeholder or their management company for a Leasehold Information Pack – which relates to the finances of the block or development. This should include at least a couple of years of service charge accounts, so you can see what the level of service charge has been and confirm that the present owner is up-to-date with payments – which is important, because any liability will become yours once you’re the owner. It will also include the full accounts for the development (which will allow you to find out if there’s any kind of “reserve fund” or “sinking fund” in place to cover future major works), and the pack should confirm whether any items of major work are planned for the coming years.

  Finally, the pack will tell you what amount of ground rent needs to be paid annually to the freeholder in addition to the service charge. As well as knowing what the ground rent is now, you should check the lease to see if it can go up in future: it’s sometimes the case that the ground rent is “staircased” so the amount (for example) increases by a prescribed amount every ten years.

  Tenanted property

  If you were planning on renting out a property anyway, buying with tenants already in-situ can be a great bonus – it means you have income from day one, and don’t have any of the expense or hassle that would otherwise be involved in preparing and marketing the property to let.

  Because the vast majority of properties are sold with vacant possession, solicitors often won’t know what needs to be checked when tenants are involved. So as part of the conveyancing process, make sure they see the following:

  The current agreement that governs the tenancy. If it’s some form of protected tenancy (as opposed to a standard assured shorthold tenancy), you could have major issues with removing the tenant or increasing the rent. Even if it’s an assured shorthold tenancy, the specific wording of the agreement could give the tenant rights that you’re not happy with.

  The certificate that states where the tenancy deposit is registered. If the correct process hasn’t been followed, this could have repercussions for you too.

  Rental statements showing that the tenant is up-to-date with their payments.

  Then, when it comes to completion, your solicitor should make sure that any rent that’s already been paid is apportioned to you. For example, if the tenant pays monthly in advance on the first of the month and you complete on the 15th, you should be given the rent that’s already been paid from the 15th through to the end of the month as part of the completion transaction.

  Then, once you’ve taken ownership, you’re legally required to write to the tenant informing them that you’re their new landlord, and give them an address in England or Wales where they can serve notices. This can be your own address, a “care of” address, or the address of your managing agent.

  By default, you and the tenants will continue to be bound by the existing tenancy agreement: you’ll just step into the shoes of the previous landlord – which is why it’s important to see the agreement in advance so you know what you’re signing up for.

  You can either continue in this way or offer the tenants a new tenancy agreement that replaces the old one – bearing in mind that they’re not obliged to accept it if they don’t want to.

  Whether you issue a new agreement or continue with the old one, make sure that the tenants change their standing order to direct all future rent payments to you – because if the money continues to go to the former owner, it could be very difficult to recover.

  Chapter 11

  Refurbing

  My favourite thing about property investment is how there are so many different ways to approach it, depending on your personal strengths and preferences. For some people, knowledge of building work is that strength: they’re able to spot projects that look tricky and put other people off, secure the property for a great price, then use their skills and contacts to get the work done quickly and cheaply.

  I am not that type of investor. Of all the things I’m hopeless at, anything related to getting my hands dirty is probably the most pitiful of all. But I’m in good company, because I know lots of investors who are strong analytically and can raise capital, but are totally flummoxed when it comes to pricing up a refurb, putting a team together and managing the project through to completion.

  So if construction is your area of expertise, I won’t be able to tell you anything you don’t already know. Instead, this chapter is geared towards investors like me – who need to survive the process of hiring tradespeople and getting the job done. Dealing with refurbs might never be your favourite part of the job (it isn’t mine), but you shouldn’t let that put you off completely: the most profitable opportunities are usually where there’s some kind of refurbishment work that needs to be done.

  Staying compliant

  When doing any kind of work, it’s important to know whether your plans will require approval in terms of building regulations, planning permission, or both. You’ll obviously assume that permission is required for big projects like an extension or loft conversion, but you might not be aware that the government can ensnare smaller jobs in their legislative claws too.

  Let’s take building regulations first. They exist to make sure you adhere to safety standards when you want to:

  Put up a new building

  Extend or alter an existing one

  In the words of the government’s planning portal, “Provide services and/or fittings in a building such as washing and sanitary facilities, hot water cylinders, foul water and rainwater drainage, replacement windows, and fuel burning appliances of any type”

  The planning portal I just quoted from has a useful list of common projects that require building regulations approval: planningportal.gov.uk/permission/commonprojects.

  If you’re using a tradesperson, it’s their responsibility to get approval from the building regulations department of the local authority, and they’ll also be the ones to face a fine if they don’t – although as the owner of the building you could be issued with an order to bring shoddy work up to standard at your own expense.

  If the tradesperson is a “competent person” (meaning that they’re a member of a trade body scheme, like FENSA for windows or ECA for electrics), they can self-certify that their work meets buildings standards without having to invite in the local authority to inspect the job afterwards. They will issue you with a certificate stating that the work is compliant, which becomes very important when you come to sell or refinance the property: I’ve had a mortgage application held up in the past because I’d installed new windows and the fitter had forgotten to give me the certificate.

  Doing the work yourself? Then it’s your responsibility to get approval before doing the works and have them signed off afterwards, so check the planning portal to see what you need to do.

  Then there’s planning permission. In addition to building regulations approval, you might also need permission from the local authority for projects that involve a new construction, extension, or a change of use.

  Some projects will fall under “permitted development”, meaning you don’t need to seek permission. Again, the government portal’s list of common pro
jects (planningportal.gov.uk/permission/commonprojects) will tell you if the project falls under permitted development or whether you need to apply for planning permission.

  Even if the project appears not to require planning permission, it’s still a good idea to contact the local authority to check before going ahead: you might be restricted for various other reasons. For example, the property might be in a Conservation Area, or the local authority might have issued something called an Article 4 directive, which means they’ve locally withdrawn certain permitted development rights that apply nationally.

  Finding tradespeople

  As I’ve said, I’m not the “hands dirty” type. My crowning DIY achievement is stopping a door from squeaking by spraying some WD-40 on it, and my wife didn’t hear the end of what a genius I was for a week. As a result of my general hopelessness though, I’ve hired a fair number of tradespeople and can give you some pointers on how to do the same.

  Finding a builder is no different from finding anyone else to perform a service for you: a personal recommendation trumps everything else, so ask around. Of course, you want a builder who’s busy because they’re good, but you’re also not willing to wait because the property is costing you money the whole time it’s empty – so start the process as early as you can. If you’re buying a property, you can try to negotiate getting access after exchange and before completion to either price up the work or actually start doing it.

  In the absence of a personal recommendation, I’ve had a lot of success using a site called My Builder (mybuilder.com) – where you can post a job for tradespeople to express an interest in. Other similar sites (such as Rated People and Checkatrade) are available and may have better coverage in your area, but that’s the one I’ve happened to use.

  The attraction of these sites is that past clients get to publicly rate and review the tradespeople they’ve hired via the site. While not as good as personal recommendation, it’s a lot more reassuring than unchecked testimonials on a tradesperson’s personal website. Where possible I try to only consider people with more than 20 reviews, with all but one of them positive – a little leeway is required because there are probably more crazy clients than cowboy builders out there. My Builder (and other similar websites) also require each tradesperson to submit current copies of their insurance and professional membership certificates to the site, so you can be reassured that their credentials are in order without any effort on your part.

  For anything beyond the smallest job, the normal commonsense rules apply: get three quotes and trust your gut. To make sure you’re comparing like with like, ask everyone to be clear about the exact scope of work: you might find for example that one quote is more expensive because the builder anticipates needing to replaster, whereas someone else has just assumed that the old plaster will be fine.

  I always insist on a fixed price quote (rather than one based on how long the job takes) so I know in advance how much it will cost, and the builder has the incentive to get the job done and get paid rather than drag it out. I also ask for that quote to be broken down into labour and materials, which makes it easier to dig into the quote in more detail. Rather than just having someone suck air through his teeth, scratch his head and say “You’re looking at about two grand there,” you can ask how many days that includes for each trade at what day rate – making any padding in the quote immediately obvious.

  When it comes to materials, I’m generally happy for the builder to supply the basics because they’ll have access to better prices than I will – and although they’ll often mark up the prices a bit to account for their time in doing the running around, it saves me doing it myself. For anything where personal taste is more of a factor, like a bathroom suite, you might prefer to supply your own.

  Big jobs (which I’d personally classify as being anything over a couple of thousand pounds) deserve a contract with clear specifications, dates, figures and provisions for when things go wrong. The Federation of Master Builders has put together a template that you can just print off and fill in the blanks (home-extension.co.uk/fmbcontract.pdf).

  Admin tends not to be the strong suit of many tradespeople, but anyone legitimate won’t be averse to signing a contract: it’s in their interests for everything to be clear too because as I said, the world isn’t lacking nutty or unreasonable clients.

  Even for smaller jobs where a formal contract is unnecessary, I tend to put everything in writing (just an email trail is fine) and get into a level of detail that’s amused more than one builder in the past. But hey, clarity is important – you’re hiring a builder, not a mind reader, so you can’t complain if they fill in any gaps themselves and you don’t like the end result.

  Deciding on the spec

  I feel like I’m patronising you by even mentioning this, but I feel I need to because people still get it spectacularly wrong: when it comes to a rental property, you won’t be living there – which means you shouldn’t impose your tastes and standards on the property.

  Let’s address standards first, because it’s easy to succumb to over-speccing. Just because you’d be mortified to receive a guest and have them see that you use any paint other than Farrow & Ball, that doesn’t mean it’s necessary in a rental property – unless you’re going for the exceptionally high end of the market. The same goes for elaborate kitchen and bathroom fittings: you can buy a tap for anything from a fiver to a fortune, and nobody is going to pay more than the market rent just because you’ve blown the bathroom budget.

  The key is to let the market dictate what the standard of the finish should be. You can get a sense of what your market requires by looking at similar “let agreed” properties on Rightmove and seeing what they have in common, or by asking local landlords. If you’re planning on using a letting agent to let or manage the property, invite a few agents over to give their opinion too. They see hundreds of properties per year and know exactly what makes a difference between the ones that “stick” and the ones that are snapped up as soon as they come on the market.

  For example, an agent once saved me a small fortune with his market knowledge. I had a property complete while I was away on holiday, so I asked a professional project manager to go over and draw up a specification of the work needed. When the quote came back, I nearly choked on my Mai Tai: the figure was three times the guesstimate I had in my head and included recessed LED lights, replastering every ceiling, an expensive shower-bath… the works. It would have been the most fancy flat for miles around, but would it have made any difference to the rent I received? I thought not, so when I returned to the country I got a local letting agent over who confirmed that nothing so extensive was necessary.

  As a result I fired the project manager, put a team together myself, and got the work done for almost exactly the figure I had in mind in the first place. True to the letting agent’s word (which is possibly the first time that phrase has ever appeared in print), the property let on its second day on the market and hasn’t been empty since. The lesson here is that even professionals are prone to over-speccing, and local knowledge is everything.

  The other classic mistake is to impose your personal taste on the property, which is an easy one to fix: don’t do it. If you look at the units owned by professional investors, they tend to look like identical beige boxes – which they are, because that’s what rents fastest and creates the least hassle. Paint should be a variant of white, carpets should be beige or cappuccino, and ceilings should be absent of tacky pink plastic chandeliers (I have actually seen this).

  Of course, tenants still want the property to feel homely – and if you’re furnishing the property or staging it for viewings you’ll find that little details go along way. You can create a dash of colour with cushions, and throw in the odd plant to make it look welcoming and help them to imagine themselves living there – but ultimately, bright and clean is all that anyone ever wants.

  Overseeing the project

  Depending on the size of the project and your own part
icular skill set, you might decide to manage the project yourself and hire in individual trades, or hire one main contractor to serve as project manager and sub-contract any jobs that they can’t take on themselves.

  If you choose to manage the project yourself, you’ll need to have detailed knowledge of the construction process, as well as stellar communication and organisational skills. Being the project manager is a massive job – and if you don’t have previous building experience, the thought of doing it probably scares the life out of you. There’s a school of thought that says you should manage your first major job yourself – because you’ll learn so much it will stand you in good stead for all future projects, even if you choose to hire someone else to project manage in future. I understand the logic, but clearly it’s not something I subscribe to myself.

  Even if you recognise your limitations (whether that’s time or experience) and put someone else in charge, remember: you’re still the boss. As with everything in life, the squeaky wheel gets the grease. The reality is that builders are usually juggling multiple jobs, and if you’re not on top of them it’s easy for your project to be the one that falls to the bottom of the pile. The jobs I’ve seen go the most wrong are the ones where the investor put someone in charge and expected to come back a couple of months later to a totally finished project. Instead, they tended to find that the builders had got as far as making everything a total mess, but stopped short of putting it back together again.

  So, whatever the arrangement, make sure you’re a constant presence. Be on the phone every day, and on site as often as you can. Don’t get in the way or be prematurely aggressive, but do show through your actions that you’re on top of things and will give them earache if things slip.