by Rob Dix
Overseeing the project also means keeping an eye on the time and the budget. Let’s be real here: the likelihood is that your project will go over time and over budget. The solution is to make sure you’ve factored that in from the start.
In other words, if a job absolutely must be done in two months’ time, agree with everyone involved that it needs to be done in a month. Even if everyone has the best of intentions and works as hard as possible, unexpected delays will always creep in. Whether it’s weather, delays with materials or nasty complications arising, I’m yet to see a project of any size that runs exactly as you’d expect it to in an ideal world.
The same goes for the budget, because time and money are very closely linked when it comes to building projects. However carefully the job is specced out, legitimate unexpected expenses will crop up. (And just to be clear, it’s not a legitimate unexpected expense to suddenly decide that the £20 light fittings just aren’t fancy enough after all and you want to buy the £100 ones.)
The level of financial contingency you set is up to you, but I suggest 20%. It’s on the pessimistic end of the scale, but that’s the point: the absolute worst thing that can happen is to run out of money before you can finish, so you need to be able to cope with any reasonable eventuality.
Chapter 12
Management
When it comes to managing a property, you need to make a decision: are you a landlord, or are you an investor?
When I think of the word “landlord”, I picture someone coming round on a Saturday morning to collect an envelope with the week’s rent in it. If you report that the heating isn’t working, he’ll turn up with his mate from the pub and swear a lot in the vicinity of the boiler for an hour or two before mumbling something about coming back tomorrow with the right part. You will never see him again.
When I think “investor”, I imagine… nothing – because when do you ever see an investor? She doesn’t visit her properties to check up on tenants, or go to Astra Zeneca’s HQ to make sure they’re not doing anything that will affect her share price, or sit in the bank vault polishing her physical gold. She spots an investment case, allocates the resources, and lets other people take care of the day-to-day. In the meantime, she may or may not be letting out an evil chuckle while stroking a white cat.
Clearly, these are caricatures of the extreme ends of the spectrum. It’s up to you where in the middle you want to fall – a decision that starts with deciding whether to self-manage or delegate responsibility to an agent. That’s a contentious topic that we’ll explore near the start of this chapter. If you choose to use an agent I’ll provide some tips for finding a good one, and if you’re self-managing I’ll give you a list of everything you need to consider during the process.
This book is about property investment, not property management – so I won’t attempt to tell you every last thing you need to know about managing a property. That would be a whole book in itself… and it’s actually a book that I’m writing (register at propertygeek.net/management to be notified when it comes out).
It’s a subject I know a fair bit about, both from taking professional management qualifications and the day-to-day experience of running Yellow Lettings (yellowlettings.net). Here though, I’ll just give you the “must know” stuff along with links to resources to find out more – because while good management is important, it’s not something to get bogged down in.
Even if you decide to self-manage rather than using a letting agent, I strongly encourage you to apply the investor mindset to the task. There are all manner of jobs that other people can do on your behalf – from referencing potential tenants to dealing with repairs. There’s nothing wrong with choosing to do these things yourself if you enjoy doing them, but you need to be aware that the more time you spend on managing the less time you’ll have left over for investing.
Before getting into the ins and outs of property management, we first need to touch on something fundamental that property owners must understand. We throw around the word “tenant”… but what actually is a tenancy, and why does that matter so much?
What is a tenancy?
When you issue a tenancy, you’re granting legal rights to the property that supersede your own for as long as the tenancy agreement lasts. If that sounds serious, that’s because it is.
If you want to enter the property, you need to seek permission. If you want to get the property back for any reason – even if that reason is “they’ve trashed the house and haven’t paid a penny in rent” – you need to follow a specific legal process. And if you made a mistake in the course of setting up or managing the tenancy, you may not be allowed to end the tenancy at all.
Issuing a tenancy, then, is very different from having a lodger, or allowing a friend to stay on your sofa, or even having a holiday cottage where there’s a contract that allows the visitor to stay for a fortnight. Those are all contractual relationships rather than tenancies, so if you want the person to leave and they refuse, you could immediately attempt to get the police to remove them. Although I haven’t tried it, this is what would happen if you refused to check out at the end of your stay in a hotel room.
Without getting into the boring ins and outs of tenancy law, the general rule is this: if you let out a property to someone who will occupy it as their main home without you living there at the same time, you’ve got a tenancy on your hands. Even if you issue a contract with “This is not a tenancy” written at the top (or have no written contract at all), the courts will still view it as a tenancy.
Rather than just scaring you for the sake of it, I’m bringing up what a tenancy really is to make two points that have a major bearing on the management of the property.
Firstly, under an Assured Shorthold Tenancy (AST) – the type that’s now used in almost all cases – you have certain obligations as a landlord that can’t be wriggled out of. These include providing facilities for heating and hot water, adequate drainage and sanitary installations, and maintaining the property so it’s free of serious hazards. You must also give your tenant “quiet enjoyment”, which means you need to give at least 24 hours’ notice of visits to the property. These obligations are set in stone: even if you wrote something to the contrary in the tenancy agreement itself, a court would automatically side against you.
Secondly, and most importantly, the only legal way of removing tenants is through the courts. Broadly speaking, there are three ways in which tenants end up leaving a property:
They leave voluntarily, either because they want to move on or because the landlord issues them with a valid “Section 21” notice and they comply. A Section 21 notice is a way of saying that the tenant hasn’t done anything wrong but you want the property back at the end of the tenancy agreement anyway.
They fail to leave after being issued with a Section 21 notice, so the court enforces the notice and evicts them if they don’t comply. If (and only if) the law has been followed to the letter throughout the tenancy and in drawing up the Section 21 paperwork, the court will always rule in the landlord’s favour – but the process can still take a couple of months.
They cause so much trouble that the landlord wants to get rid of them, but can’t use a Section 21 notice because the tenancy agreement is nowhere near ending yet. Instead, they issue a Section 8 notice – which requires them to choose one or more reasons from a pre-written list why they want the tenant to leave. In this situation the court won’t automatically rule in favour of the landlord, so the whole eviction process can fall apart – and even if it succeeds, it can take months.
The best way for tenants to leave, clearly, is the first one: by choice or by complying with the landlord’s request. This is how the vast majority of tenancies end – but when some kind of legal action is needed, the process can be very expensive, time-consuming and emotionally draining.
I’m making these points early in this chapter to emphasise the importance of putting good tenants into your property in the first place, and managing the te
nancy correctly. With good tenants you’ll have no need to ask them to leave – but if you do, they’ll go quietly without dragging you through the courts. Even if you slip up and end up with a not-so-good tenant, managing the property correctly will make sure that any legal action won’t fall down as a result of you failing to meet a legal obligation or botching the paperwork.
I’ve been trying to scare you a bit, but I don’t want to go overboard. As I’ve already said, the vast majority of tenancies end happily. You might get unlucky every so often, but when you dig into the detail of most horror stories you hear, it turns out that the landlord has often done something daft – like let a friend move in without a written agreement, or failed to comply with legislation around safety or deposits.
So with a healthy appreciation of why it’s so important to get things right, we can decide who to put in charge of those all-important details: should you use a managing agent, or do it yourself?
Should you self-manage or use an agent?
Some people get very het up about whether self-managing or using a letting agent is best. If that’s you – maybe you think “all agents are useless rip-off merchants” or “there’s no way I could talk to a tenant about not paying their rent without losing my rag” – I won’t attempt to change your mind.
After all, there’s no “right” answer – only the answer that’s right for you. If you don’t have a firm opinion already, making that decision comes down to three factors:
How do you value your time? If you consider your time to be worth £100 per hour, then a letting agent’s monthly commission of £50 (based on 10% of £500 rent) is a good deal as long as it saves you at least 30 minutes per month.
What do you enjoy doing? Some people get a real kick out of fixing things and leaping into action to make tenants happy – and if so, that’s worth taking into account even if it’s not the best use of your time financially.
How confident are you in your ability to successfully complete all the tasks that go along with letting and managing a property? The consequences of getting it wrong can be serious, so if you’re not a detail-orientated person it might not be for you.
Of course, circumstances change over time. Many investors start using an agent then have a bad experience that causes them to take the properties back and do it themselves – or alternatively, they might start self-managing then get too busy and pass it all over. Far more important than making the “agent or not?” decision is to make sure you employ the right agent or self-manage effectively – both subjects we’ll turn to next.
Seeing as you asked (or didn’t, but now you’ve bought this book you’re stuck with me), I’ll give you my opinion: a good managing agent is an absolute bargain. Bear in mind, of course, that I own a letting agency so I’m not a disinterested party in this discussion. In fact, I’ll use my agency’s fees – which I’d say are probably pretty close to the UK average – to illustrate my point.
We charge a “tenant find” fee of £250, which covers taking photos, marketing the property, handling incoming enquiries, visiting the property as many times as is necessary to find an applicant, thoroughly checking their references, drawing up all the paperwork, dealing with the deposit, conducting a full inventory, moving the tenant in, and informing the council and utility suppliers. I’d estimate that doing that myself, if it took a single viewing to let the property and I lived only 15 minutes away, would take at least five hours of my time.
We then charge a 10% + VAT management fee, which is £60 of a typical £500 monthly rent. As I said before, if I value my time at £100 per hour I only need to save a smidgen over 30 minutes per month for it to be a good deal. And personally, I put a massive premium not just on the phone not ringing – but on having no possibility of the phone ringing. There are a lot of things I love doing, and dropping everything to book an emergency plumber isn’t one of them. Even if it’s a bad financial deal (which I don’t think it is), I’d still keep paying because having control over my time is more important than maximising my return.
This isn’t a pitch for our services, or even a recommendation to use an agent – just an explanation of what I choose to do right now. When my portfolio was smaller and I had more time on my hands, I managed them myself – and that was the right choice for me at the time too.
With your decision made either way (or at least an understanding of the grounds on which to make that decision)… how do you find a managing agent, or alternatively, how do you manage a property yourself?
How to find a managing agent
It won’t come as news that letting agents in the UK don’t have the best of reputations – and by “don’t have the best of reputations” I mean that the majority of the population view them as dishonest, charmless, incompetent, overcharging leeches.
And you know what? Many of them are. Bizarre as it seems, anyone can start up a letting agency without any qualifications or experience whatsoever. It’s a dangerous situation for a property investor to walk into, because it’s no easy task to separate those who just talk a good game from the ones who actually know what they’re doing.
But appointing the right agent is critical because even if the agent has day-to-day control, you as the property owner remain legally responsible for everything they do. So if they fail to book in a gas safety inspection or “forget” to place the tenant’s deposit in a recognised scheme, that’s an “oops my bad” for them and potentially a massive headache for you.
How, then, do you separate the competent professionals from the sharp-suited charlatans?
As ever, recommendations trump all. This is where local networking comes into its own: if you speak to a landlord who’s had multiple properties with the same agency for a number of years without complaint, you’re onto a winner.
Are they property investors themselves? It’s no guarantee, but agencies that started off by managing the founder’s own portfolio are often run along more professional lines. If some of the staff are investors too, all the better – they’ll understand your needs perfectly.
Which online portals do they market your property on? Whatever they do locally, the reality is that almost all property searches (outside of specific niches) start on Rightmove, Zoopla or OnTheMarket. Ideally, you want them to be advertising on two out of the three. (At the time of writing, there’s a silly turf war going on that means an agency can’t be on more than two of them.)
What’s the quality of their marketing like? Take a look at their online listings and see if you’d be happy to have your property represented similarly to the ones they already have.
The website All Agents (allagents.co.uk) allows users to submit reviews of agencies, so you can see what clients and tenants say about them. (Take tenants’ gripes with a pinch of salt, because agencies are powerless if the landlord is unresponsive or unwilling to pay up for repairs.)
Ask to see the agency’s terms of business before taking them on. You’d be amazed how many agencies don’t have written terms of business at all, which I’d take as a warning sign: how can you engage an agent without knowing the terms under which that relationship will operate?
If not included in the terms of business, ask them for a full breakdown of all fees that will be charged to both you and the tenant. If they’re at all evasive about this, I’d move on. It’s important for you because a low monthly fee is meaningless if they sting you for extra fees at every opportunity, and your tenant won’t be happy if they’re charged silly money for tenancy renewals.
Ask if the agent is a member of a redress scheme, like The Property Ombudsman. If not, move on: it’s been mandatory to be a member of such a scheme since October 2014, so if they’re flouting that rule it doesn’t bode well for them making sure you comply with your own legal requirements.
Similarly, does the agent list their fees on their website and in their marketing material? This has been a legal requirement since October 2014, so it’s a handy litmus test for whether they keep up-to-date with legislation.
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Those points are pretty unarguable ways to see whether or not you’re dealing with a professional outfit. I’ll also share some tips that fall squarely into the category of “personal opinion”. They’ve worked for me, but others may disagree:
Personally, I’d steer clear of the big national chains – such as a very famous one whose name, and former clients’ reactions when you mention them, both start with an “F”. While there’s nothing wrong with chains as such, staff turnover tends to be high so you can find yourself dealing with someone different every time you call.
Where possible, I’d favour a company that specialises in lettings over one that also does sales. That’s because within agencies that do both, lettings is often seen as “second class”. Sales is where everyone wants to be, and staff are only stuck in lettings until they can work their way up to a sales job. (Although this is changing as sales agents are under threat from lack of stock and online competitors, so lettings is coming to be seen as the “bread and butter” and treated more seriously.)
You could award points to agencies who are part of a professional body like ARLA (which Yellow Lettings is a member of) or NALS, because it theoretically means that they need to abide by certain rules in order to remain a member. In practice, spot-checks by these bodies are few and far between so I don’t see it as much of a guarantee. I’d put the most stock in ARLA membership because it means at least one of the directors must have completed a basic qualification – but of course, that doesn’t tell you much about the staff on the front line.
I’d have nothing to do with a company that pressures you by saying they have “qualified tenants waiting for a property like yours”, or even goes so far as to ask if they can bring someone around to view before you’ve committed to working with them. These are nothing but sales tactics. If you’ve bought a property in a good rental location and it’s of the right standard, any agent will be able to find you tenants and there’s no need to jump at the first offer that comes along.
