Finally, time to crunch numbers one last time

If you’re still happy with your proposal in principle, it’s now crunch time, and time to do a full-scale financial analysis. Paper and pen time. Make two columns – Credits and Debits. Pour yourself a strong gin and tonic.

Note, use this handy weekly equation to convert all costs into weekly costs:

• Divide annual costs by 52 = weekly cost
• Multiply monthly costs by twelve then divide by 52 = weekly cost

For example:

• Annual costs are £850 per annum insurance cost
  = £850 divided by 52 = £16.35 per week
• Per calendar month costs are £1,000 per calendar month rent
  = £1,000X12 divided by 52 = £230.77 per week

(P.c.m. rents are a recent ‘innovation’ used by agents because that helps their accounting systems – historically and in established agencies, rents are charged weekly for reasons explained later but which generate slightly more income.)

Credits column

This is how much rent you’re realistically likely to receive per week. Now put that weekly rent into your credit column. And that’s it. Next comes the really scary bit.

Debits column

Until you get used to doing this, I’ve broken some of your costs down to remind you what you may need to include. Cheating to make your numbers balance is a fool’s game – be accurate. Initially, costs need to be subdivided. All should be included in a long-term plan but realistically; most novices swallow initial set up costs (but set up costs have to be funded sometime – unless you believe in fairies).

Purchase costs

These are usually one-off costs per unit. To include them divide each amount by the length of the loan term (say 20 years), before dividing by 52 to get a weekly cost over the term of the investment.

Include where applicable:

• Stamp duty.
• Legal fees.
• Finder’s fees (if applicable).
• Mortgage fees.
• Valuation fees.
• Insurance on loan costs (if applicable).
• Plus, most lenders will expect borrowers to pay a minimum of 20 per cent deposit – so lost interest on that capital is an ongoing expense until you sell and recoup that loss.
• Other costs incurred.

Set-up costs

These are costs which may/may not occur on an annual or any other regular basis.

Include what’s applicable only to your unit and convert into weekly costs:

• Initial refurbishment and any works required to make the building suitable and safe for letting. Note, keep to maintenance and upgrades wherever possible. Improvements (like installing central heating where none existed previously) are not tax deductible until you sell.
• Surveyor’s fees (optional yes – but a godsend for schedules of conditions and for driving down the purchase price if pressing matters are highlighted).
• Furniture, carpets, cookers, other white goods.
• Other safety equipment – smoke alarms, extinguishers, fire blankets certified electrical check, gas safety where applicable.

Annual running costs

Almost all are tax deductible in the tax year.

Use the earlier equation to convert annual and monthly costs.

• Monthly borrowing costs
  Borrowings have two components: interest and capital repayments. Both must be included here for a realistic equation. Some investors are being encouraged to work out their figures on ‘interest only’ mortgage costs. And so I repeat – you are not playing games here – your full costs need to be included. Borrowings need to be repaid – and hoping that soaring property prices will bail you out is playing with fire and isn’t an appropriate strategy for investors.
• Loss of interest
  Boring I know, but if you’ve cashed in that 20 per cent deposit from an interest bearing investment or account, the loss of that interest is a real cost. If you’ve borrowed against your home, include the full monthly costs of the equity drawdown in weekly chunks.
• Ground rent and service charges (for leasehold properties).
• Insurance costs
  Landlords are advised to consult carefully that insurance will be available long before they purchase. Many areas of lettings (especially multi-occupied buildings and housing benefit claimants) are tricky to insure. Other areas where radon gas or flooding are issues are becoming very difficult to insure and no landlord can operate safely without insurance. Insure only the building, landlord liabilities and your contents. Tenants must insure their own goods. (Younger tenants sometimes find this difficult – suggest that they add their contents to their parent’s insurance policy.) Landlords need specialist insurance – a simple buildings and contents policy is not enough. Most brokers will advise you.
• Building maintenance costs
  Depending on the age and condition of property – between five and ten per cent of income per year ongoing for major repairs.
• Service contracts.
• Void periods
  Usually advised at 6 – 8 weeks per annum (but work like the devil to avoid them).
• Annual accounts
  Unless you know enough to do your own, which most of us don’t, consult a professional (see Lesson 15: The tax man’s take).
• Sundries
  Telephone calls, legal stationery, travel, postage, council tax at 50 per cent for empty periods (about to be phased out so expect 100 per cent costs soon).
• Advertising
  Always keep receipts or credit card statements.
• All management costs or tenant find costs (if applicable).
• Annual gas safety certification.
• Annual inventory costs
  The only person who works for free is you – so the more you learn, the more profit you keep. (See Lesson 7: Inventory, Schedules of Condition and Property Profiles.)
• Four full sets of keys.
• Lease costs
  These should be minimal (see Lesson 5: Assured shorthold leases) unless tailor-made.
• Licensing fees for all multiply occupied buildings
  (See Lesson 13: Houses in Multiple Occupation.)
• Unless you fancy working for love
  Try throwing a minimum wage at your hours – just for fun.
• A sense of humour and proportion
  Last – but by no means least – these cost nothing and have the potential to save you a small fortune. Breakdown in landlord/ tenant/agent relationships are one of the most costly issues that you can avoid – no charge – but which can set costs soaring if underdeveloped. Don’t take things personally. Your tenant really didn’t flood out the bathroom to spite you. And if you own furniture which you’ve lovingly polished for a decade don’t put it in a rental.

Note, most private landlords are entitled to other deductions for wear and tear at ten per cent per annum (see Lesson 15: The tax man’s take).

By now, you should have two columns, one of which is depressingly short – the other of which is startlingly long. Hold your nerve – they always look like this.

Do I know enough to invest wisely yet?

Only invest if your bottom lines tally – that is the income equals the expenditure. If they don’t, pull out unless you have other finances in place to subsidise the deal.

Why using genuine professionals matters when purchasing
investments

Unless you are very experienced, shift liability – wherever possible – onto the insurance policies of genuine professionals. Time and time again, I see and hear or read advice to scrimp on things like surveys.

What this ridiculous advice overlooks is what you’re actually buying. Buy a survey report (at £500 it’s a fraction of one per cent of most property transactions). And with it comes the assurance that if anything major is wrong with the building and they report on it, you can renegotiate the price. If it’s been missed, you have comeback because that report carries indemnity. Similarly, the same applies to solicitors. For landlords, especially those of you buying leasehold units, don’t scrimp on a cheap solicitor. This is false economy. You need a good solicitor and give them a written list of the questions that you have about your rights and responsibilities before you commit yourself.

Break open a file – you’ll need it

Now is also the time to break open a file (one per property). Owning, running and maintaining property generates a paper-trail and you need to keep accurate records.

Landlords considering buying leasehold properties

Ask your solicitor to check out the management operation of leasehold property and to explain your liabilities under the lease in detail and in writing to avoid ‘confusion’ later.

Check leasehold terms carefully

Read leases carefully and understand what you’re getting into before you sign. Many leases have strange caveats – some refuse to have rental tenants at all – some won’t allow stripped floors because of overhead noise (especially those constructed before the major Building Regulation changes in 1992). The list is endless. Know exactly what you’re buying.

If you’re considering a ‘share of freehold’ contact the other sharers before you proceed to see what they’re like. Do they get on? Are they cliquey? If so, can you be bothered with the endless angst? They can make a tenant’s life hell if so inclined.

Freehold properties

Assume nothing. Freeholds can also have weird caveats, clauses, easements and the like buried in the endless Title Deeds. Registered land (bought or sold since the 1970s) has a summary of idiosyncrasies.

Get your solicitor to check carefully for potential problems.

How to use that full structural survey to best advantage

Make all offers ‘subject to survey’. That steady surveyor is probably the only voice of reason you’ll hear amongst the babble of commission-hungry voices, disinterested lenders and over-excited vendors. What your buddy the builder says won’t cut much mustard. But, brandishing a full, professionally insured and signed report from a qualified professional is excellent peace of mind, gives you someone to sue if problems have been missed and remains the best tool there is for hammering down the purchase price.

Having paid for a survey read it. A good survey will point out problems with drains, wiring or plumbing as well as the roof and foundations. Running a building is exactly like running a car – some items wear out and need replacement – but all cost more than a new tyre. Be aware of the long-term issues in your building – and plan in costs.

Handling the purchase process

Get a written list of everything included in the sale from the vendor and make sure the estate agent explains what ‘fixtures and fittings’ means to his client. Everything that’s fixed to the wall and that is being removed (mirrors, shelves, wardrobes, etc.) must be declared in writing by the seller.

If vendors then steal what you have agreed to purchase in the deal, get your solicitor to demand restitution. If all else fails, sue them in the small claims court. Conversely, buildings should be emptied of everything that belongs to the seller that you haven’t asked him to leave. If they leave behind them several unpleasant divans and a shed full of tat follow the same procedure.

A bitter reality on the ground

Before we move on, there is an issue that I feel obliged to mention particularly for novice landlords, who know little of the lettings sector. Historically, the low end of lettings has been a hidden industry, one that has functioned for decades unseen and unregulated (maybe the new laws will change this?). The characteristics of independence and being able to ‘row one’s own boat’ have, unfortunately attracted some very unsavoury characters into the business. Individuals who feel that rules apply to everyone but them, and unfortunately, they’re often right! Whilst the local authority will chase a decent landlord’s tail over what can seem like minor indiscretions – these scoundrel landlords are rarely tackled by the man from the council.

Here’s a timely anecdote – I’ve no idea how representative it is – however, it did happen in a town where I cut my letting’s teeth – and I doubt it’s unique.

Housing Benefit and Head Lease Schemes

Even with the best efforts of some local councils, the core of many of the North’s towns are dying. People with wages are no longer willing to settle for a bleak terraced house and a bleaker back yard. So be realistic. This type of housing is almost invariably Housing Benefit territory. Which raises another issue. Social housing is almost always best provided/managed by local authorities with social work skills. Their tenants are often vulnerable people with complex social issues, heavy drinking, old age, substance abuse, mental illness and a myriad of financial pressures which accompany them.

We’ve all read stories of articles alleging ‘huge capital growth potential’. Some of them may even be true. But good rental units need a solid local economy of jobs and wages to underpin them. Without that, where are your customers?

Buying cheap property in former industrial towns can work well, especially if you can let it out through housing associations and local authorities via Head Lease Schemes. They offer guaranteed, long-term contracts, which include all management. The Housing Benefit sector remains undoubtedly lucrative – however, do check two things well in advance of plunging headlong into this type of purchase:

• 1.That the local authorities/housing associations actually need further supply. Many don’t.
• 2.That your lender will agree to this form of tenancy.

Beware of ‘too good to be true’ prices in distant
places

It can look very tempting on paper – buy up a couple of tatty terraces, spruce them up and reap the rewards. But be realistic. Two hundred miles away can be an awfully long round trip to do viewings so you have to use costly agents. The best advice for the novice is probably to cut one’s teeth more locally. Building your national portfolio can always come later.

Here’s a timely tale – told to me by an agent with a very broad grin.

A few final tips

• Only the self-reliant survive in this market.
• Look everywhere and into everything before you choose your own niche. There are plenty of opportunities for investment, and plenty of pitfalls to avoid. Remember – you’re looking for customers, not premises per se.
• Believe what you see and read – not what you’re told by a salesman.
• Bad or incomplete advice is plentiful – good advice is scarcer.
• There is no ‘one size fits all’ in the lettings’ business. It’s a bespoke kind of business.

Time to choose

Happy with your well-researched choice, feeling plucky and still fancying chancing your arm for some of HM Revenue & Customs legendary ‘unearned income’? Then it’s time to start tackling the nuts and bolts of becoming a fully-fledged private landlord. As promised – after the undoubted hassle of finding the right property, I guarantee that everything else will seem like a piece of cake!

And finally – some advice to those of you who wish to avoid the costs of using agencies.

Distance management

There’s always a way to avoid agency costs. But it does take careful planning. I’ve set up perfectly viable lets for landlords who simply couldn’t afford to use agents. The secret here is realistic planning and foresight. Distance management is a viable alternative that works perfectly well for those who fancy independence but can’t afford local agents.

Tips to make it work effectively

• Interview extensively, scrutinise several tenants thoroughly before choosing.
• Take careful references – Tenant Application Forms, bank/ employer/character and especially credit checks. (See Lesson 9: Selecting tenants and tying up the deal). Double check with phone calls.
• You’ll need a small team of local friends or relatives, each to be responsible for small areas. Don’t overwhelm any one person. One person needs to be contactable for essential repairs (to authorise repairs – or not). Bank statements need to be set up for three days after each rent payment should have arrived. You’ll also need someone local to agree to act as key-holder. Friendly neighbours work best or a security firm will oblige.
• Insure everything possible and set up service contracts for all that you can (boilers can be sorted out with British Gas to include an annual Landlord’s Gas Safety Certificate).
• Notify mortgage lender and insurers.
• Serve a Prior Notice 1 – (see Lesson 11: Ending tenancies, for details).
• Store private/precious items somewhere else.
• Approach a local plumber, locksmith and electrician. Find people willing to work and send bills to a friend left holding a small financial float of say £500.
• Compile thorough inventories and Schedules of Condition and always provide a comprehensive Property Profile (see Lesson 7: Inventories, Schedules of Condition and Property Profiles).

Tenancies like these can and do work well. Most tenants are decent people who want somewhere decent to live. Look carefully and the chances are that you’ll find some.

Whys and wherefores

There’s a huge amount of support for the advice in this lengthy lesson. Ignore agency websites and blurb. There are genuine experts all around you to learn from (especially other independents who’ve been doing the business for donkey’s years) that cost little or nothing. Look online: www.landlordline.co.uk, www.RICS.co.uk, www.RLA.org.uk or www.lawrights.co.uk are particularly useful, user friendly websites: you’ll find many more. Alternatively, join your local Small Landlords Association for impartial advice. There’s a rich seam of reasonable advice in some of the reputable newspapers. Try national newspapers online and head for their archive section – then type in a few key words. Research is as big a beast as you want it to be – but there’s no shortage of good advice out there – if you bother to look. A final suggestion is the investment in a single book on landlord and tenant law – and the Which Guide to Renting and Letting is a must.

CHECKLIST/SUMMARY

• Anyone can be a landlord – it’s being a successful landlord that counts.
• Rental properties need customers.
• Buildings don’t pay rent – that’s what tenants are for.
• Make sure that your property is safe. Specific legislation exists to protect your tenants and, in many areas, much more is coming on-stream. Besides which, they’re your customers – they deserve to be safe.
• This is a people business, learn some people skills.
• Anyone can manage any property independently – agents are a luxury, or convenience – never a necessity.
• Tenant demand is pivotal to every decision you make. Ignore it at your peril. The lettings’ business takes no prisoners.
• Rent levels follow the Retail Price Index – not house price inflation and tenants know local norms. How much you paid for a property won’t affect its rental value.
• Tenant types are as diverse as building types. Don’t limit yourself to two-bedroom flats ‘because everyone wants that’. It’s not true.
• Tenant demand covers every single aspect of the price range – be certain what type of tenant is a good match and that demand still exists for your particular investment before you buy.
• Property is never ‘a quickie’. Be prepared for a ten-year minimum commitment.
• Check areas thoroughly – before you buy.
• Be nosey. Knock on doors and ask questions. People are by nature, chatty, friendly and nice.
• When crunching your numbers, be ruthlessly honest. Deluding yourself is a fool’s game.
• Build a void period of 6–8 weeks into costings – then fight to keep your unit filled all 52 weeks.
• Empty units are your problem waiting to be solved! Find a solution. This is a punishing market for slow movers.
• Get building advice and written reports from a qualified professional.
• Get tax advice from a qualified professional – they know ways to minimise liabilities.
• No cheating now. Read the whole of this lesson – and learn the mindset.