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SUCCESSFUL
PROPERTY
LETTING
HOW TO MAKE MONEY IN
BUY-TO-LET
David Lawrenson
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ISBN: 978-0-7160-2275-6
1 3 5 7 9 10 8 6 4 2
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DEDICATION
7
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CONTENTS
9
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Index 283
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1
AN INTRODUCTION TO
PROPERTY INVESTMENT
Is it for you?
What kind of person makes a successful landlord?
The sort of person who makes a good landlord is
someone who is sceptical and enquiring and has good
people and communication skills. They are usually good
administrators and, above all, they really love the property
business and are prepared to take some risks.
Successful landlords question everything they hear and
are prepared to do their own research. So if a developer
or a consultant at a seminar tells them that his new
development of 10,000 identikit flats in Liverpool is
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Case study
In 2003, more than one thousand people suffered
massive losses after being duped by a property invest-
ment company promising ‘guaranteed’ annual returns of
15 per cent. The investors, who included accountants,
lawyers and doctors, handed over five and six figure
sums after being seduced by the company’s brochures.
The firm used adverts in publications such as the
Financial Times to tell investors they could make a
fortune buying cheap properties in the north of England,
which the company would refurbish and let out to ‘social
housing’ tenants. The company would supervise all the
refurbishment, find the tenants and even collect the rent.
Investors would sit back and wait for the money to roll in.
If only life were so simple. The company pulled in more
than £100 million but much of the refurbishment work
was never carried out and the tenants never
materialised. It turned out that investors had bought
derelict, boarded-up houses which were worth far less
than they had paid for them. Some were uninhabitable
and worth less than £2,000. The firm was closed down
by the DTI. Most of the investors were from the south-
east of England and had been persuaded that the north
was ‘bursting with investment opportunities within the
social housing sector’. Amazingly, most of the investors
hadn’t visited the areas or seen the properties at all. This
is not a unique story – even in 2011 we continue to see
property companies going bust and lots of “investors”
losing their shirts.
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Note
To avoid saying “he” and “him” instead of the clumsy
phrases “he/she” and “him/her”, I simply use “he”/”him”
to refer to both men and women.
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2
EASY AS ABC:
THE SIMPLE ECONOMICS OF
PROPERTY LETTING
30 Easy as ABC
How to calculate the true income
from your property
When people talk about property, they often talk about
the “property yield”. And yet, this term often means
different things to different people, so when you are
talking about yield, even if you know what it means, it’s
always useful to check that the other person has the same
understanding.
So, what is yield? Yield is just another way of expressing
the “income” on a property relative to the value invested
in it.Very simply it’s just the total amount of rent, less the
running costs of the property, divided by the total value
invested in the property including buying costs. So if your
annual rent is, say, £18,000 a year, the running costs are
£2,000 per year and the total value of the property is
£250,000, then the “yield” is calculated as:
Yield =
Total Rent minus Running Costs/Current Value of
Property
Easy as ABC 31
local paper to see what rents are being charged for
equivalent properties or you could ask a letting agent.
Unfortunately, both approaches may lead you to believe
you can get a higher rent than is achievable for a
permanently let property with no voids.
I’ll explain. For my properties, the rents I achieve are
typically 5 to 15 per cent less than those being asked by
other landlords and letting agents for the same type of
property. This is not because I am a bad businessman. It’s
because I set my rents so my properties are always fully let
whereas my competitors don’t. I know this, because
sometimes I pose as a tenant and go and look at other
properties. (It’s always good to check out the competi-
tion!) Six times out of ten, the previous tenants have left
and the properties are standing empty and burning up
their owners’ money.
I don’t doubt that sometimes other landlords and
letting agents do eventually let their properties.Very often
though, they’ll have had to drop the rent. Even where
they achieve high rents they may have been forced to
agree improvements such as redecorating or buying new
furniture which will hit their profit.
The period of time a property is not let, the “void
period” in landlord’s jargon, is extremely costly. In the
example above, the annual rental was £18,000 or £1,500
per month. If the property is unlet for a month, then the
annual rent falls from £18,000 to £16,500 and the effect
on the yield would be to reduce it by 0.6 per cent.
In fact, the situation is worse because, with an unlet
property, running costs are likely to be higher because you
may have to pay for council tax and utilities too. Also, if
the property is furnished and empty, your insurance
premium could well go up as well.
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32 Easy as ABC
You may get lucky and get a tenant to pay top dollar
with no gap between tenants, so no void period at all.
Your super new tenant might not even demand a new bed
or cooker for his top dollar rent! But he’ll probably find
out soon enough he’s paying a premium rent and chances
are he will become more demanding and ask more of
you! He may be more likely to leave after a short period
and you’ll have the costs of remarketing to bear.
If instead, you offer to let at a rent just below the
market average, you’ll have more tenant demand and be
able to cherry pick the best tenants and those who can
move in just after your previous tenants move out.You’ll
have no void period, you won’t need to throw in extras to
get the new tenant and you’ll have someone who is happy
and will stay longer because he knows he’s paying a fair
rent.
This isn’t about being a “nice landlord”. It’s just good
business, because those voids, additional things thrown in
“free” to attract a premium rate tenant and, most of all,
your time have to be paid for somehow!
Easy as ABC 33
LETTING AGENCY FEES
These are typically about one month’s rent plus VAT for
finding a tenant including doing reference checks, signing
agreements, dealing with utilities and doing the check-in.
Landlords with large portfolios may get lower charges
than this though fees in London could be higher.
Typically, money is deducted from the tenant’s first
month’s rent and deposit and before any residual money
is paid over to the landlord. Also, some agents “try it on”
by trying to re-charge the fee each time the property is
re-let to the same tenant. If the agent provides manage-
ment services too, you’ll need to add another 3 to 5 per
cent plus VAT. Chapter 7 has some good advice on how
to negotiate these costs down.
INSURANCE PREMIUMS
Buildings insurance premiums vary depending mainly on
the size of property and its location.You must have it and
should budget about 3 per cent of the rent for it. Where
the property is furnished, contents insurance is also a
must. Allow for between 1 and 3 per cent of the rent
depending on the level of furnishing. For properties with
few furnishings you could opt to cover damage by having
a sufficiently high deposit.
Some landlords take out separate cover against a tenant
defaulting and the cost of doing this is typically 2 to 4 per
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34 Easy as ABC
cent of the rent. In addition, you can also take out insur-
ance against things going wrong with plumbing, drains,
gas, electrical appliances or whatever. I wouldn’t bother
with the latter for the reasons explained in Chapter 5.
GENERAL MAINTENANCE
In a property which is let out, more things need
maintaining more often than they do in a private home.
The main things that go wrong are boilers, pipes,
overflows, drains and the like. As long as young people
prefer to study Media Studies rather than Plumbing, there
will be a shortage of skilled plumbers and the cost of these
services will continue to rise well ahead of the rate of
inflation. In Chapter 8, I’ll show how to keep main-
tenance costs in check, but you should expect costs to be
20 per cent higher than you would in a private home. Gas
appliances must be checked by a registered gas engineer
so you should add an additional £50 to the annual
running costs for each gas appliance in the property.
ADVERTISING
If you don’t use an agent, you will need to advertise for
tenants. In many media you can advertise for tenants for
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Easy as ABC 35
free. However, if your property is more up-market, you
may have to pay to advertise in the sort of publications or
websites that your intended tenants read. Currently, you
can get your property advertised on all the main portals
like Right Move via landlord letting sites for about £50
or £60. See the Useful Links at LettingFocus.com
LANDLORDS’ ORGANISATIONS
For less than £100 a year, you can join a landlords’ organ-
isation and get all the news including any legal updates,
helplines in case things go wrong, local meetings, access to
up-to-date tenancy agreements, discounts on websites
which advertise property, and money off buildings insur-
ance, tenancy deposit schemes, energy performance
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36 Easy as ABC
certificates and building materials. Two of the biggest are
the National Landlords Association and the Residential
Landlords Association. (See Appendix 2 for a list of the
main associations.) And check out my own blog at
www.LettingFocus.com for occasional offers.
PERSONAL COSTS
Allow for the cost of your own time plus incidental
expenses such as phone calls, travel costs, stationery and
cleaning materials.
Easy as ABC 37
Yield = Total Rent minus Running Costs/Current
Value of Property
When evaluating this example as a property invest-
ment, the figure that should go in the bottom half of the
equation is £256,937 because this is the total investment
that you, the buyer, will have to make.
38 Easy as ABC
and don’t take any account of the transaction and set-up
costs you’ll have to bear. By doing this, they make the
yield seem much higher than it actually is.
Even worse, many investors and every property TV
show I’ve ever seen fail to account for the opportunity
cost of using the investors’ own money. Let me explain.
In the example above I took as my starting point, the
£250,000 basic cost of the property. Few in the buy-to-
let mortgage market are going to lend 100 per cent of the
value of the property – 85 per cent is normally the
maximum that’s ever been advanced, with the investor
finding the remaining 15 per cent. In this example, you
would need to put down £37,500 (15 per cent of
£250,000) of your own money in order to buy this
property, with the mortgage company putting up
£212,500.
Some developers then simply divide the rent by the
value of the mortgage loan. As this is much smaller than
the total value of your investment, it again produces a
much higher yield. It’s possible to see how big a differ-
ence this makes. In our example, if you just take the
basic £18,000 gross rent and divide this by the mort-
gage loan of £212,500, you get a “yield” of 0.0847 or
8.47 per cent!
However, if you subtract from your £18,000 gross rent,
an allowance for a one month void each year of £1,500
as well as annual running costs of £2,000 and then divide
this by your total investment cost of £256,937, you get
what we could call a “true net yield” of about 0.056 or
5.6 per cent. £18,000 less £3,500 (£1,500 +
£2,000)/£256,937 = 0.056 or, expressed as a percentage,
5.6 per cent.
This true net yield is obviously very much smaller than
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Easy as ABC 39
the 8.47 per cent figure some would have you believe!
Also, bear in mind in this example, if you used an agent to
find a tenant, your total running costs are likely to be
higher than £2,000 a year.
As long as the true net yield is greater than whatever
the cost of borrowed money is to you, then you’re making
money on renting. In our example, the true net yield is
5.6 per cent and if the cost of mortgage money is 5 per
cent, we are 0.6 per cent to the good. Put another way,
0.6 per cent of the value invested in the property
(£256,937) is about £1,542, so this is what we are
making in net income from the property.
Of course, if mortgage interest rates go up above 5.6
per cent, then, in this example at least, we will be
making no money in net income at all. However, over
time, if you have bought wisely you would expect rents
to rise, thus increasing the income from a property in
the future.
So, if you are investing in property you need to allow
for the possibility that interest rates can go up and you
must make sure that you can afford to meet interest repay-
ments.
The key messages of this discussion about yields are:
40 Easy as ABC
How to calculate capital growth
Of course, the other way that properties make money
over time is by going up in value, or “capital growth”.
Fortunately, calculating this is easy. It’s simply the differ-
ence between the value of the property when you buy it
and the value when it’s sold less the total costs incurred in
buying and selling.
In the example above, the total buying cost (including
mortgage cost, solicitor’s, survey, furnishing and all
preletting costs) is £256,937. In the same way, when a
property is sold, it’s important not to forget to include
solicitor’s costs, selling agent fees, costs in making the
property ready to sell and the cost of utilities and lost rent
from the day your last tenant leaves until completion.
Often, a property that has been let for a long time can
look tired so, when the final letting ends, it’s worth
spending some money to make it look attractive to a
potential buyer. I will discuss in Chapter 5 how to get the
property to look its best. Don’t forget to allow for this
cost.
Don’t forget about tax either. Most income on residen-
tial property is subject to income tax, and capital growth
may be subject to capital gains tax. For more on taxes see
Chapter 11.
Many people today invest in properties where the
starting net yield is nil or negative. In other words, their
running costs, including interest are higher than the
expected rent.These people are hoping for better rents in
the future, lower borrowing costs and good capital
growth. But is this wise?
Well, it all depends. If you’ve done your homework,
and follow my advice in Chapter 3, you’ll have a good
idea of whether future rents will be higher and if the
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Easy as ABC 41
property is going to go up in price. I think such a strategy
can work, but some degree of caution and a long time-
horizon are required.
Of course, yield and capital growth go together like a
horse and cart. If the price of a property shoots up over
time (high capital growth) but the rental income from the
property stayed the same, then the yield must have gone
down. If the yield goes low enough, then it’s always worth
thinking about selling and doing something else with the
money, like investing in another area or even just putting
it in the bank. If you put it in the bank though, you’ll miss
out on any further capital growth there might be in the
property. Also, if you sell, you’ll have to consider possible
capital gains tax complications.Again, for more on tax see
Chapter 11.
So, good professional landlords are always evaluating
their property investments, looking at their potential,
working out the best time to buy and sell and the best
types of property to invest in. It is this that is the subject
of the next chapter.