Advice for new landlord please

madeupname1

An good estate agent is useful for:

(1) the purpose of marketing and finding available tenants and

(2) giving you guidance as to what you need to do (in England, things like getting an EPC, gas safety certificate and registering the deposit). Having someone that knows the rules will help you avoid costly mistakes.

You have already found the tenant but you may not have a full understanding of your responsibilities. You might be able to do this without the agent, for example by joining some kind of landlord's association, but it would definately be more difficult and, if you get it wrong could well end up costing you more than the 15%.

Out of interest - is the 15% a tenant find fee or a full management fee? If its a tenant find fee, I would definately negotiate it way down particularly if you point out to the agent that you have already found the tenant! It may also be possible to negotiate the fee down if the EA is providing a management service (or perhaps think about whether the extra 'service' you get under the management option is actually worth the charge).

The EA can also carry out the references and produce a tenancy agreement (although their tenancy agreements aren't always good quality and there may be an extra charge for this). Again if you are a member of an association, you could probably get a template agreement from them. You should also note that the estate agency fees are tax deductible in the UK and if you end up making a loss, you can carry forward those losses for up to 3 (I think) tax years to set off any profit you might make in the future.

pyueck

madeupname1 wrote: »

An good estate agent is useful for:

(1) the purpose of marketing and finding available tenants and

(2) giving you guidance as to what you need to do (in England, things like getting an EPC, gas safety certificate and registering the deposit). Having someone that knows the rules will help you avoid costly mistakes.

You have already found the tenant but you may not have a full understanding of your responsibilities. You might be able to do this without the agent, for example by joining some kind of landlord's association, but it would definately be more difficult and, if you get it wrong could well end up costing you more than the 15%.

Out of interest - is the 15% a tenant find fee or a full management fee? If its a tenant find fee, I would definately negotiate it way down particularly if you point out to the agent that you have already found the tenant! It may also be possible to negotiate the fee down if the EA is providing a management service (or perhaps think about whether the extra 'service' you get under the management option is actually worth the charge).

The EA can also carry out the references and produce a tenancy agreement (although their tenancy agreements aren't always good quality and there may be an extra charge for this). Again if you are a member of an association, you could probably get a template agreement from them. You should also note that the estate agency fees are tax deductible in the UK and if you end up making a loss, you can carry forward those losses for up to 3 (I think) tax years to set off any profit you might make in the future.

Paying an agent, even 10% for the services above seems expensive for what you are getting. Remember that agents are not solicitors and while they may be able to advise you about the basics, it really is not rocket science to work out your obligations as a landlord. A good book on the subject is a start, e.g. http://www.amazon.co.uk/Renting-Letting-Which-Essential-Guides/dp/1844900541/ref=sr_1_4?ie=UTF8&s=books&qid=1272634843&sr=8-4 . You can quite easily meet all landlord obligations without an agent, and you may even find it easier to rent your property if, as you do, you have a suitable tenant, as the tenant wont have to pay agency fees. You can do references yourself, you can get somebody to do EPC's and gas checks for little money, and you can protect the deposit yourself.

Also remember just because you have an agent, your responsibilities as a landlord don't change, and the tenant will still sue you and not the agent should anything go wrong.

Think about it an agent may charge you £300 admin fee at the start and then 15% of every bit of rent. If the rent is £750 a month this is £1350 a year, £1650 a year including admin fees. While this can be offset against tax, it is still money you would probably rather have. A landlord association is an idea, but again its an expense.

Emm_Eff

Guys,

I think I need to throw some figures in here to help illustrate the situation a bit better.

House value: £80,000
Amount owed to bank: £37,000
Term left on mortgage: 18yrs.
Mortgage cost: £282 / month
Mortgage type: fixed rate - 2 years left to go.
Mortgage provider: Halifax

Potential rent: £475 pcm
Agent finder fee: £125 (surely I won't need to pay that if I find the tenant??)
Agent management fee : 15%

Going on the yield formula posted earlier, I would calculate yield at:

Gross - 80,000 / 5,700 = 14.03%
Net - 80,000 / (5,700 - 855) - 500) = 80,000 / 4345 = 18.4%

That formula for yield doesn't make sense as the net is greater than the gross??? The 855 in the net formula is the 15% agent fees. The 500 in the net formula is for expenses above the 15%.

Yes! I could liquidate the asset. I could sell for a net profit of maybe £40,000. The question I ask myself is, can I invest the 40,000 and make more money than I would by leasing? Also, if I lease then I continue to own the house and therefore make a profit and retain the asset for future.

It's a difficult decision, as I have absolutely no experience in all this... plus liquidating the asset might not be so easy given the current housing market!

Would also like to add that any profit I make over the year would be invested back into the property by mortgage overpayments. I want to do this to pay the house off asap, and I'm thinking if every penny is invested back then I don't need to pay any tax?

new_home_owner_3

Im in a similar situation i owe 100,000 house worth 150,000 and my mortgage is 360 a month, i rent it out for 675 and my mortgage is over 4 years to run on a fixed rate.

I dont see any reason in selling, i know the yield is probably low, but if i sold and put 50,000 pound in the bank i would still get nowhere near 315 pound a month.

house prices may fall, but if i can keep on renting and taking a steady income i will be happy, im thinking of doing this between 10 to 15 years, then hopefully if house prices have grown a bit i will sell and hopefully have a nice little nest egg.

I rent my property out myself, its easy enough, agents are okay but if you get a bad one, you can end up in a world of !!!!!!.

madeupname1

Emm_Eff wrote: »

Guys,

I think I need to throw some figures in here to help illustrate the situation a bit better.

House value: £80,000
Amount owed to bank: £37,000
Term left on mortgage: 18yrs.
Mortgage cost: £282 / month
Mortgage type: fixed rate - 2 years left to go.
Mortgage provider: Halifax

Potential rent: £475 pcm
Agent finder fee: £125 (surely I won't need to pay that if I find the tenant??)
Agent management fee : 15%

Going on the yield formula posted earlier, I would calculate yield at:

Gross - 80,000 / 5,700 = 14.03%
Net - 80,000 / (5,700 - 855) - 500) = 80,000 / 4345 = 18.4%

That formula for yield doesn't make sense as the net is greater than the gross??? The 855 in the net formula is the 15% agent fees. The 500 in the net formula is for expenses above the 15%.

Yes! I could liquidate the asset. I could sell for a net profit of maybe £40,000. The question I ask myself is, can I invest the 40,000 and make more money than I would by leasing? Also, if I lease then I continue to own the house and therefore make a profit and retain the asset for future.

It's a difficult decision, as I have absolutely no experience in all this... plus liquidating the asset might not be so easy given the current housing market!

Would also like to add that any profit I make over the year would be invested back into the property by mortgage overpayments. I want to do this to pay the house off asap, and I'm thinking if every penny is invested back then I don't need to pay any tax?

I think these figures look good, although I can't comment on the yield figures. I think the purpose of them is to compare yields on one investment (i.e. owning and letting a house) with another. However, that doesn't take into account capital growth and, if thats what you're looking for, not sure that the yield is necessarily a good measure. However, would be interested in others views on this.

One question - are you able to pay the rent in the event that there is no tenant in the property (or if the tenant stops paying because she or her partner loses their job)? If you can I personally don't see alot of risk in what your doing if your job is pretty secure. In fact I am doing pretty much the same thing.

Think about whether the overpayments are a good idea. The more you overpay, the less you owe and the less interest you get charged. That is good. However, given that you only get tax relief on the interest portion of your mortgage repayments, the more of the principal you pay, the lower your interest and the higher your taxes. The overpayments are not tax deductible. Its 6 of one and half a dozen of the other (either you pay interest or taxes). What you could do is put the money that you would have used to make the overpayment in some other investment vehicle or savings account so you know that you have it ready to pay down the principal if necessary.

Personally I think it would be a good thing for you to try. But we all bring our own prejudicies to this debate. I think its a good idea because its something I have done relatively successfully. Others don't like the idea - sometimes they have a moral objection to people not releasing property to the market, thereby pushing up prices / sometimes because it hasn't worked for them or very risk averse.

If you are living near to the property, I don't think that having an agent manage the property for you on an ongoing basis is generally good value for money. I think they are useful at the beginning, but thats pretty much it. Definately negotiate down the 15%.

surreybased

Yield not correctly calculated..Its the income you receive (less expenses) divided by the value of the asset. So in your case: 5700 (475x12) less expenses which you should estimate and don't under estimate / 80000.
Gross yield = 7%

Just remember to include all possible expenses. We often hear of LL's on this site who have under estimated expenses and when the bills mount up they resent the low return. If it gets to this stage then the relationship with the tenant can be damaged. Being a a LL is not hassle free, you have responsibilities in law which you need to be aware of. I would also suggest its good to view the house no longer as 'your home' but a business asset. Business assets can lose money!
Mostly LLs have been counting on increasing house prices to boast yield. What if house prices go negative/remain stagnant for 5 years - How would you feel?

surreybased

new_home_owner wrote: »

Im in a similar situation i owe 100,000 house worth 150,000 and my mortgage is 360 a month, i rent it out for 675 and my mortgage is over 4 years to run on a fixed rate.

I dont see any reason in selling, i know the yield is probably low, but if i sold and put 50,000 pound in the bank i would still get nowhere near 315 pound a month.

.

Your calculation on the benefit should take into account the £50k already invested + the £360 per month that your contributing to the asset (plus any other costs and time & effort) circa 5% yield.

Annisele

Emm_Eff wrote: »

Guys,

I think I need to throw some figures in here to help illustrate the situation a bit better.

House value: £80,000
Amount owed to bank: £37,000
Term left on mortgage: 18yrs.
Mortgage cost: £282 / month
Mortgage type: fixed rate - 2 years left to go.
Mortgage provider: Halifax

Potential rent: £475 pcm
Agent finder fee: £125 (surely I won't need to pay that if I find the tenant??)
Agent management fee : 15%

Going on the yield formula posted earlier, I would calculate yield at:

Gross - 80,000 / 5,700 = 14.03%
Net - 80,000 / (5,700 - 855) - 500) = 80,000 / 4345 = 18.4%

That formula for yield doesn't make sense as the net is greater than the gross??? The 855 in the net formula is the 15% agent fees. The 500 in the net formula is for expenses above the 15%.

That's because you've got your formula upside down

Your gross yield is:
total income received/value of asset = 5,700/80,000 = 7.125%

Ignoring tax, your net yield would be:
(total income received - expenses) / value of asset.

Assuming agent fees of 15%, two void periods a year, one finder's fee per year, and insurance/maintenance/other costs of x, your net yield would be in the region of:

[(475*10*.85) - 125 - x] / 80,000

If x was 0 (i.e. assuming no maintenance or insurance costs, which is horribly unrealistic) your net yield would be in the region of 5%.

Those yield calculations are for income only; they ignore the effect of house price rises/falls.

If you have a look at some posts from experienced landlords on here, you'll see that "nightmare tenants" can take months to evict. If they trash the place but don't have any money, you're pretty unlikely to get it back. 5% isn't a huge rate of return to compensate for that risk. Plus, if interest rates rise - which they almost certainly will - you may find that market rents don't go up enough to compensate you for that rise.

You can offset the mortgage interest against tax, but not the capital repayment part.

Emm_Eff

Thanks for all the replies so far. There's loads to mull over here, so I'll get back to this thread when I've had a good think about things.

new_home_owner_3

surreybased wrote: »

Your calculation on the benefit should take into account the £50k already invested + the £360 per month that your contributing to the asset (plus any other costs and time & effort) circa 5% yield.

Like i said im not really interested in the yield, we tried to sell our house in 2007, dropped it over 30,000 and no luck, we also took 50,000 pounds out for a deposit for our next purchase.

All i look at is we make nearly double of what my mortgage is. Infact what we make on our rental property pays for over half of our new mortgage,