Why Am I Drafting This Article?
So, you’re thinking about buying a property as an investment and you haven’t done it before. There’s nothing to it really, is there? Just a question of getting a flat that’s in good condition, or buying one then making sure that it ends up in good condition, then you find a tenant, get the rent in and make a tidy profit. No?
I’m afraid that the information in this article is borne of a rather large dose of pessimism that has come of slightly bitter personal experience and that of people whom I know. I have only recently become a landlord (in the last five years). My experience is that most people who buy a flat to rent it out to people they don’t know don’t do their research first. Hands-up time: I’m a solicitor (albeit not a landlord/tenant lawyer) and I kind of assumed that I knew what I needed to know from speaking to other landlords. And it turns out that I didn’t! It also turns out that a lot of those people, unless they were inordinately lucky, were riding high on the back of years of capital values of property rising and had had several years of a booming economy and easily-obtained credit supporting their tenants in being reliable payers. There also probably was an element of people hating to admit that they ever make mistakes influencing their accounts of what it meant to be a landlord!
I, on the other hand, am happy to admit that I make mistakes just like the rest of them, and also that I’ve been a landlord in a time of credit crunch, recession and global financial crisis, so I thought I’d pass on a little bit of what I’ve learned and some of the less-than-positive experiences that I’ve had, in that time to hopefully prevent you from falling in to the same pitfalls.
So, What Are the Pitfalls that I’d Recommend that Potential Landlords Are Aware of Before They Decide to Invest in a Property?
As I said, I’m not an expert in landlord and tenant law. Quite the opposite: I find it thoroughly confusing and am at the mercy of other solicitors and letting agents to advise me on what my rights and obligations are. The following is therefore very much in layman’s terms and there might be a couple of inaccuracies and, at any rate, shouldn’t in any way be construed as legal advice (if you are having any issues regarding a tenant, please seek your own legal advice, there are plenty of excellent landlord/tenant lawyers around and I’m not one of them!). However, the prevailing sentiment and advice, from painful experience, is most certainly true.
1. Your 6 month lease does not mean that the tenant has to move out at the end of the 6 month period, even if you serve them valid notice plenty of time in advance. Beware of just how hard it is to get rid of a tenant who is not paying their rent.
This sounds completely counter-intuitive but is completely true. If they don’t move out, you can’t just go and change the locks. You will have to take legal action to get them evicted.
I’d say that most new landlords, or prospective landlords, whom I meet just don’t know what the law is and what rights (or lack of rights) landlords and tenants, respectively, actually have. I was one of them so, honestly, I’m not judging you if you are one of them!
You only need to speak to a handful of letting agents (who are slightly more impartial than landlords) to get the impression that the law is hugely stacked in favour of the tenant. Landlords have been vilified as being unscrupulous, greedy and negligent in the last few years (indeed, probably forever!).
However, in my experience, those landlords who are fairly new and are not making their living from being a landlord but who simply have seen property as an investment for their savings are most certainly not in the category of unscrupulous types who are taking advantage of their tenants and making them live in totally insanitary conditions. Indeed, when there is a surplus of rental flats on the market in cities like Edinburgh and Glasgow, I don’t know why people would choose to live in a two bedroom flat with seven other individuals unless it meant that their rent was much lower than if they lived with the legally-permitted number: in that case, I really do have to conclude that they should exercise just a little personal responsibility here and admit that it’s their own choice to live in this way. However, most of the landlords whom I’ve met are really just trying to cover their costs and to make a small return on their investment.
Nevertheless, the law is hugely stacked against landlords. I think the thing that most landlords don’t realise is just how hard it is to get rid of a tenant who stops paying you. From my meagre understanding of the court process regarding eviction of tenants, there are certain grounds for eviction that are ‘mandatory’ and certain that are ‘discretionary’. In other words, the court does not have to grant an eviction order to you unless the tenant is a full THREE MONTHS in arrears. Persistent late or short payment, as far as I’m aware, gives the court the discretion to grant you an eviction.
The problem is that, once the grounds are satisfied, you then have to get a court hearing to actually enforce your rights. Bearing in mind that it takes 6-8 weeks to get a court hearing at the moment, after all the papers have been validly served upon the tenant, this means that your tenant will most likely be at least 5 months in arrears by the time you get the court order. And even then you have to then arrange for the eviction to take place. So the tenant will probably be 6 months in arrears by the time you get rid of them. And that’s all on the basis that the tenant doesn’t actually challenge your court action such as by defending it on the grounds that they claim they can prove that they have paid you (even if you and they know that this is completely false)…if they do challenge it then it can take considerably longer as the court will have to hear evidence at a further court hearing before then granting the eviction order.
You also have to beware that if the tenant is vulnerable or is likely to be homeless as a result of you evicting them, it will be even harder to evict them even if they are not paying rent for a LONG period of time.
If you do decide to go ahead and guy a property as an investment, ensure that you have a cupboard full of headache pill to cover situations like this!
2. Local Housing Allowance is not paid directly to you as the landlord.
If your tenant loses their job and stops paying rent, they might be able to get Local Housing Allowance. It might be that your prospective tenant is already receiving Local Housing Allowance when they first contact you. Now, if you are an honest tenant who realises that you have a contractual obligation to pay your rent to your landlord whilst you are in their property, why would you not want that money just to be paid directly to your landlord? Particularly when someone else is paying it on your behalf anyway: Councils/Local Authorities don’t have cashflow issues like private individuals?
However, the Local Authorities, in their infinite wisdom, have decided that this disempowers the tenant and, as of a couple of years ago, most of them will not pay the Local Housing Allowance directly to the landlord. You have to then hope that, when the tenant receives that money, they transfer the full amount straight out to you as the landlord.
The irony is that, in my experience, things start getting tight when tenants who are receiving Local Housing Allowance actually start working again. Their LHA is cut at that point but their cost of living goes up (paying for childcare etc) so you have to hope that the LHA that they continue to get comes to you instead of being spent on other things. I’m sure that there are tenants up and down the country in exactly that situation who faithfully ensure that the LHA is forwarded on to the landlord. However, I personally have yet to experience it myself!
And what is worst is that when the rent stops coming to you, the Local Authority will not tell you whether or not the tenant is still receiving LHA (in other words, whether the money is at least there to pay the rent). You have to get that information directly from the tenant. When your tenant has stopped paying rent, you will have more chance of getting blood from a stone than of getting any information from them about anything!
3. Credit checks done by letting agents can be woefully inadequate in ensuring that they tenant actually has the ability to pay their rent.
I’ve just had a problem with a tenant who was nearly £2000 in arrears and finally left the one bedroom flat that I was renting to him, through a letting agent.
I’ve now seen the credit check that was done by the letting agent who told me that this tenant was a suitable candidate for tenancy of this flat. The most frustrating thing is that this type of flat is in pretty high demand (it’s a beautiful wee one bedroom flat, just off Easter Road, in a lovely block, fully refurbished, and the rent is just £450 per month) so there was no need to put someone like this in that flat. However, I just found out that the credit check form stipulated that the tenant had to earn 2 1/2 times the level of the rent, BEFORE TAX. Is this enough, bearing in mind that a salary of £14,000 would pass this credit check based on a £450/mth rental.
It is woefully inadequate! The cost of rent, council tax, utility bills, TV licence, telephone, insurance will probably be around £750/month. Their take-home pay, after tax, will most likely be about £800-900/month. Without credit cards, how do they eat, get to work or have any kind of life? Frankly, when I earned only a little bit more than that as a trainee solicitor, I didn’t think for a million years that I could afford a one bedroom flat all to myself and I rented a single room from a friend of mine.
What’s more, the credit check forms that they fill out TELL THEM that they will have to have a gross salary of 2 1/2 times the rent to pass the credit check! And it appears that no pay slips are requested as proof of earnings, so there would be a huge temptation to just raise the figure to the required amount. Indeed, this tenant who has left with £2000 in rent arrears actually amended the amount of his gross salary on his credit check form, raising it from below the 2 1/2 x salary threshold to a figure that just passed this check. Coincidence…? Of course, this was all done by the letting agent so I didn’t see it until too late. You could be in the same position very easily so, if there’s any lesson to be learned here, ASK the letting agent what the gross salary of the prospective tenant is, regardless of how lovely a chap they tell you the tenant is!
4. Most people are very optimistic about the costs of owning a flat
Now, one thing I do know quite a lot about it people who buy and sell properties: that’s how I make my living. And I know for a fact that most people are wildly optimistic about the cost of home ownership and will do absolutely anything to justify moving to a property that is going to stretch them to the financial limit. Now, that’s fine when you’re living in the property: if you have to sacrifice that night out with your friends at the weekend, it’s going to impact upon your quality of life but it won’t make you bankrupt.
However, that is not the case with an investment property that you are going to rent out! Over-optimism here can lead to ruin. So how do you avoid that?
Remember to factor-in void periods (months between tenants when you are looking for a new one), maintenance (it’s amazing how many more things go wrong when someone else is living in a property than when you are living in one!), insurance, management fees, the re-letting fee (a one-off fee charged in addition to the letting agent’s management fee), landlord registration dues (you have to register as a landlord with the Council), plus a healthy contingency for exterior maintenance on the building.
From personal experience, I can vouch for the fact that the cost of refurbishing the property after a tenant has moved out can cost more than the combined rental payments for several months or indeed years. To add insult to injury she hadn’t paid her rent for 5 months and I will never be able to recover any of that money. Whilst these things are very, very annoying, they can also be financially ruinous, particularly in an age of uncertain property market movement where it’s fairly easy to find yourself unable to sell a property because it’s worth less than what you owe on the mortgage or have made a very significant ‘paper loss’ and just don’t want to sell the property right now because it will mean writing-off a considerable amount of money. If you can’t sell it, can’t afford to renovate it to a standard where you can rent it, you are, to use a technical term, stuffed!
5. Letting agents will tell you to take your property off the market once a prospective tenant has paid their ‘holding deposit’ but if they decide not to move in, you end up with nothing
Personal experience here again folks! Especially when you don’t have a large queue of people wanting to rent a property that you are trying to let-out, you are slightly over a barrel on this one but it’s worth being aware of. When a tenant pays your letting agent a holding deposit and plans to move in to the property in three weeks time, the letting agent will usually stop marketing the property and therefore will have no contingency for when, three weeks later, the tenant doesn’t turn up at the move-in date. Not only that, the ‘holding deposit’ is miniscule and doesn’t represent the amount of time that the property is being held. All of which just extends the void period where you have no tenant in the property.
6. Social Stigma: Beware that Many People Will Treat You as a Fat Cat, Even if You are Losing Money Hand over Fist!
Why shouldn’t a landlord be allowed to make a return on their investment, however small? I regularly hear people saying, ‘I grudge paying rent? I’m just paying someone else’s mortgage.’ Well, yes and no. If the economy requires interest rates to go through the roof and property owners start paying £1500 per month instead of £500 per month for their mortgages, will the rent on that flat increase by that much? Not a chance: quite the opposite, the chances are that this will be in the face of massive economic problems and inflation and, in that case, rents are more likely to react in a downwards direction as members of the public have less money in their pockets.
When a storm blows the roof off, who has the hassle and expense of repairing it? And who has to fix the shower when it breaks, the toilet when it blocks and pay for a new kitchen every few years? It’s really not just a question of sitting coining-in the money for no cost or hassle! At any rate, these landlords earned the money they invested in the property and could just as easily have put it into a bank or shares rather than creating more available housing stock for the rental market. So, against that backdrop, I don’t really think that most criticism of most landlords is justified. However, as a result of this prevailing opinion about landlords, the law and indeed public opinion seems to have evolved recently to be more and more in favour of the tenant. So you’ll have to get used to the fact that because you own a flat that you rent-out, there’s a good chance that some people either will assume that you’re minted or that you are a horrible individual, or indeed both!
I have probably been very unlucky with my experiences of being a landlord. There are people who have never had any such problems. Equally, I know of several who have had far worse than I’ve had.
I suppose the reason for this article was that, if my bad experiences are to have any positive impact, it’s better that I share them with people who maybe, in knowing these things, decide that they never wanted to risk having that experience but who would have otherwise opened themselves up to that possibility.
Being a landlord can be financially rewarding and a very good investment. None of these issues are such big problems if you own the flat outright, with no mortgage. However, if you have any kind of borrowing and you are having to pay quite considerable sums every month for the flat then a non-paying tenant for a long period of time can really get you down. I’ve experienced it myself and seen other people on the receiving end of it too and it really can be quite depressing, largely because you just think, ‘Why did nobody tell me this before I got into all this?’.
I would have loved if someone had taken me to one side before making the decision to invest in property and told me a few of these things. I hope therefore that this article might just provide that for you and I wish you the best of luck with whichever course of action you do decide to take.