Maximizing the potential benefits of the investment while minimizing the risks.
In my blog should I become a landlord, I extensively discuss the advantages and disadvantages of investing in property. Consequently, it is crucial to ensure that it remains a profitable endeavor; otherwise, it contradicts the primary objective entirely.
I have read all sorts of horror stories about investing in property and being a landlord and whilst these issues are very real, it highlights the significance of taking proactive and intentional steps to ensure the profitability of the investment, despite these challenges.
Being proactive in property investment involves taking a forward-thinking and intentional approach to maximize the potential benefits of the investment while minimizing the risks.
This article will focus on actions that take place after the purchase of the property, assuming you have chosen a property in the right location to start with.
Choosing the right tenant
Choosing the right tenant is crucial as your ability to be profitable is directly related to the tenant, not just paying the rent, but paying it on time.
Setting the rent right
The primary (and likely sole) source of income for the property comes from rental payments. Consequently, it is crucial to ensure that an appropriate rent amount is being charged. Setting it too low can diminish profits, while setting it too high may result in longer void periods.
So how do you ensure you are charging the right amount of rent without pricing yourself out of the market?
If you already own properties in a specific area, you likely have a good understanding of the rental amounts tenants are willing to pay. However, if your tenants have been with you for an extended period, it’s possible that you might still be charging below the current market value.
Steps to setting the rights rental amount:
- Step 1: Check the internet for going rates on similar properties
- Step 2: Check if your property has any additional USP’s that may warrant a slightly higher figure. For example if I have a flat near the station and if similar properties do not have parking, I charge for parking separately as most people who live near the station do not expect parking.
- Step 3: Speak with your local agent
- Step 4: Set your price but be flexible
Rent Increase
It’s important to bear in mind the necessity of annual rent increases for existing tenants. If the market rate is rising, it is reasonable to adjust the rent accordingly. However, such increases can only be implemented once a year and cannot take place during a fixed tenancy period without mutual agreement with the tenant.
Landlords are legally permitted to raise the rent, but it is essential that any rent increase is fair and reasonable, aligning with the average rental rates in the local area.
I usually grant a one year fixed tenancy and increase the rent annually afterwards.
In the UK, there is no specific legal cap on rent increases. However, tenants have the right to challenge a rent increase by appealing to the Residential Property Tribunal. The tribunal will review written submissions, supporting evidence and consider various factors to determine whether the current rent should be adjusted upwards or downwards.
It is therefore recommended to apply small increases such as a fixed percentage (I apply a 5% increase) or in line with the Consumer Price Index or annual inflation. This approach reduces the potential for tenant disputes.
If granting a tenancy over 1 year, remember to build in a rent increase in the agreement.
Ensure rent is paid on time
Having the correct rental amount is meaningless if the rent is not received on time. It is crucial to establish a zero-tolerance policy for late rental payments. I personally set reminders at the 3-day and 7-day marks: the 3-day reminder serves as a gentle prompt, while the 7-day reminder acts as a warning.
When a tenant is late paying rent, it is advisable to initially send a gentle reminder, which serves as both a prompt and an opportunity for the tenant to discuss any issues they may have with the landlord.
However, if the rent remains unpaid and there is no communication from the tenant within 7 days, it is necessary to send a formal letter emphasizing their responsibilities and obligations outlined in the tenancy agreement and if possible, follow up with a phone call.
A late payment charge can be imposed if specified in the tenancy but I recommend this is only applied in the case of persistent late payments.
There are two main reasons tenants pay their rents late, either they do not care or genuinely have difficulties. In the case of the former, it is crucial to assertively employ all available measures to address the issue. However, when tenants face genuine problems and communicate with the landlord, it is recommended to collaborate with them to find a solution. Nevertheless, even in these situations, it is important to maintain a firm stance. If substantial arrears accumulate, regardless of their good intentions, tenants may become unable to fulfill their payment obligations.
Maintaining control over rent collection is instrumental in enhancing cash flow, minimizing recurring late payments, and ultimately boosting profitability.
On time with property management
Timely attention to property repairs is crucial to ensure the profitability of your investment. Neglecting necessary repairs can result in higher long-term costs as a run-down property typically requires more extensive and expensive repairs.
Tenants value timely responses to their concerns, and when issues are promptly addressed, they have no valid reason to withhold rent.
It is essential to have a reliable system in place for tracking maintenance requests and promptly responding to tenants. Maintaining constant communication is also beneficial, as tenants appreciate being kept informed and updated on the progress of their requests.
It is advisable to have written communication in the event this is requried as evidence in eviction proceedings.
Avoid agents (fees, renewal fees, management fees)
Agent fees have a way of eating into your profit. If your property is located far away, you probably cannot avoid using an agent but if it isn’t, avoiding agents can add a small amount to the pot.
Agent fees comes in different guises. While the letting fee may be seen as a necessary expense during property acquisition, other fees like renewal and management fees can be circumvented or avoided altogether.
Management fees can vary between 5% to 12% + VAT of the rental amount. While this may not seem significant when you only have one property, as you expand your portfolio, every cost becomes more crucial to consider and manage efficiently.
Renewal fees are an additional set of charges that can be circumvented. Several agents impose these fees when a tenant chooses to renew their tenancy. One effective method to avoid such fees is to allow your tenancy to transition into a periodic tenancy, eliminating the need for formal renewals.
Exit interview
When a tenant hands in their notice, inquiring about their reasons for leaving can be beneficial as it may shed light on areas of concern or potential areas for improvement.
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