Landlords beware: five common financial traps

http://www.ispeech.org

Most of these 'financial traps' are common sense; perhaps with the exception of #3...

#1 Setting the rent too low or too high

#2 Failing to monitor arrears

#3 Attempting to self-manage a property

#4 Neglecting maintenance

#5 Inadequate insurance

As for #3, appointing an agent does carry a cost yes and so that's why it is a surprising one but when you are starting out a good agent will help to rent to the right tenants at the right price, stay on top of arrears & maintenance for you, pop in now and again and crucially help to get the right paperwork set up from the outset to avoid this being an issue later.

In addition to these 5 financial traps, here are some more of my own:

#6 Fixing the mortgage rate for only 2 years

#7 Not undertaking competitive quotes for works and maintenance bills above a certain level

#8 Not having a schedule of works agreed for any refurbishment

#9 Not protecting the tenants deposit correctly

#10 Forgetting to factor in those 'little' extras such as service charges, ground rent, council tax & bills when the property is empty & voids, repairs & maintenance when doing the numbers

Elaborating a bit more...

#6 Fixing the mortgage rate for only 2 years

This sounds like a good idea - fixing the interest rate on your investment in order to give you financial peace of mind...and it is! The problem is only fixing it for 2 years at a time as there is always a fee for the privilege which also needs to either be paid for in cash or added to the loan every 2 years also - that's a hidden drain on your cashflow and a hidden boost to the lender's profits in the process…there is a reason why most BTL mortgages available are 2-year fixes you know 😉

Instead I would recommend either fixing for longer periods, ideally 5 years at a time and / or hunting out the best total cost of mortgage product (taking into account all fees) over this same time period. So, adding up the interest payments and fees and allowing for another set of fees for extending the fixed rate if it ends before 5 years is up. Low fee deals are also a better bet but to be honest whenever I look at a low fee deal the rate is often higher and vice versa – it’s all swings and roundabouts really.

As a general rule of thumb the first 5 years of owning a BTL property are the least profitable and so if you can fix the rate for this time period and still make the numbers work then you should be OK.

#7 Not undertaking competitive quotes for works & maintenance

Sounds like common sense really and it is! I usually don’t insist on competitive quotes being obtained by my letting agent for bills below say £100-£150 – which is enough for them to get their regular team out to inspect and fix most issues that arise. However, above this level I insist on 3 quotes up to say £500 spend and for higher spend jobs to be referred to me to get my own quotes as well as theirs.

This avoids the agent being too hamstrung in their work but also avoids me falling into the trap of paying for an inflated one-off quote when one trader / supplier thinks they are in the driving seat.

I have fallen foul of this in the past myself and that’s where these ‘rules’ came from.

#8 Having a schedule of works (SOW) agreed for any refurbishment

Beware of the dreaded scope-creep!! Oh yes, ‘a lick of paint here, replace the kitchen and bathroom and stick a new carpet in – that should set you back about five grand’ he said, so how come the bill came in at £8k then? It is better to have a list of jobs required and an itemised quote set against each to arrive at a realistic quote for the scope, materials and time for the job right at the beginning. Sure, things can and in fact often do just ‘crop up’ along the way but by having a written costed schedule it should reduce the uncertainty. Also, try for a fixed price job based on the agreed SOW; so that any extras are clearly understood by all.

Yep, been there…done that too!

#9 Not protecting the tenant’s deposit correctly

OK, so we have just let our neat and tidy little bungalow for £575 per month and taken a 6-week deposit from the tenant up front. Come the end of the fixed term the tenant has not really looked after the place very well and been a bit behind on their rent and so you decide to move them on and issue a s21 Notice.

The tenant goes to the Citizen’s Advice Bureau and they point out that not only was the deposit not correctly protected but the ‘Prescribed Information’ that was required to accompany it was incorrectly issued.

Result: tenants stays put, landlord gets a penalty of 3 times the deposit and is unable to deduct any money for damages and unpaid rent from the deposit either…let’s just hope that they don’t decide to sit it out and wait for you to get an eviction order now at considerable legal expense and probable with some unpaid rent in the process.

This one can be very costly surprisingly but so far so good for me on this one I am happy to say.

#10 Forgetting to factor in the ‘little’ extras

I saw a deal recently where the service charge was £2,400 per year – hopefully for that there was a communal pool and a nice concierge guy to open the door for me when I come back with my shopping in hand…but hang on a minute who pays for that…yes it would be me as the property owner…and did I factor this into the rent calculation…err no I didn’t. Ouch!! This was a hypothetical example to make the point but I have learnt as I go on this one.

I have a deal calculator spreadsheet that I use to evaluate all of my deals to help me decide if I am going ahead with a deal or not – it has spaces for all these little extras and that includes an allowance for voids and maintenance. I also have written criteria of what yields, cashflow and ROI I want to achieve and if the deal doesn’t get above these minimums then I walk away.

So, there you go 10 possible financial traps to avoid with a property investment and it doesn’t matter whether you invest in Australia, the UK or Kathmandu – there are always a fairly standard set of financial ‘gotchas’ to be aware or…and sometimes a couple of not-so standard ones…especially in Kathmandu I suspect!

Source & credits: Property Observer