Introduction – Role of Letting Agents

Introduction

Most of the costs charged by letting agents are incurred through ‘management fees’. Normally, you can expect to pay between 10% and 20% of your annual rental yield to an agent. Added to that are expenses for ‘tenant referencing’ and the drafting of tenancy agreements. The set-up of the tenancy and the ongoing duties performed by letting agents can be easily done yourself if you know how. This KIT will supply you with the tools you will need to do it yourself – for FREE! If you read and learn the information in this KIT carefully and follow the instructions it gives you, managing your own property should save you a lot of money and improve your profit margins considerably. It will also allow you to become more involved therefore you will learn far more.
Location, Location, Location
The only issue to consider is your location in relativity to your property. If you let a property in Wales but are based in London, it may not be geographically appropriate for you to manage your own property. For example, if you have to visit the property in an emergency or to perform periodic checks, this may involve a 500 mile round trip – not very convenient and probably the best scenario for hiring a letting agent to act on your behalf – sorry, this kit is good but it’s not a time machine!
 
So lets look at what letting agents do

Most property investors in the UK let out their property ? this is commonly called ?buy-to-let?. The majority of purchasers get a professional letting company to let their property out. These companies will charge you about 8% of the rental amount for finding a tenant, and 8% of the rental amount for full property management services. These fees vary depending on the area, agent and local competition ? the letting fees are negotiable, although you might not get much of a reduction unless you have about 5 or more properties. Some agents do not give reductions for large portfolios, since economies of scale for a single landlord are not that great.

On top of the say 16% letting agents fees, you will have to take account of service charges, maintenance fees, upgrades and ground rent. The letting company will likely also withhold 22% of your rental against tax, unless you can get your accountant to advise them differently, for example, if your tax liability is zero.

The letting agent will advertise your property, show the tenants around, interview them. If they consider them good tenants, you will be advised to accept the tenants and they will put a deposit down to secure the property. The letting agents will then do a credit check and take references from them ? which might take a week or so. The letting agent will draft up the letting agreement which you sign as Landlord and the Tenants sign. The tenants then move in after paying the first months rent.

Most buy-to-let property is let using a ?Short-hold Assured Tenancy Agreement?. These are commonly for six or twelve months. It is very important to make sure your property is let using such an agreement, since this gives you the flexibility to ask the tenants to leave after a certain period. If you do not have an agreement or it is not a Short-hold Tenancy Agreement, you might have a tenant that moves in and become legally entitled to be a ?sitting tenant? ? a tenant that you cannot evict. This could drastically reduce the property price and lead your bank to ask for their money back. You need to get good advice from a reputable letting agent on such matters.

A letting model: The typical costs and fees

1 bedroom flat in SE England – value 100,000 pounds, Loan to Value (LTV) 80%

Monthly Rental

£550

   
Yearly Rental

£6600

Void Period (10%)

£-660

Yearly Rental minus void

£5940

Letting agents – finding tenants (8%)

£-475

Letting agents – management fee (8%)

£-475

Maintenance fees (10%)

£-660

Service charges

£-450

Accounting / tax services

£-200

Ground rent

£-50

Mortgage costs (5% disc of 80,000 pounds)

£-4000

Net profit / loss

£-370

Net profit / loss without agents fees                                 Up £580

 
 

As you can see, a typical letting agency arrangement can cost you the best part of a £1,000. If you are located a long way from your rental property(s), this type of outlay may be of value. However, there is always something you can do yourself to cut the costs even if this is your chosen route. The chart above is a this fairly typical example of a ‘negative cashflow’, even with a low 5% mortgage rate. If property prices go down, you have lost considerable money. If they go up, you should be fine. One of the key variables is the interest rate – I have done this calculation based on a 5% discounted rate, a rate you should be able to achieve for the immediate future at least, but rates are falling and so this model would improve slightly when the rate cuts are passed on by the lenders


Assessment of managing your own property without agents


Another key variable is the cost of letting ? finding a tenant and manage the property yourself should save about 950 pounds a year, although you might experience longer void periods, make an expensive mistake or get put off by potential hassles – more about reducing the risks on these aspects later. Most people that have a day job and invest in their spare time have not got the time or energy to manage their own properties. This is particularly the case if you are not living in the area of your property investment, or feel uncomfortable taking on the hassle and risk.

Submit a Comment

Your email address will not be published. Required fields are marked *