Date Published 04 July 2016
At John Wilcox we have an extensive understanding of the lettings market in Kensington and Chelsea, Holland Park and Notting Hill, and we have put together a five-part guide to the process which we hope will give you a good idea of the how to get the most from your property.
Part II – The Nuts and Bolts of the Lettings process
The letting process has many moving parts which must line-up to meet your needs as a landlord. Below are some of the things to consider:
The amount of rent
A good estate agent who knows the area will be best able to advise on the right price to advertise your property, and what sort of yields you can expect.
Remember, if you are buying with a mortgage, rent-to-property price yield will not be the return you get.
To work out your annual return for property you already owe, subtract your annual costs from your annual rent and then work this sum out as a percentage of the value of the property. If you are using buy-to-let finance, don't forget to add in the cost of your interest payments.
For a £2,000,000 property that could rent for £1,000 per week, you will face some of the following costs:
Lettings Fees: £5,200 per annum + VAT
Service Charge (If appropriate): Approx £5,000 per annum
Maintenance Costs: Assume £2,000 per annum
Net Income: £38,760 per annum
Gross return = 2.6%
Net Return = 1.9%
Pets or not
Local residents are fortunate to have their pick of fantastic dog walks with the beautiful open spaces of Holland Park, Kensington Gardens and Hyde Park close at hand. Many properties also have access to communal gardens.
Landlords can be understandably wary of letting to tenants with pets, but recent reports have shown that the amount of dog owners in London has risen from two percent to almost twenty percent in the past five years, and this has caused dog-friendly rentals to become so scarce that landlords can command significantly higher rents if they are willing to allow pets.
The vast majority of pet owners are responsible tenants with well trained animals. However, landlords with high-end, luxury properties can be understandably careful when they are contemplating adding a friend with fur to the tenancy.
Are pets really such a risk to property? Here at John Wilcox & Co we regularly help landlords and tenants negotiate satisfactory terms. We have many loyal clients with pets, and indeed are often found dog-sitting one of the local ‘best friends' of the neighbourhood.
It is important to make sure that your agent is fully conversant with the Deposit protection registration rules that were introduced to protect a tenant's deposit.
Short term lettings from a few days to six months can provide excellent returns for landlords. They are typically required for work-related, corporate secondments / projects / placements, alternative accommodation during on-going works on existing property, alternative accommodation for insurance claims, tourism, awaiting completion dates when purchasing property, wanting to ‘get to know' an area before buying or renting property, and filming and productions – accommodation for crew and actors.
Short term lets are predominantly in furnished properties.
Long term lettings are less risky, with fewer change-overs of tenants or risk of a property sitting empty. A good tenant is worth hanging on to, and so it is a good policy to make sure that your agent looks after your tenant well.
Potential tenant's ‘wish list'
Instead of imagining whether you would like to live in your investment property, put yourself in the shoes of your target tenant.
Who are they and what do they want?
If they are young professionals it should be modern and stylish but not overbearing.
If it is a family they will have plenty of their own belongings and need a blank canvas.
Remember that allowing tenants to make their mark on a property, such as by decorating, or adding pictures, or you taking out unwanted furniture makes it feel more like home.
These tenants will stay for longer, which is great news for a landlord.
• An Option to Renew: An option to renew is a specialised clause in the tenancy agreement which gives the tenant the legal right to renew their tenancy for an additional period. The renewal is usually for the same period as the original tenancy and normally has an automatic increase in the rent. The terms of these Options are always agreed at the beginning of the original tenancy and give both Landlord and tenant reassurance for the longer term.
• Renew for a fixed-term tenancy: The advantages of agreeing on a new fixed-term tenancy is that both the landlord and the tenant will have some security over the coming months. The landlord will be guaranteed income for a set period, and the tenant will be guaranteed a roof over their head, as the landlord will not be able to evict the tenant until the lease has expired (unless the tenant consistently fail to pay the rent).
• Rolling tenancy: If the tenancy expires without the landlord and the tenant having officially signed a new agreement, then the tenancy automatically becomes a 'rolling tenancy', in which case it just carries on from month-to-month or week-to-week.
These kinds of tenancies are quite common and can even stretch out over the course of several years. The trade off is that neither the landlord or the tenant are committed to upholding the tenancy for any set period, so either of you can choose to end it at any time, provided you give the other at least a month's notice.
For those looking for long-term security, this is obviously not ideal, but those who relocate frequently may find the more casual nature of the rolling tenancy well suited to their situation.
• End the tenancy: In most cases, a tenant will be able to leave on the last day of a fixed-term tenancy without giving the landlord notice, though it is common courtesy to do so. A landlord may include a clause requiring the tenant to give notice before leaving when the tenancy expires, so the tenant should double-check the tenancy agreement just to make sure he understands the terms.
A break clause is a provision in a tenancy agreement which enables either the landlord or the tenant, or both, to end the lease early – usually on two months' notice. It's important for both the landlord and tenant to be very clear about the details of the clause because there has been an increase in litigation in recent years. Again, a reputable and experienced lettings agent will be able to advise.
It is often prudent to ask for a holding deposit from a tenant to reserve a property, while the agent checks references and draws up the tenancy agreement.
Carrying out a tenant reference correctly is possibly the most important process you will undertake as a landlord, it involves making sure that your prospective tenant has a good credit history and the means to pay the rent. Add to this the new legislation regarding checking that an overseas tenant has the right to rent, and it becomes clear that it is vitally important that your lettings agent is fully experienced and capable of carrying out all the checks properly.
Drafting, agreeing & executing the Tenancy Agreement
The Tenancy Agreement is a very important legal document which requires the specialist knowledge of an experienced letting agent.
Once you have found a tenant and signed contracts there are several important processes which must be undertaken on or just before the start of the tenancy. These include:
• Inventory & check-in
• Meter readings
• Utility transfers
• Welcome Pack
Management or not
Buying a property is only the first step. Will you rent it out yourself or get an agent to do so.
Agents will charge you a management fee, but will deal with any problems and have a good network of plumbers, electricians and other workers if things go wrong.
You can make more money by renting the property out yourself but be prepared to give up weekends and evenings on viewings, advertising and repairs.
If you choose an agent you do not have to go for a High Street presence, many independent agents offer an excellent and personal service.
Select a shortlist of agents big and small and ask them what they can offer you.
If you are considering going it alone look at where you will advertise your property and where you will get documents, such as tenancy agreements from.
It really pays to look after your tenants. Do this and they will look after you.
The biggest drag on many buy-to-let landlord's investment returns is the void period – a time when you don't have anyone in the property. Good tenants who want to stay help avoid this – and if they move on they may even recommend your property to someone they know.
Keep up with maintenance, make sure your property is a nice place to live and try and build a good personal relationship with your tenants.
We hope you have found this instalment of the lettings guide useful. If you have questions on anything we've written, please give us a call on 0207-602-2352. We will be happy to help you sort out any queries you may have.
Next week: Part III: Protecting Your Property Asset