Monthly Archives: June 2009

Advantage Collecting Rent with Direct Debit?

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Direct Debit

Direct Debit

Simon Galgut, Accountant and IT Manager, PAD4U Letting Agents Manchester writes:

One of the most important duties of a property management company is to ensure rent is paid on time by the tenant.  Systems need to be in place that ensure rent is received and that it is the correct amount for the period.  If rent isn’t received on time, this needs to be detected quickly and acted upon.

The majority of agents collect rent via Standing Order as PAD4U does currently.  However, there are some disadvantages to this approach.  Firstly, the tenant has to setup the standing order with their bank, usually by completing a prescribed form.  The tenant then hands this form to their bank to setup the instruction.  Often tenants neglect to do this on time.  Tenants also alter payment dates, and perhaps cancel standing orders and decide to pay by other means.  Ultimately the control of payments is in the hands of the tenant.

Given the above, it not hard to understand that reporting on arrears can be difficult which can slow down the process of following up on rents that have not been paid on time.  From PAD4U’s perspective the process is administratively time consuming and inefficient.

Direct Debits offer a number of advantages including: the agent controls the time and amounts that they debit from tenants accounts, therefore payments are made accurately and on the agreed date. Also, administration is simplified and it because far easier to detect non-payments.  If non-payments do occur the agent can retry the debiting of the account giving notice to the tenant that this will occur.

Of course Direct Debits cost money, however as agents we will bear the costs of this, no costs will be borne by either landlord or tenant.  PAD4U would expect to profit from streamlined administration.  Banks are very concerned with giving Direct Debit services to companies due to the amount of control it offers.  PAD4U’s reputation, experience and strong financials mean that we are currently negotiating with our banks and are confident we will be given access to this service.

We will in the up and coming months start to trial the Direct Debit service, if you have any questions about Direct Debits and how they will work at PAD4U.  Please comment below and I will try to answer all questions.

Interest Rates – Where to now?

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Historic UK Interest Rate

Historic UK Interest Rate

David Boyd, Managing Director, PAD4U Letting Agents Manchester writes:

As a Lettings Agent in Manchester, we’re often asked about interest rates and what they will be in the future.  We don’t have a crystal ball, but we can take some cues from history.

The Bank of England has cut interest rates to 0.5%, the lowest level in its 315-year history, as it continues efforts to aid an economic recovery.  It’s a pretty safe bet that interest rates are likely to rise in the future.  The question is when, and what you can do as an landlord?

Sit tight?

There is certainly some evidence to suggest sitting tight is the best option right now.  Inflation has decreased close to government targets and the BoE Quarterly Report foresees a low inflationary environment until well into 2010.

But don’t get too complacent.  Swap rates have recently increased (important as this is the market banks use for financing mortgages).  This is occurring due to expected “Green shoots” of recovery and recent rebound in oil prices.  This is fueling the fear of inflation.

The effect of Quantitative Easing are difficult to predict.  Certainly this has the potential to be inflationary.  But it’s impact is unknown, the judgment of how much QE is required to kick start the economy and avoid deflation, yet not drive inflation is a fine balancing act.  It’s likley given human nature that we will err on the side of avoiding deflation and thus risk driving inflation in the future.

Our view

Our view is that interest rates are likely to rise in the region 1-2% mid 2010. However this may not result in banks adjusting their rates greatly as this change in the BoE rate may be priced in by the banks and financial markets already.  After this, history tell us we’re unlikely to control inflation in a cool, calm and collected manner.  Instead we will see interest rates steadily rise over the coming years.

There are few options for landlords to fix rates at sensible levels at the moment, and many lenders’ LTV ratios mean that only the lowest geared landlords could take advantage of these rates.  Therefore a wait and see approach is fine, but do not be complacent and pay close attention to financial market signals, and take advantage of good fixed rate offers as the property market stabilises and banks become more willing to lend.  It may very well be the case that fixed rates will not fall, but continue to rise.

Don’t beat yourself up if you don’t judge this right, it isn’t very likely you will. Speculation on swap rates continue, and like share prices very few individual guess the market right.  Inflation may lead to higher interest rates, but likewise it should also lead to higher rental returns cushioning the blow.  Getting the right fixed rate at the right time, should you be that fortunate, will just mean an increase in your returns.

The economy may also give us a swerve ball and remain low inflation and low interest rate for years to come aka the Japanese economy.  However, the UK market is very different and our view and that of most economists is a rise in interest rates over time is the most likely scenario.

If you want to find out what the best deals are, our Mortgage Brokers the Fresh Partnership give free independent advice.  Please call to book a telephone/office appointment.

Finding a good investment

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David Boyd, Managing Director, PAD4U Letting Agents Manchester writes:

Rather than beginning a discourse on property investment, I thought it would be useful to look at a recent investment I’ve made and examine how I came to decide this was a good investment to choose.

So how did I find the investment?

Well I hate to disappoint but it wasn’t through some esoteric method of searching auctions or through investment clubs or anything of the sort. I simply searched Rightmove as I do from time to time looking at property prices in areas where we manage property already. A property caught my eye and I called the local agent to view the property. Simple as that. Local estate agents are an excellent source to find suitable property without the emotion of an auction room.

The Property

The property is a 2 bed terrace property in Gorton, Manchester. Terraced properties have held up well during the downturn as they are versitile and have a wide target audience. Gorton is a familiar area as we manage many properties here (this is an important point, by choosing a well known area I take the guess work out of investment).

The property itself was owned by a Housing Association. The property will require a complete refurbishment, but this is preferable as it provides a blank slate and I don’t need to spend money on something I’m going to rip out anyway. Here I use the services of PAD4U’s building arm to find out a ball park figure for refurbishing such a property. The cost will vary from 15K-25K depending on the quality required for the area. Here I will aim for the lower end refurbishment as I feel this will be suitable for the area and still bring the property to a standard above that of the majority of properties in the area.

Doing the math!

Because I’ve chosen an area we manage all the time, I don’t have to look too far to work out expected rental value.  In fact, we manage a property on the same street and many streets nearby.  I discuss the investment with Alaine our Estates Manager and come up with a rental range of £400-450 pcm.  Alaine cautions that Gorton’s rental values are a little weak in the current market and I thus set my rental target at £400 pcm.

On the basis of the rental value and the cost of the refurbishment, I put an offer on the property of £50,000 which is accepted.  Adding the refurbishment £50,000 + £15,000 will leave me with a total asset cost of £65,000 with an expected rental value of £400 pcm.

So what will £65,000 cost me per month?  Here I turn to our mortgage brokers the Fresh Partnership to see what deals are available.  This free service saves invaluable time as it is difficult finding buy-to-let mortgages at the moment.  Within minutes I get a list of options and I decide the best one is a rate of 6.25% fixed for 5 years, with a LTV of 75%.

Many investors make the fundamental error of only calculating the costs of the money lent by the bank and do not include the 25% deposit they must put down.  This doesn’t make sense as money (wherever it comes from) costs money once employed.  Think about the interest I would make if I left my deposit in the bank, or in bonds?  Thus, we calculate the for the full property outlay:

£65,000 * o.0625 /12 = £338.54 pcm.

Doesn’t look a bad deal so far?  But we must take account of additional costs:

Firstly one oft overlooked.  Voids.  We should calculate a minimum of half a month void per year.  This would cost (400/2) /12 = £17 pcm.

Then the management fees (I pay 10% + VAT to PAD4U as I have 5+ properties) = (400*0.10)*1.15 = £46.

We should also add a minimum of £20 pcm for maintenance issues.  (This figure is low since I will be refurbishing the entire property).

We should also allow around £15 pcm for building insurance.

Adding all this to the cost of the mortgage = £338.54 + £98 = £436!

Not such a good deal now?

I haven’t added one off costs such as licensing and finding my first tenant nor solicitors fees.

Conclusion

Property investment isn’t easy and there is always risk involved.  Doing the maths above may suggest that I would be mad to invest in this property.  But property investment isn’t all mathematics and I must take into account my expectations of the future, such as:

  • rents are weak currently, I expect some recovery in the near future upto £450 pcm.  Medium term I see increased rental values as inflation returns due to various Government policies.
  • capital values have dropped significantly and I would expect a recovery in 5 years of around 20% which is equal to £216 pcm.  I thus expect a reasonable return on investment in time.
  • on the deposit I’m being quite robust here because although there is a cost of using the money you wouldn’t get 6.25% return on cash or any risk free investment.

It is with the above assertions that I believe the property offers a good investment opportunity. However, there is always risk to every investment and what could be seen as a good investment could easily be viewed as a bad one.  The difference if the what assertions we put in place for the future.

What the reader may have also notice is that I rely on PAD4U for information on the market, to carry out renovations and to assist in finding the best mortgage.  These services are all free to me as they are to every PAD4U landlord.  By concentrating on the investment itself and getting information and assistance from professionals where appropraite, I make the investment process as painless as possible, allowing me to maximise my time on making investment decisions.