It’s no good just finding a tenant. It has to be the right tenant. The right tenant will depend on the following factors:
The property
If you have acquired a private one-bedroom riverside apartment in a central location, then a single mum on benefits is probably not the most suitable tenant. When looking at properties it’s a good idea to build up a picture of the tenant you think is most suited to it. A tenant can only fall into one of eight general categories based on the size of the family unit and whether they are working or claiming benefit. The table below suggests which property is suited to each category of tenant:
So if you buy a private one-bedroom flat you know that the right tenant is a working single person or couple. You need only advertise for that tenant – ‘suit working person or couple’, the advert might read. If you misplace a tenant at your property it will only lead to the hassle of finding another tenant later on. It’s worth noting that a two+-bedroom ex-local authority house meets six out of the eight tenant categories.
You could use this table to dictate the type of property you buy. For example, if there are a lot of single parent DSS claimants in the area looking for properties then a two-bedroom ex-local authority flat might be the right property to go for. If you wish to go for the minimum risk route then go for the two+-bedroom ex-local authority house.
You!
If you are going to manage the property yourself then the most important person in this whole tenant-choosing process is YOU! If you feel you can get on and deal with only a certain category of people then choose them exclusively. If you’re a professional person used to dealing with only professional people then steer towards private properties in the nicer areas and vice versa.
Personally I have no prejudices or hang ups – apart from two:
It can be very difficult to extract rent from tenants when you cannot communicate with them. If there is an initial language barrier then I can only foresee problems. Unless there is an intermediary, like a social services officer because social services are paying the rent, then it’s okay. Otherwise steer clear of such tenants.
Couples aged under 25 are always troublesome. The tenancy will only last as long as the relationship does. They think it’s a great idea to move in together after knowing each other for only two months but when the couple fall out neither one takes responsibility for the rent. You’re left with the task of chasing them both independently for the rent but when they both blame each other, you’re the loser. If a couple under 25 are the only ones interested in the property ask them how long they have been together and if they have lived together before. Try to get a larger deposit – two months is ideal. Also try and get one of their parents to be a guarantor.
Your lender
If you are borrowing to finance the property purchase then lenders often stipulate what type of tenant you can have. The main exclusions are DSS claimants and student lets. You need to check with your lender what exclusions they have and let this be the criteria for your selection of the lender.
Advertising for a tenant
There are five main ways of advertising for a tenant, the cheapest form of advertising first:
Contacting the local council
Councils have a waiting list of people looking for a place to live. Since councils have fewer council properties on their books, they are always pleased to hear from private landlords willing to let their properties to residents in the local area. The councils have lists of working and unemployed people as well as refugees and asylum seekers.
I would advise that you write a letter detailing the property you have to let to the Housing Section of the local council and follow it up with a phone call. Councils can be slow so I would not rely on this as your only source of finding a tenant.
Advertising with large local employers
There are two large local employers in the Harlow area. I wrote to both of their human resources departments detailing that I had various properties for their employees. I get a call once every other month, so I would not rely on this as your only source of finding a tenant.
Contact local accommodation projects
Local accommodation projects are always on the lookout for willing landlords to take on ‘homeless’ people in the area. The ‘homeless’ does not mean that they are currently living rough – they simply do not have a fixed place of accommodation. These projects usually collect the rent and guarantee the rent if the tenant fails to pay. They do not charge for their services, as they are charities or non-profit organisations.
Advertising in the local press
This is probably the most effective way of advertising. It is best to advertise in a paper that is delivered free locally so that your advert reaches every resident in that area. There are certain key elements you need to put in your advert:
To find out about the local newspaper in the area of the property you have bought or thinking about buying, visit www.newspapersoc.org.uk.
Through a letting agent
This is the most expensive way to find a tenant. They usually charge one month’s rent + VAT. But they will show prospective tenants round, run credit checks, ask for references, arrange a standing order and do an inventory check on the property. I would recommend this if you work or live far away from the property.
If you can’t let it
If you are having trouble letting the property, there are a number of things you can do. I suggest you do this in time order:
Credit checking your tenants
You can check the credit of your tenant like a lender credit-checks a borrower. This costs between £17.50-£94.00 depending on what service you require. Some credit checking agencies guarantee the rent if your tenant defaults. All letting agents insist that landlords do this but I disagree. Credit checks are advisable for only certain types of tenants and areas. Let me explain by way of a table detailing the different type of tenant (private or DSS) and area (low and high demand for rental properties). A yes in the box means you should credit-check your tenant.
So only in one out of four circumstances would you normally obtain a credit check on your prospective tenant? The justification for this is as follows:
Credit checking is also dependent on your acceptance of risk. If you have a low acceptance of risk then it is probably advisable to get the full credit check that guarantees the rent if the tenant fails. If you are willing to accept some degree of risk then it is advisable to get a credit check in the circumstances noted above. If you are a risk taker like me then never get a credit check. Get an employer’s reference.
I use my common sense and intuition – it hasn’t failed me yet. A prospective tenant who fails a credit check could be better than a tenant who passes a credit check. Let me explain. The two most common causes for someone to fail a credit check even though their credit rating is still good are:
The most common causes for a tenant to pass a credit check but ultimately end up defaulting are:
So you can see that credit checks have limited use. The key questions you need to be asking yourself about the prospective tenant is:
I assume that if someone can afford to pay over a month’s deposit and one week’s rent in advance then he or she will probably be able to pay the rent in the future. So far I have not been wrong. The times I have been wrong is when I have not taken a deposit and let a tenant move in with just one week’s rent in advance. The tenant quickly falls into arrears because they cannot budget. That is why they never had a deposit in the first place!
Dealing with councils for housing benefit payments (DSS)
If you decide to accept someone on benefits, then the local council will pay most of the rent. Many investors do not like DSS tenants but I have had little trouble with these type of tenants and once set up the rent simply arrives at your doorstep. There are a number of key factors when dealing with the DSS:
The relationship between landlord and tenant
Your tenant is not your friend! If your friend approaches you wishing to live in one of your properties then say no – make some excuse. We all know the feeling when we’ve lent a friend £20 on a night out and then we have to ask for the money back – we all hate doing it. There is a good reason why we don’t like doing so and that is because money and friends don’t mix. Many friends in the past have fallen out over very small amounts of money, let alone a month’s rent.
If your tenant tries to become friendly with you, like inviting you to their Christmas party, always decline. The relationship between landlord and tenant is strictly a business relationship and if this becomes blurred, then you are heading for trouble. This does not mean you have to be overly distant. Remember that you are in business with each other and that is the only reason why you know each other. For the relationship to last, the following simple contract needs to hold – you are supplying a safe property for the tenant to live in and the tenant is paying you the rent on time. Do not complicate matters by drifting into a friendship/business relationship.
Rent collection
You can collect your rent in four main ways:
Apart from using a letting agent, the way to collect the rent should be dictated by the tenant. You need to make the way the tenant pays their rent as easy as possible and this will be determined by the tenant. Your choice of tenant should not be dictated by the ease of collection of rent. The choice of tenant should be dictated by the factors mentioned above. It is your duty to work around the tenant if you want the right tenant and to receive the rent on time.
1. Using a letting agent
Letting agents can handle the whole process of letting your property. This involves finding a tenant, taking inventories, collecting or guaranteeing rent and dealing with all tenant and property problems – sounds too good to be true. However, letting agents are expensive! For a full management service the fee charged can range from 12 per cent to 20 per cent + VAT of the rent collected. We accountants call this ‘top line commission’. It is called this because they are charging commission on the rental income rather than the overall profit you are making. The expression ‘top line’ comes from the fact that income is the top line in any profit or loss account.
An agent’s fee can wipe out a significant proportion of the profit you potentially could make. Look at this following example, where method 1 is with an agent and method 2 is without an agent:
We can see that a 15 per cent agent’s fee can reduce your net profit by 40 per cent - basically just under halving the profit you would make if you did not have an agent! That is not to say you should not use an agent. You need to decide how involved you wish to be in the day-to-day running of the property you have just bought. I would use an agent in the following circumstances:
When I first started I used an agent as I worked full-time and did not want to get bothered at work when something went wrong. Sometimes it can be very time- consuming chasing your tenant for rent. Remember letting agents are experts in handling tenants and cannot do only what you do but they can do it better – that’s their business!
I would advise you to use an ARLA accredited agent as you are insured against frauds committed by the agent and bankruptcy of the agent. This means that you would receive all the rents collected by the agent even if the rents were not handed over by the agent. Proof of the fraud would not be needed as the rents are covered by an insurance scheme backed by ARLA.
ARLA agents can be found by visiting www.arla.co.uk.
Assuming your tenant has a bank account then you can set up a standing order which deposits the rent directly to your bank account from the tenant’s bank account. I suggest you use the template in the Appendix and ensure that it is sent to the tenant’s bank branch at the time of the tenant signing the lease. This template will set up the standing order:
Another way you can collect rent through your bank is to ask the tenant to give you a series of post-dated cheques to cover the rent. So, for example, if he is to pay a rent of £400 on the first day of the month then ask for six cheques for £400 dated the first of the month for the next six months. You then simply present these cheques when the cheque dates become valid.
You could also give your tenant a paying-in book for your bank account. This is best for tenants who earn cash but do not have a bank account. This way the tenant could visit your branch and deposit the rent when possible rather than you both organising a rendezvous for the tenant to hand over the cash.
3. Through the post
I receive the majority of my rent through the post. This is either from the tenant themselves or from the council housing benefit departments. I prefer this method as it is easier to keep a mental check of who is supposed to be paying (because a cheque physically lands at your door on a regular basis), rather than continuously checking your bank account.
I have one tenant that consistently sends me the rent cheque by recorded delivery. As I am never up when the postman knocks on my door (around 8am) I have to go to the sorting office to get my cheque. I asked my tenant not to send it by recorded delivery but he prefers to do it that way so I have to accept that I have to go to the sorting office every week! Remember, the tenant always dictates the method of payment.
Under no circumstances should you allow the tenant to pay cash through the post.
4. Face-to-Face
It is unlikely that the tenant will insist on face-to-face collection of the rent. You may feel more comfortable collecting the rent face-to-face so you can see what state the property is being kept in. If the tenant is happy with you collecting the rent that way, it is important that you do not let him feel that you are checking up on him. This will make them feel uncomfortable and could lead to them moving out. If you have chosen your tenant right you will not need to check up on them so often and you can revert to the payment method that suits the tenant
