Running the show: When to use a letting agency
Offloading the day-to-day upkeep of a BTL to a property manager is an enticing prospect for many landlords, says Laura Miller
Landlords peering down the telescope at 2020 are eyeing choppy waters. How to steer a way to profit when your business is both in demand but socially and politically unpopular?
Predictions for private rental from Arla Propertymark reveal the tensions. Eight out of 10 letting agents think rents will rise, up on last year’s more muted optimism. Likewise, six in 10 think demand will increase. Both bode well for buy-to-let businesses.
Trouble tempers the mood, however. Almost 70 per cent of letting agents forecast a decline in landlord numbers, driven out by rising costs. The same proportion expect BTL taxes to rise again this year.
Torn by these demands, landlords are weighing up how much of their increasingly troublesome job they actually want to shoulder.
Flying solo versus the squad
Hiring a property management firm to run the show or acting as ringmaster yourself is a decision based partly on personality. Studies have found solo athletes prefer autonomy, while team athletes score better on interpersonal relationships (Nia and Besharata, 2010). Landlords will find little profit in outsourcing while continuing to micro-manage.
“If you get a property manager, get someone you trust and can build a long-term relationship with, who will keep your role as a landlord as stress-free as possible and allow you to grow your portfolio,” says Private Finance mortgage consultant Chris Sykes.
Offloading the day-to-day upkeep of a BTL – and having a buffer between them and their tenants – is a big draw for some landlords.
Lighthouse Group’s former head of research, Andy Gadd, has only one BTL property but still uses a letting agent.
“It’s simply to avoid the hassle of dealing with tenants,” he says, “some of whom are great and no trouble. But we had one whom the agent told us got them to go round to change a lightbulb.”
Landlords who use a letting firm or other property manager usually require six things, according to PlanetRent chief executive Mary-Anne Bowring.
She lists them: ”Less reputational risk, so distance from tenant complaints; better access to tradespeople; not to be on call 24/7; advice on their legal position; less worry about red tape; and to sue the agent if something goes wrong.”
Such concerns are even less appealing for landlords who live far from their investment property.
Aldermore’s latest City Tracker ranks Oxford as the best city in the UK for BTL investment, but opportunities are nationally spread. London lies in fourth place, behind Manchester and Edinburgh, with Norwich rounding off the top five.
Hull has the best short-term returns through yield, and London has the highest average total rent. Cambridge is number one for long-term house price growth, Cardiff for the lowest number of housing vacancies, and Oxford for the highest percentage of population that rents.
In an environment where taxes on BTL income have increased, and may do so again, successful landlords cannot afford to be parochial.
“Having a good management team allows you to invest in locations away from home,” says Nova Financial Group managing director Paul Mahoney. “That may make more sense, given property fundamentals, than buying around the corner.”
Mahoney tells most clients to have their properties fully managed by a reputable local agent, something he also does with his own BTLs.
“We view property investment unemotionally and commercially minded,” he says, “so we want clients to be as hands off as possible.”
Counting the cost
Absolution of day-to-day responsibilities does not come cheap, however. For a let-only service, letting agents tend to charge landlords around three or four weeks’ rent. Full property management fees may be around 10 to 20 per cent of monthly rent.
Sykes says: “The fee should basically take all admin and work off the owner’s hands, so they simply have to ‘OK’ things, such as: ‘Flat 4’s heating is broken; I need to book in an emergency engineer. Cost should be around £200 plus parts. All good?’"
Any extra costs will be deeply unattractive for some landlords. Sympathy is scant for the BTL sector when rent costs more than mortgages – the Intermediary Mortgage Lenders Association has calculated that buying the average £230,000 home could work out £133,700 cheaper than renting it over three decades.
But figures from UK Finance show landlords under pressure. Between July and September 2019, 4,550 BTL mortgages were in arrears of 2.5 per cent or more of the total borrowing. Of those, more than 1,000 were in serious arrears of 10 per cent or more. A further 800 were repossessed.
Shunning the middleman
Dynamo chief executive Ying Tan says: “Some may question the quality of letting agents, and cynics would say they are interested only in rent collection.
“The virtues of a landlord managing their BTL properties themselves, apart from the obvious cost savings, are that the landlord has direct control of looking after their significant financial investment.”
By being hands on, landlords can treat the tenant like a customer, ensuring they feel happy and comfortable in the property, says Tan.
Issues can be resolved quickly, and with regular inspections the property can be kept in good condition. Not only is this good customer service, it can also create a profitable positive feedback loop.
“If you have a happy tenant then void periods are kept to a minimum, which is clearly imperative in making the BTL property profitable,” says Tan.
However, he warns: “It’s not for everyone, and deciding whether an agent or self-management is better is entirely dependent on the landlord and their objectives.”
Competency, capability and opportunity cost will all be deciding factors. Bespoke Finance director Adam Hosker says competency is obtained with time and experience, but should be based on training offered by the Residential Landlord Association.
“You will also find the aspiring self-managing landlord in Facebook groups,” he says, “asking questions and reading of others’ folly, and even at local meetups because many describe it as a lonely job.”
Capability may be more difficult for those already employed, trying to take calls or time off to attend to day-to-day tenancy issues. For landlords with larger portfolios, running everything solo may be unfeasible.
Sykes says: “If you’re investing in houses in multiple occupation, a large portfolio and/or holiday lets, it is likely to be a full-time job. You should be prepared to commit the same hours to the management as you would any other day job.”
The real price
Landlords’ decisions about whether to use a property manager may come down to opportunity cost – the price of spending time on completing tasks.
“While you save costs on employing a letting agent, reducing the time spent on your employed or self-employed hours also reduces your income,” says Hosker.
“At the outset, outsourcing is often better, and having multiple income streams. It takes a lot of properties until it becomes efficient to quit your day job.”
The larger the portfolio, the more time is required to attend to it, taking landlords away from other income-generating tasks.
Savvy landlords should weigh up the lost opportunity costs involved in doing everything themselves versus enlisting a property manager that will save them time and therefore, in certain respects, money.
Sykes says: “If the time spent managing the property could be better spent elsewhere – at your day job or scoping new rental opportunities – then it definitely could pay off to enlist professional support.”