Just a week or so ago I received a message from a client to say that he would like to discuss an important matter with me regarding his rental portfolio. I arranged a video call and we got into a conversation about all things buy-to-let, as I normally do. The reason for the call he explained, was to discuss how to go about dealing with rent arrears.
As I listened to his woes of a particular tenant, I knew that I would be unable to make comment on how to deal with the situation. It is not the first time I have had such a discussion, of course. I am ill-equipped to provide advice on such matters because across my portfolio I do not have any rent arrears and cannot remember the last time I did.
Well, there was this time during the first lockdown when I agreed to reduce rent for a few months which was then made back up, but it was pre-agreed before it became an issue, and the matter was put to bed within three months. Aside from that, it's an issue I’ve rarely had to deal with, and when I have it’s been sorted quickly.
Now if you are the proud and fortunate owner of rental properties, and you have experienced rental arrears then you have my sympathy. The blood sweat and tears that go into creating a quality home for a tenant does not deserve such treatment. I thought it might be a good opportunity to discuss how to avoid arrears in the first place. Because as we all know, prevention is always better than cure.
During my weekly ramblings to various interested property types, I teach two key methods to avoid potentially problematic tenants. As far I am concerned, this is just normal practice and why every landlord does not do it is beyond me.
Do your homework
Firstly, having spent 20 years as a mortgage broker, old habits die hard. I underwrite every new tenant application as if it’s a new mortgage they’re applying for. This person is not only going to be living in your house, but they will also be paying your mortgage. You need to be 100% sure they are going to be a good bet.
To verify their suitability as a customer of my company, I get them to send me copies of:
· Passport and secondary ID documents
· Experian credit checks no more than a week old – I check their credit score and ensure there are no nasties that could call them out as a financial rascal
· Their last 6 months' bank statements – I check that rent has been paid on time every month to their previous landlord. I also like to see a healthy positive account balance, light use of any agreed overdraft facilities, and for me, gambling issues are just a no-no. No thank you, goodbye.
· The details of their previous landlord - call them and ask directly what they think of their outgoing tenant. Be careful here, do not just take their word for granted - the landlord might want them off their hands and may spin you a yarn about their payment conduct. That’s why it is oh so important to have bank statements too.
· Their last 2 consecutive payslips - speak to the employer and check they do work there and that their net pay coincides with what appears on the bank statement.
· If all is good, I will meet the prospective tenant at the property to see the original documents and look them in the eyeballs to see if they have arrears in their soul.
Cream rises to the top
I make my judgement based on the quality of the items and people presented, and if any are not pristine, I simply reject them. To the layman, this approach may seem a little harsh, but if you were lending them money on an unsecured basis, then that is exactly the approach you would take.
There are plenty of excellent tenants out there looking for a quality new home who are willing to play according to the rules of the game. And with the government, seemingly every week hellbent on making it harder to be a landlord, why make it more difficult for yourself? You must stack the cards in your favour by choosing the cream of the crop.
Beware: If you use an agent to find your tenant, they will do all the above checks, to a degree. Make sure you are the one who oversees the documentation and rubber stamps the outcome. The agent just wants their commission and be done with you. Secondly, the quality of the accommodation on offer is equal to the quality of tenant you will attract. If you plan on renting out sub-standard homes, then expect the relevant people to apply. Do yourself a favour, learn the following phrase by heart:
Poor Properties = Crappy Tenants = Rent Arrears
It does not cost the earth to bring a property up to a high standard that is acceptable to an excellent tenant.
Depending on the state of a property, a lick of paint from top to bottom and new carpets and flooring throughout (I always go with a grey/white theme) is the bare minimum you should do. Bathrooms and kitchens should be modern and function correctly. Everything in the house should work, and the property must be clean and fresh. My aim, at the outset and between tenants, is to get a property to feel like nobody has ever lived there before. The tenant will take pride in their new home, and you will not have to deal with calls about broken toilet flushes and beeping smoke alarms from frustrated people on a Saturday evening when you are about to blow the head off your third pint.
Best of all, you will have mitigated the chances of any rent arrears and you will have minimal maintenance requests.
Finally, consider managing the property yourself. Leaving the job to an agent will mean giving up 10% plus VAT of your rent each month. On your average UK rent that’s around £1,500 of annual profit wiped out. If you have 10 properties that’s £15,000 a year, or one, two, maybe three family holidays, depending on how posh you are. And for what? Trust me, if you have completed tasks one and two above, then you will have eliminated almost every potential issue that could occur.
Leaks
At this point when I’m advising a client, they will usually say to me: ‘…but I don’t want tenants calling me at 11pm about a leak in the ceiling’. It rarely happens, and it only takes a couple of phone calls to build a solid relationship with a 24-hour plumber, who will take care of 95% of your tenant problems.
What’s more, is that you will build a stronger relationship with your tenant. They will appreciate that it’s your home and investment and have a stronger desire to pay you on time and look after it properly, than if it were managed by a faceless company. They will also stay longer knowing that you’re at the end of a phone and that you maintain it regularly.
Like everyone, excellent tenants love to live in superior quality well-maintained homes and are prepared to pay a premium for it. You will be able to increase your rent in line with inflation every year without question and you can expect the value of your properties to compound nicely as the years go by.
