2 – MANAGEMENT

Management is a very woolly word.  So what do I mean when I say management?  Well there are twelve parties involved within property investment that have to be managed to ensure that the business is run efficiently and lawfully.  To grow in any business you have to manage the parties around you.  Some businesses grow too big and neglect the management of these parties – even I am guilty of this!  What eventually happens is that you become too removed from the business to the point where you do not know what is going on.  The twelve parties that surround property investment specifically, in order of importance, are:

1. You
2. The Bank
3. The Tenant
4. Letting Agent
5. Employees
6. Contractors
7. Solicitor
8. Mortgage Broker
9. Local Authority
10. The Freeholder & Managing Agent
11. Accountant
12. The Law

Notice that even though you are involved in property investment, which is essentially bricks and mortar, the things you have to manage are people!  Property is a people business so if you don’t like dealing with people then this may be the wrong industry for you.  So let’s look at these twelve parties more closely – starting with YOU!

1. You

Everything starts with you.  If you’re not with it then nor will the property business be!  You have to be a good manager of yourself to start with.  The rest will always ultimately follow.  But before I start preaching like a self-help guru let me get in to what you have to manage about yourself specific to property:

2. The Bank

There’s only one thing the bank is interested in from you – that you pay the monthly mortgage payment in full and on time.  That’s it!  The only way you can ensure this is that there are sufficient funds in your account from where the bank can take payment.  Adopt the following practices:

3. The Tenant

If you’ve decided to instruct a letting agent then the management of tenant relations should be handled by them.  Your job is to subsequently manage your letting agent – see below.  If you’ve bravely opted to manage your tenants yourself then read on.

Its no good having an investment property without a paying tenant.  Its like a shop without any customers.  To ensure you have a paying tenant you have to manage the relationship between you, the landlord, and the tenant in a proper way.  Businesses spend fortunes managing their customer relations so we should learn from them.  After all your tenants are your customers.  Consider these pointers:

4. Letting Agent

Choosing the right agent.

This is harder than you think!  Its not like choosing the right tenant.  With a tenant you can credit check them, get references and take a deposit off them.  With an agent it would be hard to get a reliable reference or check whether they were any good.  There are several measures you can take to help you choose the right agent:

If the agent is a member of ARLA, the Association of Residential Lettings Agents, then this should give you some comfort.  The real (and only!) benefit of choosing an ARLA member is that you are covered against fraud by the agent without having to prove who is at fault.  Do not let your selection process be simply choosing an ARLA letting agent.  A letting agency is a people’s business and it doesn’t matter what professional standards bodies they are members of, if they have the wrong people the job will never be done properly.

Managing your chosen agent.

Do not think that once you’ve handed your property over to an agent its all sorted – because invariably its not!  You need to keep updated on what is going on.  To manage your agent you need act if things don’t go to plan.  Have a look at this table:

5. Employees

If you are in the fortunate position to be able to have employees then you need to be able to control, motivate and inspire them to run, manage and grow the business.  The employees you are likely to have are:

• Rent collector
• Handyman
• Bookkeeper
• Secretary
• General manager

There are four management styles that can be identified which you should be able to identify with one.  The key to success is to identify with one, namely being the last one of four.  Lets look at them:

Source: Likert, R. (1967), The Human Organization: Its Management and Value, McGrawHill.

http://www.businessknowhow.com/startup/manyhats.htm

6. Contractors

What ever you do – do not consult your local Yellow Pages for a builder.  There are many rogue contractors that spend a small fortune on advertising in the Yellow Pages posing as many different firms.  You will ring around from the different ads but ultimately you will speak to the same few contractors that employ this scam. 

Builders

My advice is to use a builder from the National Federation of Builders (NFB).

The key features of the NFB and their members are:

• The National Federation of Builders is the industry’s longest established trade association with almost 3,000 member companies, ranging from smaller builders to large contractors.
• It has a network of regional offices across England and Wales - each one can provide a list of reputable, professional companies in your local area.
• Member companies of the NFB have satisfied the most stringent entrance criteria for any building trade association.
• Companies must provide at least eight references from accountants, previous clients, suppliers and professionals such as architects and surveyors.
• All references are followed and, if satisfactory, applications are then put before a panel of existing members who are local to the potential new member for assessment.
• Every potential new member is also visited on site before they are accepted.
• If the panel is satisfied with the company's technical competence, health and safety standards and financial probity, the company is admitted into membership.
• All member companies must be VAT registered (if applicable) and CITB-registered.
• They also have a regional network of officers in the field meeting member companies day in, day out to ensure that the highest standards are being
• The Federation also operates a Code of Conduct and a full complaints procedure, which involves a mediation and arbitration service. Complaints are thoroughly investigated by the NFB and if a member is found to be in breach of the Code of Conduct they are expelled from the organisation.
• All NFB members can offer customers the ‘Benchmark Plan’ - an insurance-backed guarantee scheme which pays out the cost of correcting any building work defects for periods up to 20 years.

You can find your nearest NFB member by visiting www.builders.org.uk.  The NFB also encourages its members to use the JCT building contract for homeowners and occupiers - a straight-forward, plain-English contract - which sets down in writing what’s expected of you and your builder, such as payment terms and agreements, helping to avoid any potential disputes. For a copy, priced £9.95, call Construction Industry Publications (CIP) on 0121 722 8200 or order it online at www.buildingcontract.co.uk).

Plumbers

Again avoid the Yellow Pages for the same reason.  Visit The Institution Of Plumbing at www.plumbers.org.uk where they have the same strict admission procedures for their members.  The Institute’s Top 10 tips for choosing a plumber are:

1. Ask friends/relatives/neighbours who they use.
2. Use a member of the Institute of Plumbing - members have to hold recognised qualifications in plumbing and/or extensive experience.
3. Get at least three quotes - when asking for quotes find out if there is a call out fee and many people will be doing the job and if the price per hour includes all the workmen/women or if more is charged per plumber.
4. Ask for a written quote - unless there are any unforeseen costs, the final bill should not deviate too far from this initial written quote.
5. clearly explain all of the work you need doing - write it all down if possible.
6. Ask how long the job will take.
7. When you have found a plumber and the job is completed, ask for a full breakdown of the bill so you know where your money has gone.
8. Never pay upfront before a job is completed.
9. Good plumbers will be busy no matter when you call. Don't give up on quality to get a job done quicker.
10. Don’t be scared to ask questions, a Registered Plumber will be knowledgeable and able to answer anything you need to know.

Electricians

As with the builders and plumbers you need to go to an electrician that’s a member of a professional standards body.  The National Inspection Council for Electrical Installation Contracting (NICEIC) was set up more than 45 years ago and is the electric industry's independent, non profit-making, voluntary regulatory body covering the whole of the United Kingdom. They are not a trade association and do not represent the interests of electrical contractors. In order to protect users of electricity, the NICEIC endeavours to register as many electrical contractors as possible that are able to comply with its Rules. Every contractor that applies for registration is subjected to detailed assessment by the NICEIC, including the technical standard of their electrical work, before being admitted to the Roll of Approved Contractors.  They employ more than 50 Area Engineers who make annual visits to Approved Contractors to assess their technical capability, and inspect samples of their electrical work.

You can find a suitable electrician in your area by visiting www.niceic.org.uk.

7.Solicitors

Your solicitor acts for you and you only.  They have to act in your best interests.  Any deviation from this and they are in breach of The Law Society rules.  To ensure you get the best from your solicitor or conveyancer adopt the following principles:

1. Mortgage Broker

A good mortgage broker can be key to the whole buying process.  Its not about getting the best deals.  The difference between the best mortgage deal and the worst is nothing to write home about if you have bought at the right yield – see the chapter on yield above.  Its all about getting your broker on your side.

Most brokers are small businesses anyway so they will understand your thinking.  Many brokers dabble on the buy to let market so they will understand your situation as they have been in your situation also.  Here are some requests that you should ask.  They may seem a little bit pushy but if they are a truly good broker they should not be surprised by your requests – this assumes that you’re serious about property investment:

If you’re struggling to find a suitable broker then try my one.  I cannot promise she will grant you the same terms that I have (because I’m serious about property investment!) but its worth a phone call.  Contact Liz at Connect IFA on 01708 443334 and mention my name and you’ll get a 50% discount on her fees.

1. Local Authority

If you’ve decided to accept the low paid, unemployed, sick or invalid as your tenant (which I suggest you do) most or all of your rent will be paid by the local authority.  Getting the first rental payment from them can be a mission but after that its an easy ride.  Let me tell you a little bit about how it works.

If you are a landlord wishing to rent out property, you may have tenants entitled to help from their local council towards paying their rent.  Should a tenant make a claim for this help, called Housing Benefit, the local council will normally ask you for some simple information about the tenancy.

Below is how Housing Benefit is calculated, what information the tenant will be asked for and what information you will need to provide in order that an assessment of the level of Housing Benefit payable can be made.

What is Housing Benefit?

Housing Benefit is a government scheme administered by local councils that gives help towards housing costs for people on a low income including those who receive Income Support or Job Seekers Allowance.

How is a claim made?

A claim is made by completing a Housing Benefit Application form.  A tenant does not need to tell you that they have claimed benefit. The Council can only discuss a benefit claim with a landlord if the tenant has given his or her permission in writing for this to be done.

What tenancy information is needed?

In addition to proof of income, every applicant for Housing Benefit must provide the following details:-

How much housing benefit will be paid?

Almost all claims for Housing Benefit are referred to the Rent Officer for a decision on a reasonable market rent for the property.  Rent Officers are employed by the government to help the Council work out how much Housing Benefit a tenant can have.  If a rent is considered to be unreasonably high, then the amount of Housing Benefit paid could be restricted. Housing Benefit may also be restricted because a tenant is living in a property which is larger than needed.

For example, a couple with one child needs only two bedrooms, so their Housing Benefit may be restricted to the level for a two-bedroom house and not the three-bedroom house they actually occupy.  The following criteria are used when deciding whether a property is or is not overlarge.

One bedroom is allowed for each of the following:-

Housing Benefit cannot be paid for that part of the rent which covers services such as water rates, fuel costs or meals.  The costs of these items are deducted from the rent payable before Housing Benefit is calculated.

For example:-

The remaining figure is called the Eligible Rent.  A person who receives Income Support could be entitled to their full eligible rent. A person not on Income Support but on a low income will receive only part of the eligible rent.

Housing Benefit is always paid on a four-week cycle.  If a calender monthly rent is charged, the appropriate weekly rent will be calculated and then paid on the usual four-week cycle.

For instance:-

So, if a tenant is entitled to full Housing Benefit they would expect to receive £460.27 every four weeks, which is 4 x £115.07 weekly rent.

Pre-tenancy Determination

If you are looking for rented accommodation and need to know the maximum amount of housing benefit you may be paid you must obtain a Pre-Tenancy Determination.

How is Housing Benefit paid?

Housing Benefit is paid every four weeks, in most cases 4  weeks in arrears.  Housing Benefit is paid to the tenant unless a rent direct form is completed, in which case the benefit will be paid to the landlord.

If the Housing Benefit is paid to you as the landlord you will also receive a schedule showing which tenants' Housing Benefit are included in the cheque and how much benefit is in respect of each tenant.

How long is housing benefit paid for?

All benefit claims are reviewed at least once a year.  Benefit will continue as long as there is entitlement and providing the claim review form is returned on time.  Housing Benefit is only paid while a tenant lives in the property. Entitlement to benefit ends as soon as a tenant leaves the property. This condition also applies if a tenant dies, as entitlement ends on date of death.

Entitlement may continue during a temporary absence from home.  If a tenant moves out or dies and you have been paid Housing Benefit beyond your tenant's change of address or death, then you will have been overpaid.  You will have to repay this money.

There may be times when the Housing Benefit Section finds out a tenant has left before you do. Housing Benefit will still end on the date the tenant is known to have left - any further rent due is a matter for you to pursue with your tenant. Also if the council find out that he is working and is not entitled to housing benefit anymore the council will come after you if they have paid the rent directly to you.

I have been the victim of this many a time.  I have had to pay back anywhere between £70 to £2,400 back to the council due to my tenant being ineligible for housing benefit.  The law has to change as there are many landlords losing out due these claw backs.  You have to decide whether you trust the tenant to receive their benefit directly and pay it over to you or get it paid direct to you but take the risk of clawback.  I always favour getting the rent paid direct and risking a clawback.

What does the Council need from the landlord?

Council tax

Under normal circumstances the tenant is responsible for paying their council tax.  If however the property is empty then YOU are responsible for paying the council tax.  The council tax departments are hot!  They somehow know how to track you down to pay the tax so there is no point avoiding their charge.  If you do you could face being up in front of a magistrate and ultimately having your goods seized by registered bailiffs.

There are ways of reducing you council tax bill if the property becomes vacant:

• 100% exemption for the first 6 months when the property becomes empty – unfurnished only, 50% exemption for the 6 months after
• 50% exemption for a vacant furnished property
• 100% exemption for the duration the property is uninhabitable

Please ensure you communicate to the council the status of the property to ensure you can claim all the exemptions allowable to you.

10.Freeholder&Managing Agent

This section applies only to leasehold properties i.e. flats and maisonettes.

This is a book in itself.  There have been many changes to the law giving more rights to leaseholders due to the unscrupulous behaviour of certain freeholders and managing agents.  If ever I have seen criminal behaviour within property investment the majority of times it has been within this sector.

Definitions

The freeholder or managing agent will send you a bill for the ground rent and service charges either monthly, quarterly, half yearly or annually.  There are some that will charge you what they think they can get away with.  I have a flat where the service charge is more than the mortgage!

If you get extortionate service charge bills then you can do the following:

11.Accountant

If you’ve instructed an accountant to handle your affairs because the thought of filling in your own tax return seems too daunting then you have to mange him or her.

Ensure that:

12.The Law

Apart from the standard contractual law that exists between a landlord and tenant under the Housing Act 1988 there is two other categories of law you have to adhere to:

• Regulatory

• All - encompassing

Regulatory

There are there main regulations governing the renting of properties:

1. Gas safety
2. Electrical safety
3. Fire resistance

1. Gas safety

If there is gas at the property then you have to get a landlords safety record from a CORGI registered engineer. They will inspect:

• The central heating boiler
• Oven and hob
• Gas fire
• Gas meters

If you do not get one of these certificates and someone suffers or even dies from carbon monoxide poisoning then you could face a hefty fine and imprisonment. The guilt will be even worse.

1. Electrical safety

A yearly inspection is needed for all electrical appliances supplied with the property by an NICEIC contractor. Basically anything electrical will need to be examined and passed by the NICEIC contractor.

So it’s quite obvious - keep the number of electrical items to a minimum! The fewer electrical items you supply the less there is likely to go wrong. This limits the reasons why your tenant can ring you up telling you about a problem. You don’t need your tenant ringing you up at 6am complaining about the kettle not working.

There is no certificate issued but an inspection will cover you from being sued if any electrical appliance were to harm your tenants or their guests.

1. Fire resistance

All upholstered furniture must comply with the Furniture and Furnishings (fire) (safety) Regulations 1988. You can tell if the furniture is compliant because there will be a label in the cushioning. Any furniture purchased after 1990 will automatically comply with all fire regulations.

Although not a legal requirement, I would recommend that smoke alarms be installed in rented properties to cover you against any negligence claim if you were to be sued.

All-encompassing

You will also be legally bound by the normal all-encompassing laws of the land. This includes:

1. The law of tort - negligence and personal injury.

2. Criminal law.

We are all bound by the above two laws even if you are not a property investor.

1. The law of tort

Even though you may have all the safety records in place you still owe a duty of care to your tenant and anyone that enters your property. If it can be shown that you were negligent in any way then you could be sued and ordered to pay damages.

As a landlord you are liable for any damages if all of these conditions are satisfied:

1. Your tenant or anyone entering your investment property were to suffers an injury; and
2. You owed a duty of care to the person entering your investment property who suffered the personal injury; and

• You breached that duty of care.

So for example if Zak, the landlord, failed to fix the cooker socket in the kitchen and the tenant’s guest, Liz, suffered an electric shock burn then Zak would be liable to compensate Liz for her injury.

This is because:

1. Liz suffered injury;
2. Zak owed a duty of care as it is realistically expected that a tenant would invite a guest into their property;

• Zak breached that duty of care, as he did not fix the socket when asked to by the tenant.

2. Criminal law

Even if your tenant hasn’t paid you any rent for two months you cannot ‘send the boys round’. Threatening your tenant or being violent to your tenant because he hasn’t paid you any rent is no justification for your behaviour in the eyes of the law. Investing in property can sometimes challenge your ability to remain calm and situations can become quite heated.

Remember, it’s only money! This is the phrase I say to myself when I get stressed when a tenant ‘does a runner’ and leaves me with £1,500 owing. Like I said in my introduction, you have to be a responsible person and realise that if you want to take investing in property seriously then you have to act lawfully in every way.

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