How well you manage your systems will be indicative of your future success, and regardless of whether you’re looking to buy and hold for equity or to buy and hold for income, identifying how best to manage your properties should play a leading role in your overall strategy.
When it comes to property investing, all systems are important; but failing to manage your interests in an effective manner could have a devastating effect on your business. So as an investor with a growing portfolio, should you manage your properties yourself or would it be wiser to appoint an agent to manage your properties for you?
There are cases for and against both arguments, but the answer will lie in what system will work more efficiently for you. To help you decide, let’s take a look at the advantages and disadvantages of each scenario.
Management fees are typically charged between 10% and 15% plus VAT and as such, by managing your property yourself not only will you save on this fee, but you can significantly boost the return on your money invested.
To give an example, if you buy a property with a purchase price of £100,000 and a loan of 75% for 20 years with an interest only mortgage (with a variable rate of 3.75%), and a rental value of £500 per calendar month, the return on your money invested would be as follows:
Your Return with Management Fees:
Rent: £6,000
Less
Mortgage repayments: -£2,812.50
Management: -£600
VAT on management: -£120
Insurance: -£250
Repairs: -£600 (@ 10%)
2-week initial letting period: -£250
Total costs: £4,632.50
Balance: £1,367.50
Here, the net return on your money invested, i.e. 25% of the purchase price, would be 5.47 %.
However, if you were to manage the same property yourself, the outcome would be very different:
Your Return without Management Fees:
Rent: £6,000
Less
Mortgage repayments: -£2,812.50
Insurance: -£250
Repairs: -£600 (@ 10%)
2-week initial letting period: -£250
Total costs: £3,912.50
Balance: £2,087.50
As such, the return on your own money invested, i.e. 25% of the purchase price, would now be 8.35%.
However, there are other advantages aside from the return. No disrespect to agents, but no one will care for your property with the same diligence as you will, and by managing it yourself not only can you keep on top of any problems that arise, but you’ll be able to remain in control too.
Nevertheless, there are also some disadvantages. Without appointing a managing agent, the geographical location of your investment property will probably be limited to areas that are within easy reach. And unless you want to go trekking half way around the UK whenever a problem arises, it’s likely that your portfolio will only include property close to home. Having a power team comprising an electrician, plumber and builder who you know will cover you in an emergency can help, but you will still need to be prepared to receive (and act on) calls in the middle of the night.
In essence, without an agent you will have to be proactive on all fronts. This means dealing with everything from blocked toilets to rent collection and problem tenants. You may need to go knocking on doors to get paid and you may need to confront occupants directly that are not treating the property in the manner that you expect.
If you decide that issues such as these are not your forte, appointing an agent can take away the strain of dealing with problematic situations. However, this will very much depend on the reliability and efficiency of your agent.
Whereas I typically warn investors not to get too emotionally involved in their properties, it often strikes me that it would be far better if managing agents were much more emotionally involved. In an ideal world, an investor would be able to buy properties, hand them over to a managing agent and sit back and pocket the residual income. But in my experience, this very rarely happens.
I’m of the belief that the vast majority of agents care very little about the properties they manage – it’s merely a means to an end – and quite often, investors like myself find themselves having to manage their managing agents. (In my case, I probably spend a third of my time managing agents and the other two thirds sourcing new properties, arranging finance and doing the paperwork). Don’t be under any illusions that having an agent will mean you can walk away and leave your property completely in their hands. There will still be aspects you need to keep a hold on yourself.
You will still have to expect repairs not being done or not being done quickly enough, properties becoming vacant and not being let quick enough, insurance claims not being made (or being made out of time), blatantly unsuitable tenants and, a firm favourite of mine – forgetting to pass on the rent. Management agents are not without their issues.
On the plus side though, agents are effective at dealing with the day-to-day matters and the face-to-face interaction with the tenants. There are times when collecting the rent or placating a seriously distraught tenant can be very difficult, and it’s during these times that investors not only appreciate having a third party manage their interests, but suddenly realise that the management fee is money very well spent.
There’s no right or wrong answer as to whether an investor should look after his/her own properties or appoint an agent instead. With regard to my own situation, it would have been highly impractical for me to have even considered managing my own properties. I decided to buy away from home where the yields were much higher and have found that having agents located close to my properties works better for me.
However, at the time of writing it was announced that agent’s letting fees are to be abolished and this will certainly have repercussions for me as well as many other investors that chose to manage their properties through a management company. In a move that may see agents pass the fees onto landlords instead of the tenants, I may have to once again rethink my strategy. When this ban goes ahead, there is the likelihood that many will pass this cost back to the tenant in the form of higher rents, but at this stage in time I’m yet to consider whether this is a route I would take myself.
In the meantime, whatever you decide to do yourself, I can only advise that you ensure you have the right systems in place to help your property achieve optimum performance, and would like to remind you to keep your property in good condition to enable it to continually attract a quality tenant so as to keep void periods to a minimum.
Here’s to successful property investing
Peter Jones B.Sc FRICS
By the way, I’ve rewritten and updated my best selling eBook, The Successful Property Investor’s Strategy Workshop, which is an account of how I put together my multi-property portfolio, starting from scratch and with no money of my own, and how you can do the same. For more details please go to ThePropertyTeacher.co.uk