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Don’t take a punt with your property management

30 Mar, 2017

Blog

Don’t take a punt with your property management

Imagine, if you will, that one day you find yourself in the happy position of being introduced to someone who can guarantee you financial security for the rest of your life. All debts paid, all care covered, as many holidays as you like, fine dining, a cleaner – the works.

And imagine, too, that this offer is all above board – no laws will be broken or questionable ethics involved.

I don’t know what financial security looks like for you personally, but let us pluck an arbitrary but reasonably realistic figure from the air that would probably do the job for the majority of people. For the sake of round numbers, let’s go for £1m.

The person you are introduced to tells you that the cost of providing you with total financial freedom and the security of living the rest of your days very comfortably is £5,000 and you have three years by which to pay it.

Because you’re just an ordinary jobbing Joe, you don’t have five grand burning a hole in your pocket and it’s not the sort of sum you’re going to find in the pocket of an old pair of jeans. For the sake of this illustration, let’s assume you can’t borrow it either.

What you do have, though, is one thousand pounds in a savings account. It’s money you set aside for a rainy day – your buffer against unexpected problems down the line. So it’s money you can’t afford to lose.

But you realise that if you can invest your £1,000 sensibly, there’s a better than even chance you can grow that into the £5,000 you need to pay your fixer in three year’s time. The question now is who are you going to select to invest it on your behalf?

An independent financial adviser (IFA) would be a good, solid choice. You could put it in the bank, though interest on a thousand pounds is unlikely to get you to your target. You could buy a lot of lottery scratchcards and there’s a decent chance you’d come away with more than you started with – but you might also lose the lot. You could bet it on one of the Grand National favourites next week, but on average half the field fail to finish.

Or – and here’s an idea – you could give it to a complete stranger who has no experience of managing cash and investments and see what they do with it.

I know what you’re thinking. You’re thinking that’s a terrible idea. I mean, why on earth would you give your last thousand pounds – the total wealth you have – to a complete stranger, never mind a complete stranger who has no experience of handling investments?

And yet, that’s what millions of people are doing every single day of every single week. And not just a thousand pounds, either. In many cases people are trusting relative strangers with hundreds of thousands of pounds. In some cases, millions of pounds.

Unwittingly, you see, this is what millions of landlords are doing every day with their rental properties by paying a letting agent to manage them.

On the face of it, this makes a deal of sense – the agent takes on responsibility for making sure the rent is paid, telling the landlord when repairs are needed, dealing with tenant complaints and numerous other tasks besides.

But what the majority of agents don’t do is the very thing the landlord needs them to do – protect the property as a long term investment. For all landlords, their rental property is part of their overall wealth portfolio. For the majority, it represents financial freedom in the long-term.

Yet they place this critical investment into the hands of people who have neither skill nor, frankly, the interest in managing the property as an asset; instead they are, understandably, primarily concerned with the capacity for that asset to deliver short-term revenue – back to them.

Not only that, but the property managers at the big High Street estate agents are usually dealing with around 250 properties each, which prompts one to question how much attention they’re physically capable of giving to a single property, regardless of their best intentions.

And, of course, this is all a double whammy anyway, because whilst your IFA earns his or her money in commission from the organisation accepting the investment rather than in fees from the investor, the letting agent makes his money out of the landlord who, in this context of course, is the investor.

So the landlord is losing at both ends. Now, because the charges, which generally amount to a VAT-exclusive 5% of the rental value, eat into the yield, and later because a property not effectively managed and maintained during its time in the lettings market is then highly unlikely to achieve its full potential in a sales market.

At Property Wealth Management we call this incontinuity and we’ve written on that subject before.

In the end, just as I wouldn’t give my last thousand pounds – a sum, let’s face it, dwarfed by the value of London property – to a complete stranger to look after, so I wouldn’t give my investment portfolio to someone who doesn’t understand investment. And I don’t understand why anyone else would either – especially when there’s an alternative approach that not only saves money today, but also optimises the property asset for the future.

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