The 3 Approaches to Property Management
Very few property education resources focus on property and tenant management. This is bizarre, given that over the investment time frame you are considering (which should be a minimum of 5 years and preferably 10+ years), property management will by far be your biggest and longest task compared with the time taken sourcing, adding value and subsequently selling the property.
This is a big subject itself, but for now, I want to give an overview of the different choices you have once you have secured a property to let out.
Your choices are:
- Use a Letting Agent: Fixed fee basis.
- Self management: Doing it yourself.
- Outsource it: Building a team to do it on a PAYG basis (this is where you should be heading as part of your Systemise phase).
Let’s consider each in turn.
The good news is you have huge choice here. Every medium sized town upwards will have several agents on the high street. Some will be sales only, some lettings only and some will do both. There will probably be a mix of national agencies and local independents.
You can employ agents on a Tenant Find basis or on a Full Management basis. A Tenant Find service means they do everything from marketing the property, viewings, referencing, tenancy agreements, inventory and check-in. Basically, everything up to getting the tenant in the front door. From then on, the management of the tenancy and property is over to you.
A Full Management agreement means they will also manage the tenancy for the duration. This is supposed to mean you are hands off. If they are very good, then it will mean exactly that.
The bad news is that there are so many agents because the barriers to entry are low. This means there are good agents (a few), mediocre agents (several) and terrible agents (many).
The advantages of using a letting agent are:
- They do all the heavy lifting, arranging viewings at times to suit the prospective tenant, the referencing, the legal stuff and so on.
- They (should) be well versed in the legal and regulatory requirements, to ensure everything has been complied with. Notice the “should”!
- If you select a Full Management package, then you are essentially hands-off.
If you are investing at a distance, have a busy day job or otherwise hate the thought of doing it, then a good Letting Agent is a sensible choice.
The disadvantages are:
- You pay a fixed monthly fee, regardless of whether anything needs doing or not. This varies hugely, from about 7%+VAT up to 15%+VAT (especially in London). If you are investing in an expensive location with high rents, this is a serious chunk of cash. Note that this is taken from the gross rental figure.
- In my experience, from using large national agents to local independents, you always invariably end up managing the agent in some respect. From chasing for paperwork, to dealing with an agent that tried to bluff me that he had protected the rental deposit (he hadn’t).
The key to this route is to choose a good agent.
At the opposite end of the spectrum, you can choose to self manage your properties.
The technological and social factors (remember PESTLE) have meant that over the last few years, tenants are increasingly using online portals to find rental properties, reducing the need for a High Street presence. Further, many startup companies have focused on this sector and there is now the ability for a landlord to advertise directly onto the main property portals, examples being OpenRent and Upad.
If you have the time, knowledge and experience then it is entirely possible to be your own agent and self-manage the full process from marketing to moving a tenant in.
There are clear advantages to this:
- Cost: Apart from using a tool such as OpenRent, the costs are minimal to find a tenant. You will also save the ongoing management fee, which can be considerable.
- Control: This way, you retain complete control over the process and get to meet prospective tenants if you undertake the viewings.
To balance this, there are disadvantages too:
- Time: Viewings in particular can be tricky. You need to be available when tenants want to view and a full-time job or investing at a distance will make this virtually impossible.
- Knowledge: If doing it yourself, you need to be completely up to speed on the regulatory and legal requirements you need to meet.
You can blend the two, which offsets some of the risk. For example, use an agent on a Tenant Find basis to source a suitable tenant and then self-manage. This is exactly how I started out.
However, this is a business. I do think all landlords should understand exactly what is involved and what effort is required, if only to be able to manage and ensure the chosen agent is doing their job properly! Remember, as CEO of your business, the buck stops with you.
The Third Way – Outsourcing on a PAYG Basis
There is a middle way, which retains all the advantages of being hands-off whilst also benefiting from the cost savings of doing it yourself. This is achieved by recruiting a team on a PAYG basis and training them how to manage your property portfolio.
As you expand, this will get increasingly attractive as the cost savings are considerable.
To take a simple example, a rent roll of £100k per year, may cost 10% plus VAT to have fully managed. That is £12k per year, every year. You could hire a full-time admin assistant for that! And I guarantee an average portfolio generating £100k per year in rents does not cost anywhere near £12k per year in costs to manage.
This is the approach I have taken myself, but it is not without effort. You need to develop a system, which I define as:
- People: You need to recruit the right person / team.
- Processes: You need to develop operating procedures for each task you wish your team to do.
- Controls: You need to retain management oversight and ensure the right things are done in the right way and at the right time – without micromanaging or ending up virtually repeating the work yourself.
Naturally, the set-up is relatively time intensive, but the pay-offs are considerable.
In my own case, I pay a small, flat monthly fee that covers all of the “at desk” tasks: Dealing with tenant enquiries, arranging Gas Safety Inspections and so on. I then pay an hourly rate (plus travelling expenses) for “away from desk” tasks, such as inspections, tenant viewings, check-ins and so on.
This means that on a normal month, where nothing much is needed to be done, my property management costs are < 1% of my rent roll. Compare that to a typical letting agent charge of 10%+VAT!
Most investors will be aware of the first two options: Using a letting agent or self-managing. If you have a full-time job, or this is your first property, then it might make more sense to use a letting agent in order to get going. A good agent should know the various legal and regulatory items you have to get right, especially prior to marketing the property and before allowing a tenant to move in.
If you are very hands-on and people management is a strength, then self-managing can be a sensible choice, as there are cost savings to be had over using a letting agent. However, you must be very confident you understand the legal and regulatory requirements and be confident in your tenant selection process.
A hybrid solution can work: You can use a letting agent to find a tenant and move them in on a so-called tenant find basis. You can then manage the property and tenants for the lifetime of that tenancy on a self-managing basis. This can work well if you don’t have the flexibility to be available for tenant viewings but would prefer to self-manage.
The third way, of building a system that you can outsource retains the best of all worlds:
- You get all the benefits of self-management.
- You are not the first port of call in dealing with issues (often one of the main reasons investors choose a letting agents).
- Once you have a large enough rent-roll, it works out cheaper than letting agents.
Which route you choose initially will be down to your time, knowledge and skillset as an individual. But you should look at outsourcing when it makes sense to do so during your Systemise phase.