Wednesday 14 June 2017

Should you be scrappping deposits for your properties in South London?

Well, some interesting news in the world of property at the moment: Get Living, the company behind the UK's biggest rental scheme in the private sector in the Olympic Village is going to be scrapping deposits altogether from today. They reckon that the average deduction equates to a few days' rent, so for them it's not economical to register the deposit, comply with various bits of legislation and then have to account for returning it later. Amazing!

Red tape?
Yes, red tape. When you take a "holding deposit" as we used to call them, many a landlord and agent fell foul of the regulations already. After all, the Housing Act (amended 2008) states a deposit must be registered within 30 days of receipt. Furthermore, prescribed information must be given to the tenant. What's this? Well, it's just a paper trail that the landlord/agent is obliged to serve on the tenant to ensure they've been told where this deposit is held. If this isn't done in the right timescale then you may struggle to regain possession and are open to a fine of 3x the deposit amount.

Following on from the above, you can't just deduct whatever you fancy from the deposit because the tenant hasn't left it in pristine condition on exit. An allowance must be made for the useful life of the product. Say a worktop is damaged beyond repair. These are supposed to last say 10 years, it was 3 years old when tenant moved in and tenant was there for 2 years, well you've only had to replace it 5 years early, so the tenant would contribute 5/10 of the cost of a replacement worktop. For those that don't know a section of worktop is about £100-£200 depending on the quality. So you've deducted say £100 and the tenant puts up a fight; it's then down to you as the landlord/agent to prove the condition of said worktop on the way in. Inventory is key! So you've paid £200 for a good inventory on the way and another £200 on the way out. £400 plus the cost of registering the deposit (administrative and perhaps otherwise if using insurance-backed schemes). Doesn't seem worth it, now does it? Get Living claim to deduct a few days rent from each deposit. Say the average rent is £1650pcm or thereabouts per tenancy, the daily rent is about £54. They reckon they're deduction about £100-£150. So I guess what I'm reading (between the lines) is that they reckon, on a big scale, they're saving £400 or thereabouts per tenancy so they don't mind £150 worth of damages that they write off. I suppose this makes good commercial sense. Mind, some damages will be higher than others, but as a big company with so many units it all averages out.

Should you or shouldn't you?
As a private landlord and ex-estate agent I've always taken deposits. One may argue that we "want to make renting more affordable" and so forth. I disagree. Take this example - you have two applicants with the same job, the same qualifications, same social demographic. One however has had the foresight to save up for a rental deposit (let's face it, it's not a deposit on a purchase which runs into 6 figures here, we're talking just over 4 figures!) and one who has not - which tenant would you rather have? Yes, exactly, the one who can manage his finances better. Even if he is unable to manage his finances surely you have a credit card or similar to fall back on? Oh you don't? Well that's just poor planning isn't it? The other factor to consider is that you are not letting hundreds of units like Get Living. You will be letting less than double digit properties no doubt if you are self-managing. So you do not have the luxury of being able to "write off" damages like they can, because after all, your portfolio isn't so large that one flat being left damaged and 399 others being pretty much immaculate will balance your books. It's likely that if you have one bad tenant it will wipe out a big chunk of profit. So my thinking is you want to be attracting the right people, the right tenants who have a vested interest in getting back that deposit (because that's what's most important to them, above treating your home respectfully - one does lead to the other though).

So in summary, I am sceptical about this whole deposit scrapping idea. You are lowering standards, and in an industry where rogue tenants are on the up, you want to keep the bar high. I think having a vested interest in the property is a good thing. Not only financially, but perhaps offer to pay for an improvement, or some other kind of incentive. It may not be a bad thing...! I've been active in the London property market for nearly 15 years now, so if you fancy picking my brains about something by all means start the conversation via email, or come down to the Clapham Property Meet and join us this month for a lovely talk on planning gain followed by a social evening of networking with other local property investors. Hope to see you there!

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