If you want to use your rental property as a pension when you retire, you should be giving serious thought to how you can maximise your return. It’s never too early to start planning – and most people leave it far too late.
The lifetime value of your investment property will change depending on two kinds of factors. One group you can’t control, such as national trends in house prices and property tax. But there are plenty of factors you can control, such as minimising costs, that can make a big difference to how much money you get out of your retirement rental.
Reducing costs isn’t just about increasing your retirement income. It will also optimise your income in the short term. Making pension-friendly changes, such as paying off your BTL mortgage earlier, increasing your payments into a SIPP or, indeed, saving up for that next BTL property will help you in the short term and the long term.
The Single Biggest Drain on Landlords’ Pension Income
Letting agent fees are the single highest avoidable cost that most landlords face.
Getting a better mortgage deal or lower insurance premium are important, but can seem trivial compared to the £1,000s that landlords hand over to agents every year of their investment property’s lifespan.
If you’re with a high-end estate agent, you could be paying as much as 10% (12% inc. vat) for ‘tenant find’ and rent collection. That’s 12% every month, every year your tenant stays in your property. There are a few high street estate agents who may reduce the percentage after the first year but, generally, renewals are charged at the same price as the initial tenancy – ouch!
And if that wasn’t bad enough, you still get charged, on top, for a lot of the processes involved in setting up the tenancy such as contract drafting and signing and deposit protection registration – often as much as £540 inc. vat. And if you take management, you could be paying a 5% mark up on any repairs needed.
If you add all these costs up, they have a significant impact on your rental yield. Take a look at this worked example…
Worked Example: the three-bed flat that cost Pam £114,674
Pam has a three-bed property in South London that she plans to use to pay her pension. She charges £1,800 rent per month and finds tenants through her local estate agent.
She self-manages but the agent still charges her 10% ex vat which equates to £216 per month after vat. On top of that she pays £540 (inc. vat) for tenancy setup every time her tenants change over.
If we presume her tenants stay for an average of 2 years, then Pam’s estate agent fees equate to (24 x £216) + £540 = £5,724 for every tenancy. That’s nearly £3,000 per year that should be tucked away into her pension pot.
The £115,000 opportunity cost
Pam bought the flat when she was 35 and plans to retire at 65, so she will let the flat for at least 30 years. £3,000 per year multiplied by 30 years is £90,000.
If Pam had decided to invest the money she paid to the agent in monthly fees, and put it into a pension instead, then she could have grown the £90,000 by an additional £115,000, assuming a standard 5% annual growth rate.
A total saving of £205,000
Combing the money lost in fees with the growth on investment at 5% per year, Pam has added an extra £205,000 to her pension pot to enjoy when she turns 65. That’s an incredible saving, all because she decided just to find tenants herself.
OpenRent charges no monthly percentage of rent, saving you thousands of pounds compared to a high street agent.Set up with OpenRent
What Should Landlords Do to Avoid Losing £100,000s?
Use an online agent to stop paying a % of your rent every month
Call us biased, but we think using an online letting agent is the easiest option and will give you the best results. These days, using an online letting agent in the UK pretty much means using OpenRent. We let more properties than all other online agents multiple times over.
Typical online lettings agents charge a set fee between £50 to £100. For this they’ll use Rightmove and Zoopla to find you a tenant. They will also do all the things a high street agent would normally do to set up the tenancy:
- drafting the contract
- getting the contract signed
- dealing with the holding deposit
- collecting the main deposit & first month’s rent
For most online agents, the upfront cost is fixed and there are no expensive ongoing commission payments. OpenRent even does free renewals!
When using an online agent, you usually perform the viewings. This has its own benefits, such as being able to meet the tenants and avoid having to deal with (and entrust your keys to) disorganised letting agents. We hear too many stories of landlords meeting tenants on the day they move in and regretting not making contact earlier.
If you really don’t want to do the viewings, OpenRent can organise this for you. They typically charge £40 per viewing or £20 if you buy an upfront bundle. These costs take a bite out of your profits but still work out a lot cheaper than paying a high street agent hundreds every month. This option is particularly handy if you live remotely from your property.
Negotiate with your agent
If you really don’t want to bid your agent goodbye, then it’s time to roll up your sleeves and try to negotiate. It’s all about who blinks first as it’s highly likely your business will still be attractive to your agent even if you negotiate their fee down to a few hundred pounds. As we’ve shown elsewhere, agents have very low costs, so you can really dig into their margins for great savings.
If you have a portfolio or can demonstrate that you’re in this for the long haul, then expect even greater reductions. Our feedback from landlords tells us that it’s much easier to negotiate outside of London, away from the big chains, as many of these have company policies of charging high fees that they aren’t allowed to break (and which definitely don’t amount to price-fixing).
If you enjoy negotiation, then shopping around could make for an entertaining day out. Research local agents within 2-3 miles of your property and pay them all a visit. Listen to their sales pitches (with appropriate pinches of salt) and, once you have all the information you need, start comparing.
Ask if they’ll match or better their competitors. It’s likely that their abilities for tenant find will be fairly similar (they all use Rightmove or Zoopla, despite claims about having a ‘database of tenants’) so your main criteria should be to minimise costs.
Keep focused on this and don’t be tempted by fluffy selling points that don’t directly increase your rental income!
Congratulations on Adding £205,000 to Your Pension!
We hope you’ve found our ideas useful. If you decide to act on them, remember us when you’re enjoying retirement with that extra £205,000! Pam will certainly be enjoying hers.