Cashflow benefits of 2 x 2 benefits tenant stratagy

Reply to the comment left by "Jonathan Clarke" at "10/11/2014 - 21:19":

You make it sound so easy....... but you and I both know that LHA tenants can be much more difficult to manage, and if they do build up rent arrears and decide to do a moonlight flit and strip everything out of your house, the reality is that there is very little chance of you being able to recover any of the money owed. This makes them very high risk, and if landlords are not familiar with the Housing Benefit system, and dealing with this category of tenant, then they can come badly unstuck and end up losing a small fortune. Some novice landlords are lucky and have no problems with their LHA tenants, and that's great for them, but the run of good luck can end.......

If landlords really want to enter into the LHA market, then I strongly suggest they go on the Shelter training courses about HB/LHA, and also arm themselves with a copy of the "Guide to Housing Benefit and Council Tax Rebates", and only enter this LHA market place when they feel they have understood it all. It is very easy to fall foul of the HB system as it is so complicated, and the landlord can be held liable for the actions (and frauds) of the tenants. Do it by all means, but arm yourself with knowledge first.

Reply to the comment left by "Robert Mellors" at "10/11/2014 - 22:00":

Property investment and managing tenants is not easy per se but I dont draw this great blanket distinction between LHA tenants and working tenants that some landlords seem to do. An LHA tenant can get a job tomorrow and a working tenant can get a P45 tomorrow. Their personality does not though change overnight.

For me its about the interview and selection process. I`ve got plenty of LHA tenants who do not cause me any grief whatsoever. They know the system they know the rules and are often far less problematic than working tenants who sometimes make unreasonable demands on me. Its all in the tenant selection at the outset. There is more than enough LHA tenants to go around so you select the good ones.

I feel its a big mistake to stereotype someone just on the basis of that they receive LHA. Its scaremongering to say they will strip everything out of the house. I`ve just had an LHA tenant refurb a property at their own expense. They put in carpets and retiled the kitchen and the bathroom because they wanted to personalise it. Ive had many a bathroom and some kitchens put in by them because they are in the trade. I pay for the parts and they do the labour for free often.. It enhances the value for me and I can release the equity.

They can be high risk yes but so can any tenant. It really is all about the interview selection process which is often a very neglected part of the business I find. You talk about the run of good luck as if its all a gamble. When somebody gets offered a job at Macdonalds yes the interview process is not that rigorous. Its a bit of a gamble There is a high turnover. But if the interview is for MI6 then they want to get it right or the consequences are disastrous. They spend much more time on getting it right.
Interviewing a prospective tenant falls somewhere inbetween whether LHA or working.

So if I put a tenant in a 100K asset of mine where they could do 10K of damage if they go off on one I want to spend a bit of time selecting the best candidate for that `job`. Thats why I self manage. Some agencies just do the basics and no more because they dont pick up the tab if a place is trashed. In fact they earn more fees out of it often.

I agree with you that you should make yourself aware of all the regs which is a task and a half. But so is doing a 3 yr university degree. Tenant law itself has about 140 or so rules and regs and yes LHA is like an extra specialised module if you like. But if you apply yourself to learn, it is fairly logical in many respects. People study for master degrees because they like the process of learning and they hope to earn more money out of it at the end . Studying LHA rules and regs is similar I feel.

At one point in the early 2000`s I reckon the financial rewards were double in the 70% of my LHA properties than what I was achieving with the 30% of my properties which were more traditional working tenants in good class quality locations. So yes you have to work at it but the rewards are there for the taking.
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The specific 2 x 2 strategy I was thinking of is to have 2 x 1-bedroom ASTs, implying (1) what amount of Council Tax for the property? (2) in my Broad Market Rental Area = (being approximate in all cases) 2 x £399 instead of (a) 2 x £246 (joint tenancy room rate) or (b) £454.50 (family rate – assuming 3-bedrooms + 1 lounge), so a hefty yield hike (but you may have to pay the Council Tax?/ or charge a premium for it and for maybe utilities? Or could you add special conditions to the contract, “Tenant pays a nominal sum equal to 50% council tax?”)

Jonathan Clarke appears to have the right idea if he has a “list” of prospective tenants. I almost imagine a “party” where tenant matchmaking follows the manner of speed dating “May the most suitably matched pair apply!” with the reward being a pair of 6-month ASTs and a home to live in… (Haha!)

They would of course be committed to the (ideally guarantor backed?) term!
So what’s the real world like? I’m glad I asked the question as it appears a number of you report a higher risk of truancy difficulties in this type of tenancy, which is nevertheless commended in some quarters…

Yes Shelter training appears to be a good idea Robert, and I’ll get myself around to reading the guide you refer to. Thank you.

Mike Sosner

I wrote the comment above last night and posted it not having read Jonathan’s latest comment…

Yes, I agree wholeheartedly Jonathan that a great part of our skill as landlords is about tenant selection, which for me is a good deal of referencing and that can be complimented by an instinct or feeling about people. I look for tenant applicants who are transparent, whatever their circumstances. I too had experiences of letting agencies not managing my properties as well as me and in my case I decided to keep my portfolio to a manageable size so that I can do it. This led me to take business growth in a different direction. And I agree with you Jonathan that one can’t overstate the value and importance of consistent study and training, as one would for any profession.

I personally began my career creating tenancies for exclusively working and professional tenants. Any business changes as the market changes. We’re all in the business of helping people by providing hopefully, good people with decent homes and these days there is a tremendous opportunity to serve the social housing market because councils just can’t cope!

I’m still “hands off” on the 2 x 2 strategy, yet maybe the perfectly matched house share applicants will come along at a time when I’ve got just the right property to offer them, it’s a “tool in the toolkit”, isn’t it!

Thanks for the enlightening comment, people…

Mike Sosner

5 Bed rate is now abolished.

Yes, was good old days. I bought some bigger 4-5 bed houses for the then Govt you could say, as they knew they was struggling housing these bigger families, so gave a generous rate to kick-start something, we buy the houses on the proviso we now gonna’ get paid for them, & then few years later, they pull the rate-After we’re already locked into these bigger houses, that now, the new lower 4 bed rate won’t cover the mortgage.
Again Govt changing the rules, ‘cause not got a clue about ground level.

Just as now, I believe some Housing Associations are buildind one bed flats, because of bedroom tax & too big places for some & not enough small places to put ‘em in, & then when these one bed flats are built, within 10 years, the rules will probably change again. We Landlords commit, the Govt pulls the rug from under our feet.

And yes the under 35 rule, don’t get me started on that, I have that many single blokes now sharing with niece, Mum, cousin, sister etc.

Reply to the comment left by "Mike Sosner" at "11/11/2014 - 06:49":

Giving 2 x 1 bed ASTs makes no difference to the LHA rate paid to your residents because if they are sharing any facilities at all then they will only be awarded the single room rate (£246 each, not the 1 bedroom self-contained rate £399 each). Also, if you are letting it as 2 x 1 bed ASTs, in the same house, as well as only getting the room rate of LHA, you have also created a mini HMO and this then means that you become liable for the Council Tax.

If you do 1 x 2 bed AST, with them as joint tenants, then they will be liable for the Council Tax, BUT as mentioned already, you have the continual problem of what happens when one decides to leave, or one is paying rent but the other isn't, or one pays his share of the utility bills but the other doesn't, etc, etc.

This is why you need to be careful about what you are doing, the LHA rules are not so straightforward, and if you simply adopted the strategy you had in mind, then you would be creating a 2 bed HMO, would be subject to some of the HMO regulation, liable for the Council Tax, and possibly liable for some of the utilities, AND you would not get the level of LHA income that you had envisaged. (not to mention the LHA waiting periods, cancellations if tenant has their JSA sanctioned, payment in arrears, HB clawback of overpayments from a previous address, and many other issues that may arise). Also, like Mike says, the Govt does have a habit of changing the rules whenever it feels like it, so you have to be able to adapt to this.

I'm not saying don't do it, but don't be miss-sold the idea, get the facts, learn all you can, and go in with your eyes open, otherwise you could be making a very costly mistake. I've been doing this since 1998 and I enjoy the challenge, but it is hard work, and I do have a background as a debt counsellor and welfare benefits caseworker, and I've also worked in Council housing needs departments, and even now I'm still learning.

Johnathon is right to emphasize the importance of tenant selection, but this is after you've decided on your letting strategy.

Reply to the comment left by "Robert Mellors" at "11/11/2014 - 08:36":

I would say start with your investment strategy first . What is going to make you the most money. Tenants are just an occupational hazard of my decision to invest in the BTL property market . Some investors dont even want the hassle of tenants whatever their working/non working status is so they adopt a BTS strategy. Good luck to them it can work well.

If you go for a BTL and the `perceived` hassle gap between LHA and working tenants is so great in your mind then your whole investment strategy may have to adapt to that mindset. Fair enough. I help my clients close that perceived gap right down until its not really an issue. The issue is - How much money can I make.

If you get the tenant selection procedures spot on and are confident in your abilities in this area then the letting strategy is almost merged across the board . One of my 20 questions is . Are you LHA or working. The other 19 questions are equally valid and their overall score determine whether they get selected .

I accept though that some people would not even get to the other 19 questions if the answer to question 1 is LHA. I think they miss a trick.

I mentor people in investment strategy and this question often arises. I delight in turning negative perceptions of LHA into positive perceptions for the sake of them making more money . When that gap in their minds is adjusted sufficiently to their satisfaction then they focus more on the actual interesting part which is the financial rewards rather than the side issue of the type of tenant in their property. When they do that you get a lightbulb moment and then they are on a roll

I used to buy flats at 75K and get £625 pcm which is a yield of 10% . at the same time I saw properties costing 150K with a similar rent yielding 5% The former was on a typical LHA estate the latter on a posh estate. Gross Cash flow of around £400 v £160. pcm. Nearly 5K pa or nearly 2K pa cash flow You choose. Deposit of nearly 19K or a deposit of nearly 38K. You choose.

I would source the properties for them and the extra cash flow paid for my management cost of the tenancy . So they have a hands off investment and in effect free management. They didnt have to ever set foot on an LHA estate let alone have any dreaded human interaction with `one of them`. They just counted the extra profits.
Everyone`s happy 🙂

Two for the price of one was my mantra. If you can achieve that with your investment strategy the tenant ( though an integral part of your business ) has to take a back seat I`m afraid - whether they are in or out of work.
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