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View Full Version : How my HMO has gone from cashflow positive to deep debt :(



sjcollett
04-02-2010, 19:19 PM
Hi,

Just wanted to share my little story with you on my blog:

http://wp.me/pCIxO-11

Hope you can learn from my mistake!

Sam

mind the gap
04-02-2010, 19:31 PM
Hi,

Just wanted to share my little story with you on my blog:

http://wp.me/pCIxO-11

Hope you can learn from my mistake!

Sam

It is indeed sensible not just to take your own readings, but also to work out the cost based on unit prices which the utility companies are obliged to reveal.

Absolving Ts of the responsibility for energy bills is always going to produce problems. It is human nature to want to 'get your money's worth' when something is inclusive in the rent. They will be wasteful, and you will be out of pocket. If at all possible, you should consider letting to friends on a joint AST agreement, rather than separate ones. That way, they are responsible for the bills and it is a salutory experience for them. At the very least, you could put a cap on the amount of energy included in the rent; if they jointly go beyond that, the excess can be charged to them. The trouble is, unless they know each other reasonably well, there will be resentment about who is sending the bills over the limit.

The impression given on your blog is that HMOs can only be let out on separate ASTs, but this is not the case. The constant arrivals and departures of different Ts on individual ASTs sounds like a real headache and I would avoid it like the plague.

GJMSurrey
04-02-2010, 22:39 PM
How do you have a single AST in an HMO? I ask this out of curiosity.

mind the gap
04-02-2010, 22:52 PM
How do you have a single AST in an HMO? I ask this out of curiosity.
It's quite straightforward - you just treat all the tenants separately and they all have their own individual ASTs. The advantage (the only one as far as I can see), is that they do not have to start and finish their tenancy at the same time. The downside is that it means tenants end up sharing with people they do not know to begin with. It is an arrangement which suits some young professionals and students but it can be fraught with problems.

Preston
05-02-2010, 00:29 AM
The OP has my sympathies. In my day job we deal with hundreds of such lettings and regrettably problems with utility bills and readings are all too common. Having invested a good deal of money in remote on line meter reading across a number of sites in the hope that this would solve the problem I can officially confirm that it hasn't! There is, unfortunately, no substitute for regular checking of the meters and, as MTQ suggets, the fine detail of the bills.

Good luck!

sjcollett
05-02-2010, 08:23 AM
MTG - we found that groups of friends are few and far between hence why we rent individually. I understand your point about tenants wanting to get as much as possible out of the deal. I like your idea about the cap on the bills. I think I may look into that. Although, given many have lived there for over one year I think to try and start implementing this may cause hassle and thus I will have to weigh up losing good tenants for small changes...

Preston - annoyingly enough I subscribe to the online stuff as I like to get things sorted asap! It's scary that they have let it build up so much without me having any idea!

mind the gap
05-02-2010, 08:49 AM
MTG - we found that groups of friends are few and far between hence why we rent individually. I understand your point about tenants wanting to get as much as possible out of the deal. I like your idea about the cap on the bills. I think I may look into that. Although, given many have lived there for over one year I think to try and start implementing this may cause hassle and thus I will have to weigh up losing good tenants for small changes...



I understand your concern about 'rocking the boat', but if you think your tenants' energy usage is ridiculous and wasteful, i.e.much more than what other young people in shared houses expect to use (and pay for), you need to act. Perhaps you could ask for a short meeting with them and tell them you are fast approaching the point where it will soon be no longer viable for you to let the property on the basis of 'bills included'.

Explain that you are willing to pay for reasonable usage but, that you intend to start applying a 'ceiling' to units used, beyond which they will jointly be responsible for payment. Tell them that if they leave the heating on full blast when out, they are almost certain to go over it, but if they are reasonable they probably won't. Tell them how many units you are willing to pay for and what this translates into in terms of daily usage. (The utility providers can be quite helpful here. I asked them for an estimate of how much six students should expect to get through in a 6 bed Edwardian semi and they were pretty accurate).

You cannot change their current contracts unless they agree to it, and it needs to happen with all tenants simultaneously, so you need to alert them to the fact that new contracts will be issued as of x date (this being the end of the fixed term for whoever has the newest contract), unless they are willing to co-operate before that point (unlikely!)*.

That way, you can serve a s21 to anyone who doesn't agree, and find a replacement. I know that sounds daunting, but you cannot carry on paying that much for them to have the carbon footprint of a small factory, can you? And even if it means a short void period, it is probably more cost effective in the long run.

The 'reasonable usage' amount can be taken directly from the EPC if you have one, or if not, I can work it out very roughly for you if you tell me:

type, age and size of property
no of bedrooms & tenants
number of communal areas
how water and space are heated
double glazing?
how well insulated?
cavity walls?
dishwasher/tumble dryer?

In fact even if you do not have an EPC, I recommend you have one done (about £50 if you shop round). As well as telling you what normal usage should be, it will suggest cost-effective ways of improving the energy efficiency of the property which will save you money on utilities in the long run. They are only recommendations, and not compulsory (as some people erroneously believe!), but are certainly worth considering, especially if you are going to be paying some/all of the bills.

The only other option (apart from boot-camp style 're-education' for your Ts in saving the planet!) is to instal separate meters for all bedrooms - but that is very expensive and not always practical.

Good luck let us know how you get on.

* An incidental benefit of this would be that you will bring all the tenants' contracts (6 months? 12?) into line (If they aren't already) and in theory at least create the possibility that two or more friends could become housemates at the same time, rather than just single 'oddbods', if you see what I mean. That in itself (i.e sharers who know each other beforehand) makes it more likely they will co-operate over sensible energy usage. I have noticed that in shared student houses, friends pressure each other to conform more than strangers do and resentment between strangers makes everyone less likely to feel a sense of esprit de corps...the property stops being a shared home and becomes just a building.. for which the individuals don't really care.

mind the gap
05-02-2010, 09:35 AM
Oh - forgot to say - my daughter's LL this year operates a scheme like the one I have suggested and he actually issues refunds (not very often!) if Ts are particularly frugal and use less than expected!

Carrot and stick!

GJMSurrey
05-02-2010, 09:36 AM
It's quite straightforward - you just treat all the tenants separately and they all have their own individual ASTs. The advantage (the only one as far as I can see), is that they do not have to start and finish their tenancy at the same time. The downside is that it means tenants end up sharing with people they do not know to begin with. It is an arrangement which suits some young professionals and students but it can be fraught with problems.

Sorry my confusion, this is how I do mine. I thought you said haveing a single AST in an HMO coveirng all tenants so I was confused :)

Thanks

sjcollett
05-02-2010, 09:41 AM
MTG thank you very much for your detailed and informative response.

I have been requesting £57 per month towards gas and electric from the tenants per month as the direct debit from EON was £223 - this then meant it was covered with a little extra. It has now only come to light that EON have been undercharging me for a considerable amount of time (close to 18 months) which was why I was not aware of this build up.

Going forwards - I have already informed the tenants that they will have to pay an extra £10 per month towards this. However - I already know this is not enough, but having looked at the market this seems to be already more than what other shared houses charge (when you look at room rents - thus I am concerned I am now pricing myself out of the market).

The house is large - rooms are big, 3 storey victorian, antique boiler. I have been looking at how we can upgrade the property but, now I have to pay this debt off I am rather strapped for cash - but am concerned how i am going to sort this going forward.

I have looked at the bills from EON and it would appear to be the property costs £300 per month in gas and electric (£3600 per year). This does seem pretty excessive and from what you have said £900 per year over what is expected. However, I am at a loss as to what is happening. We do regular checks to ensure heating has not been left on (boiler is actually on a timer and they have been told NOT to change this unless they have asked permission and we do check this). They are not allowed electric heaters and we do inspections to try and make sure this is not happening. All lightbulbs have been changed to energy saving. We have DG - although is about 20 years old.

My EPC when I bought the property was awful - it said about the boiler and the DG.

My current thinking is whether I should get the meters changed to card meters and put £250 per month on them and then when that runs out it is up to them to sort. However, this seems fraught with issues. Also, cards are 30% dearer so I seem to starting from a losing position.

Because it is a central meter I also do not know who is using more power! EON said my electric consumption was very high - but we have 4 electric showers, cookers, tvs, computers etc - so I guess this is to be expected.

I would be grateful for any pointers you may have going forwards as I agree this needs to be sorted!

mind the gap
05-02-2010, 09:56 AM
Sorry my confusion, this is how I do mine. I thought you said haveing a single AST in an HMO coveirng all tenants so I was confused :)

Thanks

You can have a single AST agreement covering all sharers in a shared house - it is called a joint AST. Or you can have individual ones - one for each person.

Sorry for my part in any confusion!

mind the gap
05-02-2010, 10:20 AM
If you feel that to charge the tenants more for energy (regardless of the mechanism by which you do it) is going to price you out of the market, then you need to take a long view.

First, if it is a big house and there is a lot of space which is being heated but not used, think about how you could save money by heating unused areas/space only to a minimal level (I take it you have thermostatic control valves on every radiator?). Even more radically, could you fit a fourth bedroom in, or let to three couples, providing six lots of rent (rather than four as you have at the moment?) Pulling the place around to fit in a another bedroom would involve cost and planning, but if the maths stack up, it might be worth it. Remember you can offset cost of repairs/upgrading either against tax or CGT when you sell up.

Second, it sounds as though you need to invest in energy effciency measures if you are to keep up with other LLs whose properties have higher EPC ratings - which is presumably how they are able to charge less yet still afford the bills. Look at your EPC. It will tell you how much you could improve the rating by doing various things. The light bulbs are good for this, but in the end I suspect it will be insulation, and a new boiler which make the most difference. Go for a combi-condensing model. I recommend Bosch Worcester Greenstar. 94% efficient. This link may be useful - there is a boiler scrappage scheme at the moment for which you may qualify : http://www.energysavingtrust.org.uk/Home-improvements-and-products/Heating-and-hot-water/Boiler-Scrappage-Scheme

Even if the old DG seals are still intact, then installing new will not be cost effective within 10 years - it rarely is. However if the windows are large and cold/draughty, there is a very simple, virtually invisible and relatively cheap method of secondarily glazing them (with glass) which we have used in our large, draughty house and it's made a huge difference. (Costs approx £40 per large window inc. glass, edging and holders. Pm me for details). Thermally lined curtains help. Draughtproofing on doors and windows helps. Silly girls not having three showers each per day helps.

Lastly...sounds obvious, but if you struggle to find tenants, can you say why? If it's a bit dingy (I'm not saying it is), would it be worth investing in a complete redecoration? Apparently that can improve the rental value of a 'solid but shabby' house by 10-20%.

From what you have said both here and in your blog, it would seem that something has to change, otherwise you will end up paying your tenants to live in your property (rather than the other way round). I'm all for breaking with tradition, but not in this case! Unfortunately change generally involves expenditure. How nice is your bank manager? At least loans are low interest at present (if you can get one!)

Good luck!

jeffrey
05-02-2010, 10:30 AM
You can have a single AST agreement covering all sharers in a shared house - it is called a joint AST.
Yes- but, GJMSurrey, you cannot validly let on one Agreement to more than four individuals.

mind the gap
05-02-2010, 10:38 AM
Yes- but, GJMSurrey, you cannot validly let on one Agreement to more than four individuals.

No, but, as discussed in the thread below, it does not mean that five or more people cannot live in the property together as sharers, or that if they do, they need separate ASTs. To all intents and practical purposes the difference is unproblematic. You can get supplemental agreements if you wish. If you name more than four on a joint AST my understanding is that it makes more difference to the additional 'permitted occupant(s)' -as they are not tenants as such - (in terms of their rights) than it does to the LL (in terms of enforcing obligations to pay rent etc).
http://www.landlordzone.co.uk/forums/showthread.php?t=19653&highlight=permitted+occupiers

(See last post in particular)

sjcollett
05-02-2010, 11:20 AM
MTG thanks for your comments. I will dig out the EPC and reassess the property to see what can be done within a reasonable budget. I would not say the place is shabby, it's in a good location and is to a good standard. My fear being, last year the area saw a 10-20% drop in rents and a lot of supply on the market which meant an increase in voids. The supply has lessened a bit now, but if people moved out I fear I would not be able to get the same rent for the rooms - which ultimately means I start on a downer. (i.e. where i get 400 per month I think it may now be 350 per month)

Thus the predicament seems to me that I have to accept I am now taking less rent (if you view the increased utility bill share as part of the rent) to enable me to keep the current tenants (or face the prospect of them leaving and me having to get new tenants who will ultimately pay less anyway as the market has moved downwards.

Does that make sense? Can you see my quandry?

Although I absolutely agree with you that going forwards this is not an ideal situation and one which I fear leaves me exposed to energy prices hikes (which I have already learnt!). I am just unsure of what to do for the best.

mind the gap
05-02-2010, 11:35 AM
MTG thanks for your comments. I will dig out the EPC and reassess the property to see what can be done within a reasonable budget. I would not say the place is shabby, it's in a good location and is to a good standard. My fear being, last year the area saw a 10-20% drop in rents and a lot of supply on the market which meant an increase in voids. The supply has lessened a bit now, but if people moved out I fear I would not be able to get the same rent for the rooms - which ultimately means I start on a downer. (i.e. where i get 400 per month I think it may now be 350 per month)

Thus the predicament seems to me that I have to accept I am now taking less rent (if you view the increased utility bill share as part of the rent) to enable me to keep the current tenants (or face the prospect of them leaving and me having to get new tenants who will ultimately pay less anyway as the market has moved downwards.

Does that make sense? Can you see my quandry?

Although I absolutely agree with you that going forwards this is not an ideal situation and one which I fear leaves me exposed to energy prices hikes (which I have already learnt!). I am just unsure of what to do for the best.

Sounds as though you are between a rock and a hard place. I am assuming you are drawing £400 per person per month - is that right? It does sound on the expensive side for a single room in a property shared with strangers - is it in London? In Newcastle or Leeds, for example, tenants pay between £45 and £70 for the same thing (including bills) - and you say that you are t the top end price wise for the market in your area. So in some ways, I can understand why your tenants do not feel much conscience about saving your electricity.

If the rental income does not cover the mortgage repayments + energy bills on the property, you may as well accept that it was a bad business decision in the first place and get shut of it. It does not sound as though there is much potential for improving the rental yield even if you make it more energy efficient. You say on your user profile page that you have lots of properties, so maybe this is just one which you will have to subsidise and make a loss on for a while (in the hope the market improves?) or sacrifice completely.

Is there any mileage in returning it to a 3 bed family house - how much would that bring in? At least they would be paying all the bills and it would be lower maintenance than young sharers.

You have probably worked out that there is no magic bullet here.

sjcollett
05-02-2010, 19:52 PM
Thanks for your comments. Fortunately (even with the bills) it does still make a profit. Although I am hugely concerned about the energy bills - esp. when you have been kind enough to share how much you pay on your property. I think that is where I may have gone wrong - I don't have another similar property to compare this to and to be frank, I find the consumption to be ludicrous!

I have now dug out the EPC and will visit week after next with a view to upping loft insulation and looking into cavity wall. Not sure about the boiler upgrade as it's a floor standing behemoth (Thorn M80).

You have given me much to think about and good advice so thank you again I do appreciate it