Administration, Administration, Administration

July 05

In the June newsletter, I said that one of the things that the investor can offer the vendor is speed of purchase, and in some circumstances a vendor may be more intersted in this than in the highest price for the house.

In order to deliver on this promise, you need the right team in place, and the right paperwork in place. I intend to talk about building your team in a future newsletter, but for today we have the joy of administration.

When prices are booming, lenders are desparate to lend money, and willing to sometimes turn a blind eye to the odd lapse in paperwork. Once prices look like stabilising, or there is a rumour of a price decline, then lenders typically over-react by asking for more and more backup information to support your loan application.

For the experienced investor this is seldom, if ever, a problem, since after a few properties, we end up setting up more formal filing systems. For the new investor, however, it can come as a sudden shock to be asked to produce odd bits of paperwork that, in the past, might have been thrown (or shredded.)

While the list below is not exhaustive, if you are intending to apply for finance, you should ensure that you have the following to hand before you go to see your mortgage broker:

• Two years worth of bank statements (most lenders will only ask for 3-6 months, but sometimes lenders ask for more.) These bank statements should show an income to match the income you claim to have (!) and proof that you have made payments on your existing mortgage(s) without problems.
• Mortgage statements on your own house for the last two years. Again some lenders may ask for a rather shorter time period, but some ask for more paperwork, and the requirements for paperwork are only going up at the moment.
• At least 3 months worth of payslips from the same employer, and the P60 from your last tax year. In addition, some lenders may wish for a letter from your employer outlining what income is guaranteed, and what is subject to performance (either yours, or your employers), and confirming that you are not under threat of redundancy.
• If you are self-employed, or own a material percentage of the company that employs you, then you may need to provide accounts for the last two years, together with details of your accountant (who then may, or may not actually be approached to verify that the accounts you are producing have indeed been seen by them.)
• If you already own investment property, mortgage statements for each investment property for the last two years.
• If you currently have tenanted property, copies of the Assured Shorthold Tenancy (AST) agreements for each property, showing that your tenants have valid contracts.
• Your passport. Anti-money-laundering legislation is one of those things that imposes a burden on all of us. It is not uncommon to be asked to provide a passport by not only your solicitor, but your mortgage broker and even your estate agent (if you are using one) these days.

Now for some good news. If you do not have all of these documents, then it is still possible to get an investment loan. However, you MUST tell your mortgage broker if you have problems producing any of these, or if producing any of these is likely to highlight credit problems in the past. Your broker, assuming he or she is any good, will normall be able to find a lender and loan to fit your circumstances, but there is little they can do if you apply for a loan for which you do not qualify, and are then turned down.

The other reason that you need good paperwork is at this time of year, when the investor turns to Tax Returns. The law changed a few years ago - the burden is no longer on the Inland Revenue to determine whether you need to submit a tax return - it is on you. If you receive any income from property, then you should assume that a tax return is something you will need to fill in.

The good news is that they are not as bad as one might fear! Compared to Company Tax Returns, personal returns are relatively straightforward. For the last few years, mine has taken less than an hour to complete once I have the figures together - and this means keeping my paperwork up to date.

You may still choose to have an accountant or other professional fill in your tax return for you - if nothing else, your accountant should be able to advise on which expenses can be claimed, and what allowances you should be taking advantage of. Even if they are filling in you tax return, however, you still need to be able to produce the underlying figures.

Once you let property, then you need to keep a track of both income and expenses, and, vitally, keep receipts for any expenses you have incurred.

My own filing system is relatively bulky - for each property, I have several suspension files:

• one for income, which broadly holds statements of rent receipts, and ASTs.
• one for the mortgage lender, which includes mortgage statements, plus all the paperwork concerning the loan such as terms and conditions, and a photocopy of the loan application.
• one for service charges and ground rent statements (obviously, only for leasehold properties.)
• one for other expenses, which broadly contains receipts for everything from CORGI certificates through cans of paint, replacement loo seats, handyman bills, and the other minor items I buy in the course of keeping my portfolio looking attractive and able to command top rent.
• one for miscellaneous, which holds all the paperwork concerned with owning the property, as opposed to letting the property - all the letters from the solicitor about the purchase, plus these days legal documents as a result of lenders dematerialising (this is a technical term for them deciding that YOU should store deeds rather than them paying for storage themselves.)

In addition, I have a file for each bank account, so that I have many years worth of statements to hand.

It may seem like overkill to have half a dozen files when you only have one property, and everything fits into a single cardboard box! Over the years, however, I have had no regrets about setting up a more comprehensive filing system, because I know that whenever I am asked for a piece of paper, I have it to hand.

When paperwork drops through the door, I either put it in a TO DO tray, or a TO FILE tray, depending on whether any immediate action is required.

For the TO FILE items, I strongly recommend that for your first few years as an investor, you actually file them yourself - not because putting paper into trays is a good use of your time, but because it helps you keep up to date with what your properties are making and costing. After the first few years, you should have developed your own intuition (another word for skill gained through experience and practice), and can hire an administrator to do things like filing and letters for you. I now employ someone for ten hours a month (two Saturday mornings), which is plenty to ensure that my portfolio is perfectly filed, and everything is to hand, as well as having someone who can generally sort out problems, and do things like pop out to Staples for office supplies and the like. (As an aside, the Really Useful Boxes from Staples, particularly the 35 litre ones act as wonderful filing cabinets, for a fraction of the price of real filing cabinets.)

It may seem a very tedious subject for the newsletter, but it is a subject you need to get right. The best time to sort out you filing is NOW, not when your mortgage broker phones up to say that the lender needs to see a statement from 15 months ago that you have now lost!

One final recommendation - if ever you hand over ORIGINAL documents to a lender or mortgage broker, then ask them to sign a receipt that itemises exactly what they have taken, AND take photocopies of all the documents before you let go of the originals.

The reason for stressing this is that I once had a call from a lender who had asked to see two years statements from each property I owned, plus two years from my personal bank accounts, and had refused to accept photo copies. The call was to apologise that the lender had lost them! I explained that having originals was vital to my business, as the lender would agree, that each duplicate issued by my bank or other lenders would cost typically 20 pounds, and that I would therefore be issuing a small claims court claim against them for 20 pounds times 96 statements - that is to say for just under two thousand pounds. I reminded them that their representative had signed a receipt for all the documents. Mysteriously, within 90 minutes, I had a phone call back sayng that the documents had been located.

This is just the feature article from the July 05 newsletter. Subscribe for market comment, forthcoming events, and more.

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