The Perils and Risks of Buy to Let Property Renting
Introduction– investing in buy to let property is obviously not without risk. This article attempts to define the types of risks most landlords think about investing in a buy to let property, as well as the severity and likelihood of these risks actually occurring.
House Price Crash – as many landlords are now finding, the spectre of negative equity has come back to haunt the buy to let market as property prices generally fall. If the overall objective of landlords is to receive a regular income from their property investment, then a short-term drop in house prices may not necessarily be a disaster. For landlords who have geared themselves heavily with a low deposit mortgage, house price crash restricts their capability to sell the property if the price has fallen below the mortgage level and subsequently places them in a negative equity situation.
Property prices tend to rise gently over a long period of time and the UK is particularly prone to booms and busts, despite benign periods of sustained growth in the interim. Attempting to predict the risk and likelihood of a future house price crash or boom is a bit like crystal ball gazing. Nobody has really experienced a liquidity crisis in their lifetime before that and so it is extremely difficult to predict when mortgages will free up confidence in investors and first-time buyers again.
There is no real way to minimise the risk of price drops other than to not invest in the first place. For existing landlords, managing the risk of house price could be partially mitigated through sensible refinancing with a provider that provides a high degree of flexibility, offering ability to underpay in times of difficult to overpay in times of boom.
Rental Voids – nearly all landlords experience periods when the property is not rented out to tenants. Renters unexpectedly moved jobs and choose to live elsewhere for all sorts of other reasons, which may be a complete surprise to the landlord. Even worse, if a letting agent fails to attract new tenants to replace existing ones, rental void periods can occur. The risk for new landlords is predicting how many weeks in the year their property will remain empty, will mean there will be a reduction in their rental income, while there fixed costs mortgage remains constant. To limit the risks, it is sensible to speak to local letting agents to understand what the average void period is in a particular area, based on the type of housing and tenant using historical experience. It is possible to obtain rent guarantee insurance to supplement normal buy to let insurance for buildings and contents. This aims to smooth out cash flow problems for landlords by providing a sum to protect against the loss of rental income. Landlords need to balance the cost of the premiums of this type of insurance policy against the benefits which may limit insurance payouts.
Sharp Rise in Interest Rates – the global financial crisis has caused governments around the world to reduce interest rates to record lows in order to stimulate economic confidence and growth. From this point, interest rates can only go up by mathematical certainty. There is no such thing as a negative interest rate. Many economists fear the impact of qualitative easing is storing up inflation for the future. If high inflation were to re-emerge, the central economic tool of government is to raise interest rates to dampen demand in the economy. With this in context, landlords will always pay slightly above normal mortgage interest rates anyway in the buy to let market. Although the interbank interest rate is very low, this is not matched by the rates charged by the remaining buy to let mortgage providers.
Two reduce the impact of the risk of a rise in interest rates and consequent landlord mortgage charges, there are a number of possible actions open to new landlords. The first is simply to take out a fixed-rate mortgage in which 3, 5 or even 10 year fixed rate budget can be set, understood and managed accordingly. Landlords need to be financially aware enough to calculate the impact of sharp rises in interest rates on their cash flow. In simple terms, will the rent cover the cost of an increased mortgage in the future? This may not be as easy a calculation as it sounds as there are many other ongoing management costs to take into consideration when calculating monthly cash flow, such as letting agents fees, property insurance, maintenance and repairs and so on. A lack of financial awareness is simply unforgivable.
Squatters/ Non Paying Tenants – many the UK tenants that already have huge personal debt problems, as a result of overspending on credit cards, loss of job and other financial difficulties. This is causing an increase in the percentage of non-paying tenants who are late paying a rent or even find themselves in bankruptcy scenarios. Evicting non-paying tenants is one of the most difficult and costly challenges for landlords. In general terms, the risk is relatively small due to the fact that tenants credit checked and vetted by letting agents prior to signing a short term tenancy agreement. However, circumstances change and people unexpectedly find themselves in financial difficulties. To minimise this risk is possible to obtain legal expenses insurance as part of abuy to let insurancepackage. This can help pay for the cost of employing solicitors and going through a legal process to recover lost rental monies and/or go through court action.
Tenants Damage Your Property – tenants don’t love landlord’s property in the same way in which homeowners may love their own house. It is not theirs and they will be moving on at some point in the future and they didn’t pay for any of the contents themselves. Therefore, it is only natural therefore that there is some natural dilapidation’s, accidents and breakages throughout the course of the buy to let investment property. Regardless of whether it is accidental or the result of an avoidable drunken party, repairs cost money. Tenants will need to obtain their own contents insurance and landlords will need to decide whether or not to also obtain contents insurance as part of their landlord buildings insurance policy.
Failure to Comply with Statutory Guidelines – landlords need to ensure they comply with all of these safety legal regulations of the day. These are designed to protect the health and safety of tenants who are entitled to live in a safe and secure home. In particular, the furniture and furnishings fire and safety regulations need to be adhered to along with the gas safety regulations, building regulations and electrical safety regulations. The financial impact of an accident caused by landlord failure to meet statutory laws can be criminal and financial penalties severe. To minimise the impact of forgetting or failing to do something, it is sensible to meet with a solicitor who can advise landlords on the latest legal guidelines and draw up an action checklist of what practically needs to be done, to ensure the safety and well-being of their tenants.
Assetsure provides UK landlord buy to let insurance for buildings and contents for private landlords, letting agents and property management companies in the United Kingdom.