I am focusing on the impact to property investors while at the same time acknowledging the dreadful loss of lives and heartache that many people will be dealing with.
“History shows that there are two things we can be sure of when it comes to financial crises: there will be another one, and the next one won’t be the same as the last.” Bank of England
To say that Covid-19 has rocked the world is an understatement but when it’s over there will be the real danger of the “aftershocks” – whatever is coming our way one thing is certain and that is that every business needs cashflow and to us that means rent. At a time when the world economy is very fragile and when we need to do everything we can to keep our cash flowing.
Back to work including viewings from 13th May for landlords and letting agents
The Health Protection (Coronavirus, Restrictions) (England) (Amendment) (No. 2) Regulations 2020 came into force on May 13th.
(v) or sub-paragraph (l), substitute—
“(l) to undertake any of the following activities in connection with the purchase, sale, letting or rental of a residential property— (i) visiting estate or letting agents, developer sales offices or show homes; (ii) viewing residential properties to look for a property to buy or rent; (iii) preparing a residential property to move in;(iv) moving home; (v) visiting a residential property to undertake any activities required for the rental or sale of that property;”
Remember to follow this Guide to Working Safely in Other People’s Homes.
What can History Teach us?
Many people were expecting Brexit to be the cause of the next UK financial crisis all that seems so far away now.
- 2007-8 “the UK economy suffered the deepest recession since the Second World War”
- 1990-1 with interest rates at almost 15% unemployment rose to over 3 million and the term Buy to let was still 6 years away
- 1981-1 Where interest rates rose to a crippling 17% and inflation as high as 18% with no hope of shopping around
- 1973-5 When interest rates shot up to 15% and Building Societies only lent to those buying their own home and only a maximum of £15,000
Will we Hear the Word Stagflation Once Again?
“We now have the worst of both worlds—not just inflation on the one side or stagnation on the other, but both of them together. We have a sort of “stagflation” situation. And history, in modern terms, is indeed being made”
When I began in 1972 I had no expectation of making enough income to fund my family’s lifestyle in the early years. My plan was, and remained, to live on my husbands’ income and to use my money to build a portfolio of rental properties which would eventually provide a good income and solid nest egg of equity. Many people thought that I was mad in the early 70’s where there were no AST’s nor Section 21 nor Section 8 (Housing Act 1988) to protect landlords from delinquent tenants and the term “buy to let” had not yet been coined in 1996. No one in my family has been involved in letting property and I had a blank canvass. I gave myself two criteria:
- Don’t buy anything that would not “wash its face” from day one of letting
- Always have a sinking fund to pay the bank loan and expenses for 3 months
“Wash its face” is something you don’t hear these days because a property is expected to wash the whole family from day one and when it does increase in value it’s expected to provide the deposit for the next one – yes I see that but it wouldn’t have fit my criteria. I saved the rent to provide the next deposit and built a portfolio based on 60% LTV and with no refinancing and some nice periods of capital growth, that figure soon dropped even lower and my equity increased.
During the first two financial crisis’s the victims were mainly home owners who had over stretched themselves, often remortgaging their homes as they rose in value in order to buy holiday homes – Spain being a Mecca for many – boats, cars …. It was hard to watch people who hadn’t imagined those interest rates struggling to meet their obligations while keeping a meal on the table. I had heard about Barclay Cards in the late 60’s but now I saw people using them to pay their bills and run them up to the maximum – Yes I know that this is “normal” now but it wasn’t then and it made me nervous just watching them. Another old fashioned term comes to mind “Robbing Peter to pay Paul”. These days many people live with their credit cards maxed out and therefore haven’t even got that option.
I was very glad of my sinking fund and I was glad that I had followed my gut instincts and taken a fixed interest rate on my bank loan which at the time, felt very high (10.5%) but achieved what I needed which was predictability and was now proving to be a sound decision.
When this crisis is over predictability will be a very helpful tool, we cannot predict rental income but we can control outgoings and that’s a good place to begin.
Lesson number 1 A fixed rate meant no change when flexible rates hit the roof and had been worth paying extra. Yes it can happen again. A 5 year fix can cost less than 3% these days – I would have been dancing in the rain for that.
The recession of 1990-1 was a very different case. Many people had entered the property rental business following the big changes to possession in Housing Act 1988 and had taken on up to 100% loans interest only, now their tenants were unemployed (3 million) and their interest rates shot up to double digits on both their buy to let loans and personal mortgages (many of which had been increased to provide funds for deposits or to fix up the buy to let). With no rental income and a housing market crash they had no way of getting out. Many people thought that they would always be able to sell the properties to cover their debts; no one had imagined the reality. Mortgage repossessions shot up from 15,800 in 1989 to 75,500 by 1991 with shocking consequences. I know people who have never owned their own home since.
The Buy to Let mortgage debt in the UK currently stands at £200 billion mostly on interest only with many people having no plan of how they will pay the principle back
Lesson number 2 If your Loan to value goes over 60% you may not be able to sell to repay your debt, you need a Plan B to repay the principle (remortgaging only works in a strong property market) and a sinking fund
2007-8 was a whole new ball game. So many people had entered the buy to let market (from 1996) and were trapped having refinanced as the values rose and were now well over their heads in debt.
Lesson number 3 Don’t kid yourself that you are smarter than those who went before you and then go and make the same mistakes.
Fast forward to 2020 those who were picking up bargains in the buyers market of 2007-8 had learned nothing from the desperate sellers. Many people had bought at below market value (I heard the term BMV for the first time) from those who were desperate to sell, building their portfolios often from nothing to a substantial size but with constant refinancing to re-circulate their money and leaving very little equity in the property. Cash flow was what it was all about with a seemingly limitless number of ways to make money from property.
Lesson number 4 Don’t kid yourself that you are smarter than those who went before you and then go and make worse mistakes.
“Be fearful when others are greedy and greedy when others are fearful.” Warren Buffett
There are now thousands of people “in” the property business. The last decade has spawned a whole range of new businesses
- Rent to rent for those with no money to invest but who want to make money from the difference between the rent that they pay and the rent that they collect
- Deal Sourcer for those who can persuade an owner, landlord or agent to part with a property for less than market price and then offer it to an investor who hasn’t the time or skill to negotiate
- Trainers “Those who can’t do teach” to those who are willing to part with a lot of money to find out that there really are no secrets to property investing it’s all just hard work. if that doesn’t make sense to you – none of this makes sense to me either.
- Property Developers who are repurposing and reinvigorating buildings and land to provide more homes. This isn’t new but has increased massively with relatively small investors since the days when I did it
- Short Term Lets/Serviced Accommodation I got out when AirBnb hit the UK and many people got in – people leave their brains at home when they go on holiday and they drove me mad! In my opinion this is nothing to do with property rental it’s the nearer to the hotel/B&B business and unfortunately is the biggest victim of Covid-19
- Exempt Accommodation For those who have no idea how to support those with often complex needs to make money from the latest “get rich quick” scheme
All of these people are reliant on one thing RENTAL INCOME.
Lesson number 5 “All that glitters is not gold” and you aren’t a property investor unless you actually invest your money – anything else is a job like any other and in the coming months may disappear like any other leaving you with no equity to fall back on.
No one can predict the state of the economy after Covid-19 all we can do is prepare for the worst but work towards the best outcome.
Key to this is tenants –The relationships we develop during this crisis will impact on the future. Apart from my student tenants my aim is always to encourage tenants to stay a very long time and that has sometimes meant that I need to give them some slack if they have a change of circumstances which means that they are unable to pay all or part of their rent. It’s great if you are in a position to work with them until they get back on track but there may be some that will struggle for a while and there are several options.
Rent Payment Break
It’s not a good idea to allow debts to grow too big, this can mean that rather than face the repayment period the tenant will leave and you will be without the rent owned and with an empty property as we enter an very uncertain market. I know that landlords often see the deposit as money to cover damages but I consider that one months’ rent outstanding. It is not an issue because I can claim it back from their deposit at the end of the tenancy if necessary and still have one weeks rent to cover damages or losses, not that I claim very often. I would not say that to a tenant but it’s worth keeping in mind when discussing a rent break. That’s up to one months’ rent covered but this could take the form of up to 25% reduction for 4 months and therefore I would feel comfortable agreeing to 20% of the rent being deferred if they are furloughed and only getting 80% of their income. I would agree that initially for 3 months (that seems to be the magic number at the moment) to be spread over the following 6 months or to be taken from their deposit if the tenancy ends before then. I would hope that this would remove the pressure from them for the moment and that they will save some money by not going out to work or to socialise and therefore find themselves in good shape at the end of this crisis which will enable them to pay the extra 10% for the following 6 months.
Self Employed people may not get their Income Support payments until June If they are unable to work we will need to be patient and accept our overdue rent when they get that payment.
Universal Credit will be available to many people but this takes a while to come through and we just need to be sure that the claim has been made and monitor the progress to the first payment
What is the Alternative?
I have heard that landlords and agents are asking tenants and even Guarantors for “Evidence” that they are furloughed – better to ask for the document that confirms that they are furloughed. Sight of business bank accounts for guarantors or proof that they are continuing to pay their mortgages in full and not being offered a repayment holiday – Really? I would say “Get lost” Let’s remember we are landlords not law enforcement agents and we have no legal right to demand such information. What are we going to do if they refuse? Best to keep them on side by ensuring that they have sight of the agreement you are making with the tenant which they may be called upon to honour as their guarantor because this is rent which is due under the contract that they are guaranteeing.
The final alternative is to take debt recovery action against your tenant when this crisis is over because you won’t know the extent of the debt until then. You cannot evict the tenant, even a valid Section 21 Notice must now give a minimum 3 months Notice ending after the end of the fixed term and it’s likely to take months to get a court order at the end of three months if your serve now. The same is true for a valid Section 8 Notice, which can be filed with the court but will not be dealt with until the courts open. The Bailiffs will be backed up and overall your chances of recovering possession of your property by the end of the year are very low.
Final Lesson It’s always best to work with your tenants until you can go no further. Make certain that you’ve got a good document trail so that if the time comes you can take appropriate action quickly.
I know that this is THE most stressful topic for landlords and letting agents at the moment and also that some of us cannot afford to lose rent – but we cannot get blood from a stone.
At this moment there are people planning a shopping spree buying at below market value from landlords desperate to sell (sound familiar?) – don’t be one of those landlords.
In Part 11 I will talk about planning the recovery including dealing with delinquent tenants, regaining possession and finding new tenants.
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