Many Landlords have been repossessed, and many more are on the verge of being repossessed.
Why is it happening?
Interestingly, the other day I was asked how I’m coping with the downturn; specifically if I’m struggling.
In short, I’m not struggling. I personally believe only certain types of Landlords are struggling, and it’s those that took a certain route. I’m briefly going to explain why I think this is occurring; my points may seem obvious.
The reason I’m doing this is because it may stop others from making the same mistakes, or at least if they go down these routes, they’ll try and avoid where others slipped. If anyone disagrees with any of my points, please say so, and we can battle it out (if I care enough).
1) The landlord that likes to release equity
During the boom, an influx of landlords emerged that started buying up property like they were Donald Trump. These landlords knew what they wanted, but they didn’t have the means to obtain. What was their solution? Release equity from one property to fund another. GENIUS!
Only problem is, they failed to acknowledge that there are 3 possible outcomes when investing in property- booming market, stagnating market, and busting market.
So what happens when the market busts? Properties drop in value, equity turns negative, and you’re consequently left with 20 houses that have debt greater than their value. So what do you do? You can’t sell the properties because the sale value won’t repay your mortgage balance. The rent no longer covers the mortgage payments because you’ve come off your fixed rate and onto your lenders variable rate. You can’t remortgage to get better rates because you don’t have enough equity.
You’re getting repossessed.
2) The Landlord that took the bad mortgage
At one point in time, buying property seemed like a no-brainer to everyone. Every man and his dog wanted a piece of the action. It wasn’t a case of saving to invest; it was a case of choosing which lender to borrow from. Somewhere along the line, obtaining 95% – 110% mortgages seemed like a bright idea.
So what happens when the market busts? You’re ultimately left in the same position as those that released equity- negative equity, unable to sell, unable to pay mortgage, unable to remortgage.
You’re getting repossessed.
3) The Landlord that never understood the difference between fixed and variable rates
Understanding mortgages is a key aspect of being a successful Landlord. Taking out such a huge loan without understanding the fundamentals is like walking into a shower prison facing the wall.
A lot of landlords were actually surviving for a few years even though property prices had dropped. They were still collecting rent and able to cover the mortgage payments.
However, some landlords either didn’t understand that fixed rate periods eventually come to an end, or they forgot about it. Eventually, the Landlords came off their comfortable fixed rate periods and got thrown onto the lender’s hefty variable rate, which in some cases increased their monthly payments by a third. All of a sudden the rent wasn’t covering the payments, and they had to pay out of their own pockets.
Remortgaging wasn’t an option without increasing the equity, and the only way to do that was by injecting a large sum of cash. Of course, at this time, getting finance isn’t so easy.
You’re getting repossessed.
4) The short sighted Landlord
A lot of landlords invested for a quick exit- a “grab and run” game plan. Unfortunately, BTL is never about a short term investment, unless you buy at the very beginning of a boom. The problem there is, it’s difficult to determine when you’re buying at the beginning, the middle or the end of a boom, so it’s always best to invest for the long-term to play it safe. But those that purchased at the tip of the boom looking for a quick exit have now been firmly stuck in a long-term investment they weren’t prepared for.
A lot of these investors borrowed at 100%, with the intention of selling in 12 months time, hoping to walk away with a 5% profit (assuming house prices would go up by 5%). That was the short term goal. Not a bad return, if it went to plan.
It didn’t go to plan. You’re getting repossessed.
5) The Landlord that’s trying to compete with gold with brass
At one point there wasn’t enough BTL’s on the market to meet demand, so it was easy to find tenants. Tenants were literally willing to take residence in any old squalor.
But we’re in a situation now where a lot of people have been forced to let their properties because they can’t afford their mortgages, consequently the market has been saturated with BTL’s. Supply is much greater than demand. What happens in this situation? Firstly, Landlords have to start being extremely competitive with their asking prices. But more significantly, tenants are spoilt for choice, and they’re able to pick and choose between a whole bunch of properties. And rightly so, those landlords offering properties with crusty walls and piss-stained carpets aren’t able to compete with those landlords that are offering boudoirs fit for a prince. Properties are remaining on the market, empty, while the bills still need to be paid.
naive trusting landlord
These landlords trusted their tenants to pay their rent every month, on time, on the dot. Landlords should never assume rent is guaranteed, especially when even the top bankers in the city are feeling the affects of the current climate.
Landlords have felt the knock-on effect of unemployment because it means tenants have fallen into arrears due to the loss of income. But there are ways that landlords can protect themselves in this case, but perhaps they either, a) didn’t realise b) were too lazy c) too cheap d) too positive.
Good ways to minimize risk from tenants falling into arrears is by only giving tenancy to tenants that can arrange a reliable guarantor, and secondly, by getting landlord insurance in place.
Disclaimer: I'm just a landlord blogger; I'm 100% not qualified to give legal or financial advice. I'm a doofus. Any information I share is my unqualified opinion, and should never be construed as professional legal or financial advice. You should definitely get advice from a qualified professional for any legal or financial matters. For more information, please read my full disclaimer.