Here’s a property-related question for you…
How many tenants do you think can’t afford to pay their rent? 5% ? 10% ? 15% ? More? I mean, there’s been a recession, but we’re not in a depression… right? How bad can it be?
Well get this… in the first quarter of this year, according to the National Landlords Association, nearly a quarter of tenancies were in arrears. That’s right – a quarter!
Of course that leaves many a buy-to-let (BTL) landlord in a very difficult situation. They can try to come to an arrangement with errant tenants, or else accept that they’re not going to get their cash, and chuck them out. And getting them out isn’t always easy…
In the past I had a rental property and had to get the tenant out. Even with a short term tenancy agreement, there were hoops to jump through, including going to court. So it’s not pleasant and it takes time.
Most landlords end up working things through with tenants – which usually means less rent. That reduces the already miserly yield on property. If I were still in that game, it’s probably what I’d do too.
But there’s another trick for landlords that could give them a tidy profit, and it applies to anybody with a property.
So what are you going to do?
Just about all the property indices are pointing south now. More properties are coming to market while fewer buyers want to take them on.
The errant tenant problem will probably get worse as soon as government cuts start to bite. And when that happens some landlords will bail out of a difficult market…
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So I’m sticking to my view that housing will remain in a down-trend. For what it’s worth, that’s a view shared by PricewaterhouseCoopers (PwC) and the National Institute of Economic and Social Research (NIESR). Both of them recently released reports talking about 5 down years for property prices.
So what’s a BTL landlord or a property owner to do?
I’m not going to offer the obvious advice of selling up. Trading in and out of investments (especially houses) is an expensive affair. And in fact there is one way you could actually turn this into a profit opportunity.
The potential silver lining for the shrewd investor…
BTL is certainly not the worst investment you can make. In fact, depending on how you play it and what happens to the economy it may turn out to be an outstanding trade. Let me explain my apparent schizophrenia…
The Bank of England tells us that mortgages charge around 4% interest at the moment. Now that’s with rock bottom base rates. So don’t expect them fall much from here. So why not take up this deal:
You can get a ten-year fixed rate at just under 5%. So what? you might well think, rates are staying low for the foreseeable future, so why bother?
And that’s just the point: ‘foreseeable’. Nothing is foreseeable in the financial markets. Anything can happen. And here’s one plausible scenario that’ll leave fixed rate borrowers in clover…
The economy goes back into recession sometime in the next year or so. The authorities launch QE2 (that’s more money printing), trying to revive the economy and avert depression.
QE keeps going until it ends up in serious inflation (too much money chasing too few goods). Interest rates shoot up to try to tame inflation.
At this point, a ten-year fixed rate borrower will be in a great position. Inflation ensures his rent goes up, while his fixed rate borrowing ensures costs don’t. Of course, he’ll still have to deal with tenancy issues… but at least his costs aren’t escalating at the same time.
The same benefits go for any mortgage holder with a long fixed rate. I mean, what’s there to lose? Yes, you’ll lose a measly 1% a year. But in a choice between a 4% floating rate, or 5% fixed, I know what I’d rather have!
By my reckoning, borrowers have got around a year to make the move into a long-term fix. But don’t wait too long… if the ‘unforeseen’ crops up, expect the ten-year 5% fixed rate deals to evaporate.
• This article was first published in the free investment email
The Right Side