Like almost everything I can think of, the realities of being a property investor are very different from those I imagined, although I had been the accidental owner of an informal HMO in the late Eighties and early Nineties, long since repossessed as a casualty of the last crash.
This time around, I collected four buy to let flats between June 2004 and December 2007. And lots of my clients have BTL properties too. Given the strange times, I have called a few of them together for a summit so we can try to work out what’s the best thing to do.
Today, for the first time in over a year, all four of my flats are let. The one I own and manage myself in London (and there may be a clue in that) lets continuously, such is demand. The three that I own outside of London, despite being professionally managed, have all suffered voids – sometimes quite long ones, even up to a year. And, of course, these being flats – there are hefty service charges, ground rents, insurances and re-furb costs to be borne whether or not they are rented out. So they can be a terrible and frightening cashflow drain. Even an optimist such as myself sometimes struggles to see the upside, and those of my clients who are cash poor and/or nearing retirement age are wondering what’s the best thing to do in these exceptional times.
Increasingly tenants, sensing their power in this market, are becoming more and more demanding and a hassle. And many of us are now considering getting rid of our investment portfolio.
The good news is that all four of my properties do rent out for a profit. Combined this is a very useful £1300 pcm before agents costs and services charges etc., as already mentioned. Not to be sneezed at as a passive income, if you ignore all those midnight calls about boilers not working and baths leaking into downstairs flats because silly tenants have over-filled them.
But the bad news is also very compelling. They only make that tidy profit because the four mortgages are practically free right now, what with interest rates so low. And while everyone seems to agree that interest rates will remain low for some time to come, they also suggest that when they do start to rise, they will gallop up in leaps and bounds, maybe up to 6% or 7%. And whilst this isn’t as high as I’ve known interest rates to go, it would be way more than I would need to wipe out that monthly profit so those four properties would start to cost me again. And we have no way of knowing when that will be.
The flats did cost me from June 2004 until interest rates plummeted to almost zero after the credit crunch happened. The result of that was tens of thousands of pounds in losses. Which is good news in that I won’t have to pay tax on my profits for perhaps a lifetime, but bad news in that those losses have to be funded somehow. Out of hard-earned cash, which no-one has much of right now. And when those losses were being funded with cash we didn’t mind, because we were making capital gains.
Not only are three of my properties in significant negative equity of up to about 30% of their value, which means I will be unable to re-mortgage indefinitely even should I want to, it also means that it is going to be decades before I see any capital growth on my property assets. The financial press agrees that capital values haven’t finished falling in the UK and may continue to erode for another whole generation, i.e. twenty years at least.
So the worst imaginable combination of interest rates at say 6% and sliding capital values, growing negative equity and demanding tenants is a very real spectre, some would say nightmare! This goes against everything I have ever known historically about the property market in the UK but I don’t think I am just buying into the general doom and gloom. I find the arguments behind all of these financial guesses about interest rates and capital values to be very real persuasive indeed. And I’m pretty well read on the topic right now. So the future of property investing for me may be very different indeed.
Many will not feel sympathy for me, and why should they – a greedy, though kindly landlady? I don’t seek sympathy but I do wonder how best to resolve this issue for myself and for my clients. My inclination is to sell and be done with the hassle; take the losses on the chin and find something else better to invest in. That will cost me about £100,000 to pay off the negative equity in the three flats outside of London but then, I’ve had the re-mortgage funds out of those way back so again, no complaints from me.
I think the one thing which stops me from doing right now that is the mortgages. These are such cheap finance, even at 6%. I don’t anticipate that with my properties in negative equity, at my age and with no income during my gap years that I will ever be able to get a mortgage again. Perhaps I wouldn’t want one. But one thing I do know is that if I had £100,000 the last thing I might consider doing with it is selling the three flats in negative equity, since I know how to make 50% per annum and more on other investments. Would I be better off using the cash for that instead? Because even if I did that I would have to use my gains in other investments to continue to prop up my ailing property empire.
I’m between a rock and a hard place.
Do you own BTL property in the UK? What’s your view? What are you intending to do with your portfolio? There’s no doubt in my mind there will be a continued and indeed greater demand for rental property, but is that alone sufficient reason to hang onto our “investments”?