How To Vaccinate Your Property Investment Business against COVID-19 (and other disasters!)
As Corona Virus (or COVID-19) spreads across the globe, everything seems uncertain. This global pandemic will have a big impact on most businesses and a property investment business is no exception. Whilst I personally could self-isolate for months on end and continue to run my business from my laptop, not all of my tenants who provide my income, can. However, thanks mainly to some amazing training and mentors when I was starting out, my business is already set up to weather this storm, or at least give me a fighting chance! Taking out building’s insurance at the very least on all of your properties should be a given, but I don’t personally believe most landlord insurance packages promising guaranteed rent are a good deal. So, regardless of your insurance choices, here are my top 5 tips to help protect your property investment business from unforeseen crises:
1. Keep a “Just in Case” Fund
To me, it seems obvious that no matter how great a house or how wonderful the investment area, there will be times when either the house is empty (a void) or the tenant struggles to pay the rent on time. Even if you have a relatively quick turnaround as one tenant leaves and another moves in, there is bound to be a small gap in income. It shocks me how many landlords seem to completely forget that there will be months where there is no money coming in, but you, as the landlord, will still need to pay the mortgage and any bills. At times like this, with COVID-19 spreading fast, it is highly likely that many tenants will struggle to pay their full rent amid taking sick leave or time off to look after children who would otherwise be in school. Lots of my buy-to-lets (BTLs) are in areas where zero hours contracts are commonplace, leaving many of my tenants financially vulnerable when the economy takes a tumble. If I was merrily spending all of my leftover rental income each month, then what would I do if my tenants couldn’t pay, so my income stopped but my bills carried on?! I’d be in a sticky situation, very quickly.
Instead, I prefer to plan for these inevitable lapses in income by putting aside 10% of my rental income each month into a “Just in Case” fund. I also use this fund to pay for maintenance on my properties when needed, but I make sure it’s never depleted and always ready in case the worst should happen. In light of COVID-19, I reviewed my Just in Case fund to make sure I had over 6 months’ worth of mortgage payments ready for every single house I own. I’m very much hoping that all of my tenants don’t simultaneously stop paying their rent for 6 months straight, but this fund gives me some much needed security when inevitably a few of them can’t pay in full on time.
2. Forecast in Time Buffers
Currently, I have a number of projects right in the middle of converting run-down, tired properties into warm and comfortable homes for future tenants. My builder is well used to my specifications and standards of how I like the houses to end up, and he generally gets them turned around in 2 to 3 months. However, I always budget for a house to remain completely empty and undergoing works for at least 6 months, just in case. Given the current situation, it is fairly likely that my builder and some of his contractors will have to take time off for a spot of self-isolation, which is very likely to delay the projects. Allowing roughly double the project time might seem a bit excessive under normal circumstances, but how I see it, it’s normally a bonus when the house is ready a couple of months ahead of my contingency schedule and I can get it rented out sooner. At present, I am exceptionally glad that I factor in this level of contingency on a regular basis. There’s no guarantee that a couple of months extra will be enough to see us through COVID-19, but I’ve given myself a bit of breathing room to figure out a plan if it continues to impact for much longer.
I also use this same approach to my mortgages. I want as much buffer time as possible if and when the market or interest rates change so that I have space to create a plan. In order to do this, I usually choose fixed rate mortgages for around 5 years. I’m well aware that the rates are often a lot lower on tracker mortgages and they may in fact work out cheaper on average over a 5 or 10 year period. However, I like to know that even if interest rates start to creep up, I have a few years to plan and make adjustments to my rent or bills in compensation. I’m not about squeezing every penny out of a property if it leaves me exposed to changes beyond my control. For me, I prefer a more steady, certain income with plenty of buffer time.
3. Join a Landlord’s Association
As soon as I started learning about property investment and long before I even bought a house, I became a member of the National Landlord’s Association (NLA). Recently, the NLA has joined forces with the Residential Landlord’s Association (RLA) to become one, combined organisation of the National Residential Landlord’s Association (NRLA). This body is absolutely fantastic. For roughly the price of a glass of wine each month, I get access to a huge library of information, the latest updates on things which will affect my business, opportunities to attend networking meetings, unlimited support by telephone should something go wrong and potentially the most valuable part of all, my voice is suddenly joined with thousands of others should we need to speak out about how certain policies or situations may affect landlords. And no, I don’t get any commission for singing their praises!
Over the past 5 years, the NRLA has been invaluable in advising me on how to deal with a couple of trouble tenants and now their support is coming into its own once again. The NRLA have recently released an article advising landlords on what they need to know regarding corona virus and it’s well worth a read: https://landlords.org.uk/news-campaigns/news/coronavirus-what-do-landlords-need-know. Additionally, the NRLA have just successfully campaigned to get mortgage holidays extended to landlords as well as home owners. This is going to be so important for so many landlords as not everyone keeps a Just in Case fund as I described earlier. For many landlords, if their tenants can’t pay the rent, then they will struggle to pay the mortgage. In theory this could have lead to the mortgage lenders repossessing houses, which would have meant tenants getting evicted. Not a situation either tenants or landlords want to find themselves in! Being part of a body like the NRLA brings the combined voices of thousands of landlords in the UK together and greatly increases the chances that the government listens.
4. Minimise Monthly Debt Payments
I am a big advocate of using other people’s money (OPM) to create leverage in property. It’s a strategy which enables you to acquire more properties, of higher values, more quickly than you can do with almost any other type of asset. I couldn’t have built my business anywhere near as quickly without private investor loans, bridging finance and mortgages. However, the more money you borrow, the more you have to pay out each month in interest payments. The more you are committed to paying out each month, the more vulnerable you are if your rental income is reduced or stops altogether. This means that whilst I like to make use of the lending options available, I don’t want to max them out or rely on them in the longer term. In order to minimise longer term debt, I link private investor loans to specific projects. Once that project is complete, I re-mortgage the house and use the draw-down to pay back the investor. If I have other projects lined up, I’ll give the investor the option to keep their money invested, but I won’t promise to keep it invested indefinitely – the investment has to be being used, or it goes back.
Counter-intuitively with mortgages, I opt for interest only products. This means that I’m not paying down the balance of the mortgage each month, but it frees up that extra income as profit, or to go towards my Just in Case fund. Interest only mortgages give me much more flexibility and mean I’m not committed to paying out as large a sum each month. In the longer term, I’m talking 15-20 years, I rely on the value of the house to gradually increase, whilst the mortgage balance will remain the same. This means that in around 20 years, I could potentially sell one or two houses and clear the balances of all of the other mortgages. In the meantime, I have minimised the monthly payments which I’m committed to and so I am less vulnerable to gaps in rental income.
5. Be Human
Let’s face it, landlords have quite a bad rep in the UK. This is especially true in places like London where rents are a huge portion of most tenants’ salaries. There are horror stories everywhere of rogue landlords who don’t want to pay to fix leaking roofs or who treat tenants unfairly. Even in other areas of the country, landlords can often be inexplicably stingy or picky with their tenants. A classic example is pets. Lots of landlords have a blanket ban on pets, even though the house they are renting out has already had its fair share of wear and tear from the last family’s children! I would much rather my tenants felt comfortable and looked at the house as their long-term family home. That way they are far more likely to stay in the house longer, look after it better and try as best as possible to pay their rent on time. On top of all that, if the tenants come into financial difficulties (because of COVID-19 or otherwise) and if they trust me as a landlord, they are far more likely to tell me, or my letting agents, sooner so that we have a chance to work together and find a payment plan which is realistic. In order to achieve this mutually beneficial relationship, landlords need to see their tenants as people and tenants need to be able to trust their landlord as a person. I try to be as reasonable and approachable as possible with my tenants. For example, I let them have pets (so long as they agree to pay for any damages caused), I work hard to get maintenance issued fixed ASAP, I genuinely consider their requests to re-paint a room or two and I send them Christmas cards.
A landlord being greedy is also very off-putting for good tenants. I prefer to charge just under the average rent for a high quality house so that the houses are more affordable and get rented out quicker to people who are likely to stay longer as they feel they are getting a good deal. Better to have 6 months of £400/month rent than to wait 4 months to get someone to pay £425/month. Of course, it won’t work with everyone and sometimes people need to move on regardless of how much they might like their landlord. However, as long as I keep the communication channels open and help to make my tenants feel valued, I am doing all I can to ensure my tenants stay for longer, giving me a bit more security in my income.
Whether you are completely new to property investment or are well on your way to achieving a great passive income, it’s always worth considering how you can protect your business from difficult times. No one knows the full extent of how COVID-19 will affect the property market or how long the effects will last. Similarly, no one can predict when the next big financial crisis, pandemic or natural disaster will come along and cause further challenges. The best thing you can do is prepare your business to face adversity and hopefully come out on top. If you want any further advice or have any questions on measures you can take to protect your property investment business, please do send me a message and we can grab a call!