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In (Part 4) of this series, we looked at the two common sources of unsecured debt that most people are likely to have. In this article, we take a look at some of the non regulated property purchasing arrangements that have become very popular with people wanting to be involved in the rental market.
Most of 2020 and now well into 2021, we have all been subjected to a series of government restrictions and complete lockdown which for many has gone well beyond the simple boredom that these restrictions have brought. Many small business owners have been under particularly severe strain and although Government has provided help to the employees of these businesses, many small business owners were ignored with their businesses left to fend for themselves.
Government support to business
Government did make provision for businesses to borrow money but as borrowing to sustain your business through difficult times is only sensible if you are confident that your business will survive the crises and be able to repay the debt when the crisis is over. When that fails to happen, the business can start to fail and owner and any employees can find themselves in serious difficulty.
Property rental market
One type of business that has attracted many ordinary people, is the buy to let rental business where property has been purchased to service the rental market. There are now around 5.4 million privately owned rental properties in the UK with many of them held by individual investors who don’t associate themselves as being in a business. There are may thousands of people, including pensioners, who have put their cash into this, sometimes borrowing heavily through the huge range of BTL mortgage products that are offered by specialist lenders, high street banks and building societies.
There are of course many professional landlords who have large portfolios of these properties but all, professionals and individuals are all considered landlords and subject to the rules that apply to this type of business.
How Landlords could be affected by the Pandemic
Imagine a situation where someone has taken early retirement and to supplement their future pension, have used their pension lump sums they received at retirement plus their savings, to place a large deposit on a property and taken out a BTL mortgage to cover the purchase price. They have it rented out and everything is working to plan.
Then, corona virus arrives and one of the first things the government does is pass laws that prohibit a tenant from being evicted if they do not pay their rent. The tenant then takes this as a message that they don’t have to pay and can then live in the property for a very long time without fear of eviction.
The pensioner still has to pay the mortgage on the property and other costs but now has no money coming in from the tenant.
The above describes the situation that many individuals now find themselves in including those professional landlords with large portfolios of rental property.
What are the Solutions?
Every situation will be different and the resources to fall back on will be very variable but taking an honest look at your particular situation may let you take appropriate action early to avoid an unmanageable debt situation occurring. Here are some thoughts.
Assessing the situation – The first thing would be to take make an honest appraisal of your situation to establish the following:
- Can the property be supported from other income sources while rent is being withheld.
- If the answer is yes, then a study of the the sense in doing that needs to be taken. If the answer is no, or if the study shows that its not sensible to support the property, then steps need to be taken to dispose of the property to protect your invested capital and stop debt from building.
- Where the study shows that the property should be retained but that the available income will not sustain it, then funds will need to be raised from other sources.
- Raising funds – Where funds have to be raised to support the property and the current lender will not advance further loans, then one alternative could be to secure a loan against some valuable asset, such as equity held in another property or held in a number of properties, if the landlord has a large portfolio.
Warning – If the action mentioned in stage 4 is going to be taken, then it is important for the borrower to be aware that any property, including the main residential property, if it is held as security on a loan, may be repossessed by the lender if the borrower fails to keep up the payments on the loan.
Legal Action – Although the government has banned tenant evictions for a period of time, tenants have not been given leave to withhold their rent payments. This wont be any comfort to a landlord that is not receiving enough rent to pay for the upkeep of the property but it does mean that the tenant remains liable for the debt. Putting the matter into the hands of a solicitor should ensure that any legal course of action that may be available to recover the lost revenue, will be taken.
Free BTL budgeting spreadsheet
Our free financial budgeting spreadsheet has a section within it where landlords can set out the income and outgoings for their BTL rental property, as part of their overall household financial planning. This would be particularly relevant for people who only have one or two rental properties and who want to see their overall financial position at a glance.
To learn more about this spreadsheet and request a copy, please see Part 8 of this series.