I’ve had a great question in which is ‘what are the risks of owning a buy to let property?’.
I think it is a good question because I meet many, many would-be and new investors who, to be honest, and I mean this in a respectful way, but I think that they can be a little bit naive about property investing and the consequences of owning properties and the potential problems which they could have down the line once they’ve bought a property.
So, let’s have a very quick think about some of the potential pitfalls of owning buy to let property.
The first one, which I think may surprise you, is government interference and politics.
We’ve been seeing quite a lot of that in the last decade or so, those of us who have been investing for a number of years. So, there are some buy to let investors who seem to be quite hysterical and paranoid about it who have been calling it a deliberate government attack on the private rental sector. Maybe it is. I’m not connected to government so I can’t tell you whether it’s as deliberate as that.
But, certainly we’re seeing policies, and have seen policies, coming through which have made doing property investing and doing buy to let much more difficult.
Probably the one which most people know about is section 24 which has taken away an investors ability to be able to offset mortgage interest against the rent when calculating income tax, and it’s because of that that many investors are now buying into a limited company because at the time of recording this video you still can offset the mortgage interest against rent when calculating corporation tax within a limited company.
But, many landlords threw their hands up in horror when section 24 came in, and when the ability to offset mortgage interest was phased out and many sold up and got out of the private rental market. Whether the government really intended that to happen or not we don’t know, many people think it was totally intentional.
And, there’s been other red tape as well which has been introduced which has made life difficult for investors and landlords, which I won’t go into now, but you can research it. If you go online there’s lots of people talking about it.
So, what other pitfalls are there in being a buy to let investor or investing in property?
Well, probably one of the biggest ones is maintenance issues. I think that many investors can perhaps be a little bit naïve about how much it costs to actually run an investment property.
Now, when you buy your property you’re probably going to do some kind of a refurb. I, because of the strategy and the model I follow, will always look for property which is in rundown condition, and then I’ll refurbish it and if the refurb has been done properly then hopefully that will defer and push down the line any repairs that need doing. So, after the refurb I’d expect a few years of maintenance free, but it doesn’t always work that way.
So, for example you could do a really good refurb, everything could be looking like it’s working fine and then suddenly the boiler could go.
It could be the time when you’re doing the refurb the boiler was fine and you’ve had the gas engineer in and they’ve signed it off but then something happens and this can happen. If it’s your first property and you have to spend £1500- £2000 on a new boiler then that could be your rental profit on one property wiped out for a whole year.
So, the pitfalls which I think we need to be aware of is that things can happen. Hopefully things won’t happen, we hope that things won’t happen but we have to plan just in case they do.
One of the best ways of actually self-insuring against something like that, I think, is once you start buying properties make sure that you keep on buying. Buying one property you become quite vulnerable because if you have to replace the boiler and you spend £2000 and you’ve lost your rental profit for the year then that’s it. But, if you own 10 properties and you have to replace one boiler then you’ve got nine other properties which are still producing cash flow.
So, there’s a self-reassurance in growing a larger portfolio as quickly as you can. Once you start I would suggest that you get on with it.
What else is there?
Well, there are market issues and there are things beyond our control. We can obviously watch the times that we’re in and make sure that we’re up to date with what we thinks going to be happening in the economy and in the property market, but the economy and the market is cyclical under normal circumstances and so we should always expect there will be booms and busts and we need to be aware of how we’re actually going to cope with both, to be honest.
Are we looking to sell in the boom?
Are we going to look to buy in the bust?
If we’ve bought in a previous bust and then gone through a boom and we still hold those properties in the next bust, how do we make sure that we survive that bust?
Is there enough cash flow?
And, these are the things that we need to be thinking about, but many investors, I think, come charging into the market when they can see that the market is increasing, and that’s not necessarily the best time to buy. You certainly don’t want to be finding yourself buying near the top only to see the values crash right down, which can happen.
In an extreme case that can happen. We saw that in 2007/8, we saw in the 1990s when the prices fell quite rapidly. So, we need to be aware of this and we need to come into property investing with our eyes open and aware that these things can happen.
So, what else is there that we need to be aware of and which could be a risk in buy to let?
Well, probably the biggest one and perhaps the one which you thought I might lead off with but it’s the one which most people think of, the others are just as important though, I think, but the biggest one for most people is going to be tenant problems.
What if the tenant doesn’t pay the rent? What if the tenant trashes the property? And of course these things can happen. One thing which I’ve learnt of the last 25 years of investing for myself is that if you own enough properties for long enough then bad things will happen.
I often say that property is a people business, so as we’re letting properties to people that puts us in a fairly vulnerable position, because most people are nice and most people are honest. But, there’s a small minority, a very small minority, of people who are not that nice and they are not that honest. And very occasionally, despite your best efforts of vetting and despite the best efforts of your letting agents and your managing agents, it’s inevitable that if you’re in property investing for long enough you’re going to have a bad tenant.
It is just a cost of doing business, it is just one of those things that happens, but sometimes I see on Facebook people who are besides themselves with grief because they’ve let a property to a tenant who turns out to be not such a good tenant and their whole world falls apart.
Again, it comes down to the reinsuring aspect. If you’re going to be in property you want to have enough properties so that if you do have a problem in one, the others will cover the problem.
But, also it is just part of doing business. You need to take a deep breath, you need to get in touch with your solicitor or your managing agent or whoever it is whose going to organise dealing with the tenant and just make sure that the tenant is dealt with in an appropriate legal and ethical way and that the problem is resolved. These things will happen though.
So, my final word on this is I think buy to let and property investing is great, well I would have, I’ve been in property for almost 40 years and I’ve been investing for myself for 25 years. But, I know that there can be pitfalls and I’ve learnt over the years that there’s no point in having sleepless nights over it.
But, if you are of a sensitive disposition, and if you expect everything to be perfect and for everything to run smoothly for ever, then property probably isn’t for you. But, I don’t think there are many people who are really that sensitive or that naïve.
So, as long as you understand that these things can happen and you’re just prepared, you obviously hope that they won’t happen but you prepare yourself for the fact that they could happen, then you will be fine and you will enjoy property investing, because there are a lot of benefits to buy to let as well, which I will cover in a different video.
Peter
Peter Jones
(ex) Chartered Surveyor, author and property investor
https://thepropertyteacher.co.uk
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