17:48 PM, 13th May 2011, About 10 years ago 3
With interest rates at a historic low, guest article writer Glen Ackroyd from National Property Group explains the steps he’s taking to protect his buy to let property portfolio from inevitable interest rate rises and taking his portfolio off “death row”.
In September 2008 I was having what was supposed to be my dream holiday. Like many others, I had ridden the wave of the credit boom and had acquired a large property portfolio. At the height of my success I was staying in a private villa in an island in the Bahamas, fronting onto the harbour, with millionaires’ yachts and Hollywood film stars for neighbours. Surely, life just couldn’t get any better?
Actually, I was totally depressed.
The credit crunch was causing global meltdown. The housing market was in freefall. My ability to maintain my lifestyle, based upon buying cheap property using easy credit, had gone. Worst of all I knew that my 100+ portfolio of buy to let properties were being subsidised by my income from property trading. The only thought in my mind was: how long did I have before my savings ran out?
The daily news rang out with the Lehmans Bros. collapse. After several weeks of sleepless nights, emergency intervention by the government meant that bank base rates had plummeted to their historic lows of 0.5%. For many people with buy to let mortgages this meant a pay rate of 2.25% or lower.
Phew! Crisis averted… for now.
However, as the saying (almost always) goes, “what comes down must go up”. Many economists now predict that by 2012 bank base rates will start to rise. Okay, they’ve been wrong before and maybe rates won’t go up that soon, but then again, it might even be sooner. But one thing is for sure – they won’t stay this low for ever. So, the question I ask is… “Is your buy to let portfolio bullet proof against interest rate rises?”
The reason I put that question is because there is not a day that goes by without that very thought entering my head. I know countless dozens of people who, like me, would have been wiped out if the base rate had remained at 5%. A lot of these people are now getting comfortable with low rates. They have no plan or idea about what to do to counter the inevitability of rate rises. They remain on “death row.”
During those dark winter days I vowed never to put my family’s financial security at risk again. To do so meant embarking upon a plan to radically overhaul my portfolio with the target of increasing my gross rents from £40k to £65k per month within 5 years. This would give me a yield on debt of 10%.
To put this into some context – This would mean increasing my rental income by over 60% in 5 years. How on earth was this going to be achieved?
During this period, some of my investor friends and I agreed that it would make sense for us to share common resources to save letting management costs. We were all self managing similar sized portfolios. We could work together and leverage our skills to get our own presence on the Rightmove website, produce “To Let” boards, share documents, administration staff and management software. We also pooled our knowledge to come up with strategies to optimise the efficiency of our properties. Since then we’ve offered this to other portfolio landlords – more of that later.
When you strip down the fundamental aspects required to make a portfolio work, there are 5 key drivers. However, in order to make these 5 elements work it is vital to have the foundations in place to enable efficient letting management.
For the online system, we opted to invest in a bespoke system to meet our ongoing requirements. However there are many online systems available for modest monthly payments.
Also, it is very easy now for anybody to set up direct debit collections using 3rd party providers. Tenants could also pay rent, or pay a holding deposit to secure a vacant property, by debit or credit card over the telephone. Or for those tenants who pay cash, they are given a payment card which can be used in Post Offices and community stores.
This is the allowance paid to tenants on housing benefit. It is based upon their room entitlement – not the size of the house. There are complicated rules which govern the bedroom rate a claimant can have, based upon their age, the number of children, their ages and sex. Full details can be found here: https://lha-direct.voa.gov.uk
The problem is that when you make it known that you are willing to let to DSS tenants, you get inundated with enquiries. We use a database to record all enquiries and then ask questions about the applicant’s family size and circumstances. We can then select tenants with family sizes to match the number of bedrooms. To reduce the risk of dilapidation or default we conduct a documented property inspection which is also recorded on video and obtain home owning guarantors with good credit ratings.
Quite commonly the LHA allowance rate is more than the comparable private rent for a house. That being the case we could rent to a DSS tenant. Of course the risk is that under the present rules, the rent is paid direct to the tenant.
To get around this difficultly, we carried out fact finds with tenants to determine whether they had any vulnerability to enable us to get direct payment. For anybody dealing with DSS tenants I would strongly recommend buying the “Guide to Housing Benefit and Council Tax Benefit” published by Shelter. On over 90% of our new DSS tenancies, direct payment of rent is made to us.
Okay, I know – it’s obvious! But what this means is looking at every property on a micro level and reviewing the options available.
It also means initially analysing the current rent and considering:
When I initially did this review for myself, I noticed that I had not increased the rents on a lot of my houses for some time. Many were below market rent and for others, I could achieve significantly more by renting to DSS tenants. After converting my tenants onto direct debit collections, I simply wrote out to confirm the increase, amended the collection amount and sent out new tenancies.
Just to give you some idea of the numbers here. A £10 a week increase might not sound like much. But it’s £520 a year. Or for 100 properties, £52,000. It is therefore worth looking at every opportunity to maximise the rents within your portfolio.
Our systems now automatically prompt us to undertake an annual rent review so that we can look at raising the rent. We recently took on a portfolio of 80 properties for a client. We reviewed these, increased where appropriate, and our system auto-generated rent increase letters. At a stroke the rents had increased by an average of 8%.
Whilst landlords often focus on rents, I maintain that the biggest risks to any portfolio are the 3 cancers that will eat away and destroy cash flow. I discuss the other cancers, maintenance and arrears, later.
When a property is empty you lose out on so many fronts. Obviously there is no rent and you have to pay marketing fees to get a tenant. This is also the time at which a landlord generally spends the largest amount on maintenance – the cost of cleaning, clearing, repairing, decorating, new carpets etc to put the property in a condition ready for the new tenant.
So how can voids be reduced? There is no one answer. The main ways are:
Prevention is better than cure, which is why it is far more effective to set up systems to help the tenant to pay their rent.
If you have payment by direct debit, you can set up the instruction to suit the tenant’s needs. For example, collect the rent on the date that they get paid. Or take weekly payments if that helps them to budget.
Also, you are given a report of missed direct debit payments, so you can call the tenant straight away. Have a system that enables you to collect debit or credit card transactions. You can now get apps on an I-Phone to do this! Best of all, for those tenants who always struggle and prefer to pay cash, you can offer payment cards. There are many providers available who offer these solutions.
If the tenant is on benefits, understanding how to get direct payment from the outset will mean that your DSS tenants will often be your best. The government is paying!
If you have “rent to buy” tenants, each month they pay a monthly contribution to build up their deposit to buy the house. This is forfeited if the tenancy is ended due to arrears. Therefore there is a strong incentive for the tenant to maintain payments.
Quite often you will find yourself in a situation whereby the tenant falls into arrears. This is also an occupational hazard when letting to DSS tenants who are prone to benefits being suspended or changed for a variety of reasons.
It is easy to strike out and accuse a tenant of “stealing” your rent and then unleashing eviction notices to have them removed. However – remember cancer 1! Voids are the biggest scourge of any landlord.
If you discuss the matter with a tenant, they would much rather agree to pay an additional amount on top of their rent to clear arrears over time. If you have payments on direct debit, this can be done very simply by adjusting the payment mandate.
For serial offenders, you can issue Section 8 or 21 notices to serve as a “shot across the bows” and then offer them a solution by proposing a payment plan.
If a tenant is on housing benefit you can request direct payment from the local authority. This is mandatory if the arrears are 2 months, but the council has discretion to pay earlier, so you should always ask.
Mortgage Express estimates that the average property incurs approximately £1,000 of repair costs each year. Now of course you may go one or two years with nominal costs, but then you face the tenant from hell, or the new kitchen, boiler etc, and the big ticket costs really hit you where it hurts.
There are a number of ways you can minimise these costs;
You will see from the above that rent to buy offers a solution for 4 of the key drivers for optimising a portfolio. As well as reducing voids, repairs and arrears it serves as a medium term exit strategy which is particularly attractive if you have low yielding, highly leveraged property. 30% of my own portfolio is now occupied by rent to buy tenants. For each property, upon sale I will clear the mortgage, enjoy a cash surplus and in the interim I benefit from excellent cash flow providing a hedge against rate rises.
I often hear gurus talking about lease options to acquire houses, but little focus is given to rent to buy marketing for tenant buyers. This is where the real money is made. Many people struggle with this aspect because the notion is alien to most tenants and they view the schemes with healthy cynicism. We get around this by providing easy to understand marketing, brochures, and plain English agreements with up to 10 years to buy. All deposits are retained in insurance backed stakeholder client accounts for the tenant buyer’s complete peace of mind.
Progress to Date
My current monthly gross rent roll now stands at £59k, up 48% in 3 years. Next year my forecast is to increase that by another £5k per month and I am well on the way to my target of a 10% yield on debt.
As a result of setting up a lettings business to manage our own properties, we have seen an opportunity to help others who themselves are trapped with fear at the prospect of interest rate rises.
We work alongside a number of banks who have landlords in difficulties, and also with landlords generally. We initially undertake a portfolio review to financially model and stress test the portfolio over 10 years to determine how it can be optimised for higher returns. The review is available to any landlord with 10 or more properties at a one off cost of £500.
We then demonstrate the performance achievable under our control based upon micro management for high yield returns.
We now manage nearly 1,000 properties for portfolio landlords throughout the UK, including Northern Ireland.
WHERE CAN I GET FURTHER INFORMATION?
If you would like a no-obligation portfolio review or further information regarding our services, please click on the logo below, complete the questionnaire and we will contact you within a couple of working days.
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