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Investment Property - Managing Risk - It is vital you have a thorough understanding of
the types risks associated with Buy to Let, the likelihood of these risks
actually occurring, an understanding of the potential financial impact if one of
these risks and how to minimise these risks and the cost of doing so. The risks
are numerous but manageable if understood and planned for:-
Firstly, one of the biggest perceived risks is
that the price of investment property unexpectedly falls and your
investment is in negative equity. The financial impact could be that you cannot
realise a capital profit goal, as your investment property is not even worth the
outstanding mortgage. However, if regular income is your aim, a property price
crash in year 5 of a 25 year mortgage, may not impact you at all!, (as prices
trends rise in the long term). The only way to really minimise this property
investment risk is to hold off from making your investment until property prices
have corrected themselves. The downside is that prices may not crash - they may
even continue to rise leaving you in a worse position in the longer term;
Secondly, a more practical risk is that once you
have purchased your investment property, you find you have a period with no
tenants (void period). This may occur because a tenant leaves (following
notice periods) because they have unexpectedly lost their job, got divorced,
become ill etc. In order to minimise the investment risk, you may wisely adopt
“rent guarantee” insurance. Typically, if you use a Letting Agent, part of their
package might include guaranteeing three months property rental income in the
event of not finding tenants. In practice, an agent should normally be able to
find new tenants very quickly (within 3 months) anyway. You should assume some
void periods in your Plan before you make your buy to let investment – this is
realistic and sensible planning;
Thirdly, another risk is that mortgage
interest rates rise, (thus increasing your monthly mortgage repayments).
Although this is possible, it appears unlikely in the current climate; The
Government devolves responsibility to the Bank of England’s monetary policy
committee (MPC) to set interest rates. However, the MPC is not tasked to try and
lower house prices – their only brief is to attempt to set interest rates to
meet the overall long-term inflation target of 2.5%. In addition, Euro
convergence implies a reduction in interest rates to meet political objectives,
not a rise in rates from their present levels. To minimise the risk of rising
interest rates impacting your mortgage costs, you could adopt a fixed rate
mortgage rate product. The worst-case financial impact is that your property
mortgage payments exceed your rental income as a result of an unexpected rise in
interest rates.
Fourthly, there is a risk that your new
tenants refuse to pay rent for some reason. Non or late payment of rent is
the most common cause of dispute between landlords and tenants. Alternatively,
squatters may enter the investment property during a void period. The worst-case
financial impact is the cost of employing legal professionals. In order to
minimise this risk, Legal Protection insurance provides cover for any legal
costs incurred in pursuing the tenant for any breach of the tenancy agreement.
Fifthly, tenants damage your investment
property. How realistic is this- Certainly most people who rent are not
emotionally attached to the property. However, you or your agent will have
credit checked them, obtained a deposit and rent in advance before letting them
access the property, so the tenants should be motivated to protect their
deposit. In order to minimise this investment risk, it is worth investing in
Legal Expenses Cover; this pays for legal expenses (in the event of accidental
or deliberate tenant damage), which needs to be resolved through legal means. In
addition, you may consider adopting an emergency assistance policy to minimise
the cost and hassle of emergency repairs.
Lastly, it is critical that you comply with
statutory regulations designed to protect the safety, well-being and
basic rights of your tenants. If you fail to do so, you could risk facing £5,000
fines and/ or criminal proceedings of up to six months in prison. In particular,
you must comply with The Furniture and Furnishings (Fire & Safety Amendment)
Regulations 1998, Smoke Alarms (Building Regulations 1991), Gas Safety
(Installation and Use) Regulations 1994/8, Electrical Equipment (Safety)
Regulations 1994, The Housing (Management of Houses in Multiple Occupation)
Regulations 1990 and aspects of Public Liability law.........
To find the best way to
quantify these risks view our buy to let calculator software - please
click here...
