How Private Landlords Can Begin To De-risk Their Business
Posted: 1 wk ago
Read time: 5 mins
All landlords can attest to the fact that there have been quite a number of changes that are and will continue to impact the way they do business. Interest rates have gone up significantly, input prices are going up, regulations have changed, and new regulations are on their way. In this article, we will look at three things private landlords can do to de-risk their business.
Real estate investors should continue to remain cautious as the trajectory of inflation rates, and by extension, interest rates is not entirely clear as yet. Private landlords with a fairly large portfolio of properties - 4 or more - should be looking to use a portion of his/her cashflow to pay down mortgages where possible. If mortgage pre-payment is not an option or is too expensive, a portion of the cashflow should be placed on a fixed deposit where it is possible to earn 3% to 4%, offsetting a portion of the higher interest payments on debt.
Interest rates have risen sharply over the last 2 years on the back of a rapid rise in the Bank of England's key policy rate as the institution tries to fight inflation. Over the last two months, there have been signs that the inflation rate is trending down, leading to renewed optimism that the rate hiking cycle could be coming to an end. While the Bank of England, as have many central banks across the world, pointed to the possibility of an end to the rate hiking cycle, they have also hinted at the possibility of sustained high rates going in the future.
While a lot of the slowdown in price growth came on the heels of more modest energy price increases and a slowdown in global demand, there are other risks to consider. Global wheat prices continues to remain volatile on account of the postponement of the grain deal between Russia and Ukraine, and continued tensions in the black sea. Furthermore, OPEC+ appears committed to maintaining tight supply conditions in a bid to set a minimum level for global energy prices. Latest wage data suggest that there is still some wage inflation in the economy, with the level expected to rise with continued public sector strike actions. Such market dynamics are likely to keep prices elevated even in the context of an economic slowdown.
With the Renters Reform Bill working its way through parliament, private landlords should be examining ways to boost their maintenance fund. It is quite clear that Downing Street is seeking to raise the quality of housing to a level that they deem acceptable - which is subject to opinions. The Decent Homes Standard is currently only applicable to the social rented sector but is expected to be expanded to include the private rented sector when the bill is passed. Private landlords will therefore have to consider allocating more funds to ensure that their properties:
The government will be providing guidance on what they consider to be "acceptable standards" through a new property portal and other ongoing efforts. Nevertheless, for practical purposes, it is likely that a new property ombudsman will have considerable influence on what characterises "acceptable standards".
Further consideration also has to be given to the likelihood that wear and tear on each property may increase as the government forces landlords to take more tenant risk. Under the bill, landlords will be in breach of the law when they refuse to rent to tenants who receive benefits or who are with children. Landlords must also allow tenants to have a pet in the property upon request. Fortunately, landlords will also have the right to ask for pet insurance in such circumstances, which may offset some of the cost of the wear and tear in extreme situations.
One of the big questions private landlords need to be asking is whether they can reduce operational costs and streamline their operations. Such a question is even more important given that costs are generally on the rise. Through the use of technology, private landlords can do more with fewer resources, and with minimal additional financial demands. One of the key areas of ongoing work for a landlord with multiple properties is the area of tenant management. The specific areas of potential efficiency gains are:
There are quite a few property technology companies out there that are able to offer these services, but remember the goal is to keep your cost down while accelerating the speed at which you get things done. When you look at these services through the efficiency lens, your range of options will narrow considerably. There are software companies that will do it all, but then ask yourself at what price, and at what quality. It is very rare for a company to be exceptional in all the specific areas highlighted, and so you may need to mix and match. There are software companies that specialise in a single area, but with specialisation, the cost may be higher. Private landlords need to find a provider that strikes the right balance between cost and quality.
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As private landlords look towards the future, a future that many people are calling a new norm, they should be looking at ways to innovate and adapt. So far things are shaping to be a more difficult operating environment, one characterised by higher costs, and higher interest rates. In such circumstances, private landlords must also think about productivity and better financial management, which will create the flexibility to respond to changes in the market.