With the economic downturn brought on by the cost of living crisis, inflation and the steep increase in interest rates, times are hard for landlords and renters alike. The Nationwide House Price Index for October 2023 predicts “housing market activity remaining fairly subdued”, with the “Bank Rate not expected to decline significantly in the years ahead”.
It’s now more important than ever to think about maximising cash flow to get through this downturn. Especially if you’re due to refinance onto a mortgage with higher interest in the coming months.
What can landlords do when faced with economic headwinds of a downturn? How are higher interest rates and stress texts impacting access to finance for landlords?
In this blog post, I share practical tips to help you protect your rental portfolio during this downturn.
Updated: 12 November 2023
Overview: How landlords can survive a downturn
- What does cash flow mean?
- Why is cashflow so important for landlords?
- Access to buy to let mortgages
- What practical things can landlords do in an economic downturn?
- How landlords can maximise cash coming in
- How landlords can minimise cash going out in a downturn?
- What landlords should not do when trying to maximise cashflow
- Potential upsides of economic downturn for landlords
- Final thoughts
What does cash flow mean?
Cashflow is key, particularly when faced with economic headwinds, but what does it actually mean?
Having lost my job in the 2008 Financial Crisis when the start up I worked for ran out of money and couldn’t refinance, I’ve learned a lot about riding out hard economic times. I apply what I learned to being a landlord.
The most important task for businesses in a downturn is to pay their debts as they fall due, otherwise they risk going out of business. They can have the loveliest looking profit on paper, but if it has no cash and can’t keep up with the finance costs, the bank or angel investor might call in the loan on the property.
Focussing on metrics like net profit, return on investment or yield can give investors a false sense of security. What counts in a downturn is cash flow. This is the actual cash that flows in and out of the bank account. A positive cash flow means simply that there’s cash left over in the bank account after paying the expenses.
Why is cashflow so important for landlords?
Why is cash flow so important for landlords? When an economic downturn hits, there’s more chance that others will have financial difficulties, and struggle to make ends meet. For instance, they lose their jobs or run up debts because their income has not kept up with inflation.
Landlords are particularly vulnerable in an economic downturn as rent is usually a renter’s biggest outgoing. This can be a problem if your renters fall into financial difficulty and are unable to pay the rent.
Alternatively, your renters might move out and you’ll need to find replacement tenants. Although this isn’t a problem when there’s a rental property shortage and rents are high, this can change quickly. And even at the best of times, there are usually voids between tenancies where no rent is coming in.
With higher interest rates, and any unexpected expenses like a new boiler or a tax bill, landlords can quickly find themselves in financial difficulties. This is referred to as negative cash flow, when the money going out of the bank account is more than the money coming in. In order to stay afloat if a property has negative cash flow, the landlord will either need to subsidise the mortgage payments out of their own resources, or sell. That’s part of the reason why so many landlords have been selling up.
Access to buy to let mortgages
A crucial issue for landlords during this economic downturn has been the relentless increase in interest rates, after a long period of historically low rates. For landlords whose fixed rate deals are coming to an end, they’re facing considerably higher interest rates, higher fees and stricter stress testing.
Here’s an excellent table from Zoopla using their Q4 2022 data that shows the maximum loan to value and rents needed to meet 145% interest cover ratios (ICR) at 75% LTV. It also shows the maximum loan to value at a 6% mortgage rate to meet 145% ICR for a higher rate taxpayer. Although the data for the rents and yields are out of date, the principles are the same. The average yield across GB in Q3 2023 was 6.4%, according to Rightmove. Some lenders have higher stress tests, eg The Mortgage Works ICR is 165% for higher rate tax payers.
As the table shows, there are very few single lets in the UK that would yield the amount required. This has translated into landlords focusing on higher yield properties. For instance, HMOs or serviced accommodation. Click here for a comparison of the average room rents for an HMO and the rents for single lets per region. Another option to pass the stress tests is not to pull out equity and to have a lower loan to value.
What practical things can landlords do in an economic downturn?
The best thing landlords can do in this economic downturn, particularly while they’re still on mortgages with low interest rates, is to build up a financial buffer to tide them through should their cash flow turn negative. Reduce drawings from the business to the absolute minimum, and concentrate on building a buffer of 3-6 months’ expenses, plus the usual sinking fund of 10% of rent for repairs and maintenance.
If your rental income is your only source of income, the buffer should also include your personal expenses for 3-6 months. This would enable you to survive a while without drawing money from your property business.
In terms of logistics, it’s easy to set up a standing order to pay a regular amount into a separate savings account. You’ll then be more likely to leave it alone and not dip into it, keeping it for a rainy day. This will give you the peace of mind that you will be able to ride out any temporary cash flow problems.
How landlords can maximise cash coming in
During a downturn, it’s important for landlords to maximise the amount of cash coming into their bank accounts. This means having renters that pay their rent on time.
Here are 6 tips to help you maximise the amount of cash you have coming in each month:
1. Reduce voids
When your rental property is empty, you’ll not be receiving any income, but you’ll be paying bills. For instance gas and electricity standing changes, and council tax if your local authority does not give discounts for empty properties. Here is a blog post on saving costs when a property is empty,
To reduce voids, you can either keep the renters you already have, or be very organised if a renter gives notice so you can get the property to market promptly.
If someone serves notice, either get a letting agent primed straight away, or get your property listing ready if you’re letting it yourself. Do think hard about letting and managing it yourself, as self-managing saves an average of around 14% in management fees a year. Take a look at my blog post on how to find renters yourself for tips on self-letting using an online service. It costs a fraction of a letting agent.
2. Careful tenant selection
Tenant selection isn’t easy for landlords at the best of times, let alone during a downturn. Just like interviewing people for jobs, they might seem perfect on the day. However, you realise later that they were telling you what you wanted to hear. That said, at least with rental demand so high, you’re likely to be able to choose from a short list of renters.
In order to have a stable rental income, you need renters that won’t fall into arrears. You can reduce the likelihood of arrears by focussing on affordability (a household annual income at least 2.5x the annual rent, or 30 x the monthly rent) and reliability of income (steady job in “recession-proof” organisation). For self-employed renters, you can ask for proof of earnings in a SA302, which they can obtain from HMRC.
If you’re in any doubt about their financial situation ask for a guarantor to guarantee the rent. For instance, if they are still in their probationary period at work, or self-employed. The guarantor should be able to evidence income at least 36 x the monthly rent.
Here is a worked example to show the affordability calculations:
- Take an example where the rent is £1,500 pcm or £18,000 per annum.
- For a tenant to pass the standard affordability tests, the household income must be at least £45,000, which is 2.5 x the annual rent, or 30 x the monthly rent i.
- The guarantor’s income needs to be at least £54,000, or 3 x the annual rent, or 36 x the monthly rent.
3. Increasing the rent
Increasing the rent is never popular. However, expenses have been going up for landlords as well as renters, at the same time as rents have been sky-rocketing.
Most landlords change the rent at the start of a tenancy to bring it in line with the market. However, if you’ve not put the rent up since before Covid, it’s likely that it will have fallen behind the market rate.
On the other hand, good reliable renters are key to a successful and sustainable rental portfolio. You want to avoid putting your renters in financial difficulty by suddenly increasing the rent by a large amount.
However, during periods of high inflation, if you don’t increase your rent, you’ll be receiving less rent in real terms.
According to the ONS data released in October 2023, the average rent increase in England was 5.6% per annum in the 12 months to September 2023. This includes all tenancies, including existing tenancies. The equivalent figures were 6.9% in Wales, and 6% in Scotland for the same period. This is about the same as the headline rate of inflation (Consumer Prices Index – CPI) in the UK, which rose by 6.7% in the 12 months to September 2023, down from 10.1% in March. It’s above the annual private sector regular pay growth reported in the October 2023 ONS Data, with an average wage increase (excluding bonuses) of 7.8%, ranging from 8.0% in the private sector to 6.8% for in public sector.
Therefore, it’s reasonable to increase the rent by at reasonable amount (say up to 7%). This is less than average wage inflation, and is unlikely to cause financial difficulties for your renters, but it’ll improve your cash flow. There’s no one size fits all approach, and a lot will depend on your circumstances. And certainly, when tenants do leave, increase the rent to the market level for the property.
For more practical information, take a look at this detailed guide on how to go about increasing rents in 2023.
4. Managing existing renters
It’s important to keep the lines of communication open with your renters, so they feel they can talk to you if they have financial problems. Problems can often be averted if they receive help and sound advice early on.
Regular property inspections, say every six months, are a great way of keeping in touch. Not only can you see if any maintenance is needed, but you can also look for signs of financial distress. For instance, piles of unopened bills.
5. Managing rent arrears
It will be particularly important for landlords to monitor rent payments carefully as we head into winter, with the increase in energy bills and general recession. If a renter is late in paying, send a text reminder the next day, as it might just be an oversight. If they don’t pay the next working day, follow up with a further text and a more formal email.
These informal steps are normally enough. It’s a good idea to is encourage your renters to set up a standing order so it’s not late again. However, if there is no reply or payment by Day Four, send a formal letter to the renters and any guarantor.
If the reason for the late payment is that they’re in financial difficulty, put them in touch with support. A good choice is the Citizens Advice Bureau. They can advise your renters whether they’re entitled to benefits. For instance, the housing part of Universal Credit to go towards the rent arrears. Additionally, you may need to be flexible and agree a repayment plan for them to pay off the arrears.
6. Serving notice to evict
Serving notice should be a last resort, after you’ve tried to reach a plan for your renters to repay the arrears.
If, despite all your support, they owe more than 2 months’ rent, you can serve a Section 8 notice of eviction using Ground 8. You give 2 weeks’ notice of bringing possession proceedings, and the court must give possession as it’s a mandatory ground. There is a specific process you must follow to the letter. Take a look at my article on serving and enforcing a Section 8 notice.
You can also serve two months’ notice under Section 21, if the tenancy is not in a fixed term period. However, you must have complied with certain landlord obligations to do so.
Remember, you may need to rely on your messages, emails, and letters before a judge at eviction proceedings. Keep the tone of the messages, emails and letters professional and the content clear.
How landlords can minimise cash going out in a downturn?
The other part of the equation is managing the level of cash you are spending in your property business.
Here are 5 practical tips to help you decide where and how to make cuts in your spending to maximise your net cash flow:
1. How much are you spending?
First of all, you need to keep track of how much you’re spending, and on what. Make a habit of going through your bank statements and updating your accounts at least once a month. Even if it’s just on a spreadsheet or a bit of paper, it’s good to keep track. You’ll be surprised how much little expenses (gas safety certificates, boiler servicing, new carbon monoxide alarms etc) add up. Click here for good value landlord safety checks and boiler servicing. It’s also easy to spend a lot on subscriptions. Do you really need each subscription?
These costs are even before the interest on your borrowing, and any payments to letting agents to manage your property.
If you don’t have one already, you need a separate bank account that is just for your property business. Keep your personal finances separate. You can set up alerts on your banking app to notify you if your balance falls below a set amount. This will stop you from incurring overdraft fees.
2. Prioritise your spending, make cuts, shop more wisely
Once you know what money is going out, step back, and take a look at what you could do without. What are your priorities? Rank your discretionary spend in order of how much value it adds to your business. Then go through each one and ask how it contributes towards your strategy. Alternatively, is it just a ‘nice to have’?
For instance, do you need quite so many subscriptions? Can you look for free alternatives? (Like subscribing to my newsletter and regularly reading my blog posts!) Shop around and look for cheaper options for your standard safety checks. For instance, the annual gas safety certificate and boiler service.
After the mortgage, the next biggest cost is usually the fees paid to letting agents to manage your properties. At an average of 14.4% of your gross rental income, it’s an obvious area to cut back on. Have a think about whether this is something you can take on yourself. For a detailed guide on managing your own properties yourself, click here for my blog post on how to self-manage.
If you have a larger portfolio, you can save lots of money by using property virtual assistances and contract property managers, instead of managing agents. Click here for lots of tips on how to obtain economies of scale in the management of larger portfolios.
Most agreements with managing agents will allow you to terminate the agreement by serving up to six months’ notice. Alternatively, you may be able to terminate by paying a termination fee. It’s worth asking your lawyer to look into it, at the very least.
Finally, don’t just accept the renewal quotation for your landlord insurance. Here’s my guide on how to how to shop around for competitive quotes for the landlord insurance cover you need.
3. Defer ‘optional’ building work
Unless you’re very secure financially, an economic downturn might not be the time for to landlords. to start expensive ‘optional’ building work.
For instance, upgrading kitchens and bathrooms that are a little dated, but in full working order, can be delayed. Replacing chrome taps with black taps isn’t a priority in a recession, unless they’re not in good order.
The payback time of any investment in terms of increased rent needs to be short for it to be worthwhile. You do however need to keep up with repairs and maintenance.
4. Tips for refinancing
With interest rates having increased so much, you might have to revisit your plans to take money out when refinancing. It’ll be difficult to release money if the rental income isn’t 125% of the interest payments or stress rate for basic rate tax payers and companies, or 145% for higher rate tax payers.
One approach is to pay down your mortgage, if that’s allowed, to build up more equity. You can try setting money aside to “create a war fund”, to give you the best options when you refinance.
That said, you need to get advice from a mortgage broker on your particular circumstances. The mortgage market has been in turmoil, and is still changing. This website flags up issues, but is not giving financial advice.
5. Consider self-managing your buy-to-lets
Landlords who use the full management service of letting agents to manage their properties pay around 15% of their gross rent per money for the privilege. There are also often lots of other costs like monthly compliance fees, and fees to supervise repairs. This is a huge amount of money, and is an easy way for landlords to save money.
However, some letting agents have punitive termination clauses, and make it difficult for landlords to leave when the tenant they found is still the property. It will nevertheless be possible to terminate the agreement, and eventually the landlord will be able to take over the management. For more information, I have a detailed blog post on how to terminate contracts with letting agents in the link below.
>> Related Post: How to terminate a management contract with letting agents
>> Related Post: How to self-manage your buy-to-let
What landlords should not do when trying to maximise cashflow
When money’s tight during a downturn, it can be tempting for landlords to cut back on repairs and maintenance. However, this would be the wrong decision.
Your property is a valuable asset, and like a car, it needs regular servicing. If a property is looked after, the renters are likely to be happier. They’ll be more likely to look after the property and less likely to leave. This preserves your income and reduces voids with no rent coming in.
You must also keep up with your landlord obligations for safety checks, such as an annual gas safety certificate. Take a look at my summary of what you need to do.
Do also get your boiler serviced every year. Whilst it’s not part of the compulsory gas safety certificate testing, it is good practice. It will also prolong the life of your boiler. OpenRent offer really good rates for Gas Safety Certificates with £45 as standard, with £15 for additional appliances (prices as of 15 March 2023). You can also add a boiler service for £55 . Click here for more details on OpenRent’s Gas Safety services (affiliate link).
Here’s my guide on how to shop around for landlord insurance quotes. You can also find good deals on other landlord essentials here.
If your property falls into disrepair, your tenant might report you to the local council. If the council serves an improvement or emergency remedial notice, you won’t be able to use Section 21 for six months.
Finally, don’t get behind on your own mortgage payments. If you do get into financial difficulties, get in touch with your lender to discuss a repayment plan.
>> Related Post: Does the average buy to let make money?
Potential upsides of economic downturn for landlords
Although the property market is facing strong head winds, a downturn can be a buying opportunity for landlords.
It’s now a buyer’s market. Properties are no longer going to sealed bids, and although there hasn’t been a property crash, the market has slowed down.
Rents have also been increasing and demand is still very strong. Savills’ Mainstream Rental Forecast published 8 November 2023 predicts that the average rental growth for 2024 will be 6%. Also, the Bank of England’s Monetary Report of November 2023 projects unemployment remaining below 4% until the end of 2024. These forecasts both bode well for 2024.
With the cost of living crisis fuelled by high inflation, which in turn has caused interest rates to increase, the economic downturn of 2023 has been a worrying time for many landlords.
However, focussing on maintaining a positive cash flow as we move into 2024 will help landlords get through the turmoil of an economic downturn.
Unless interest rates reduce, it may be increasingly uneconomic for landlords with the typical 75% LTV mortgage to buy single let properties. Either the rents will need to increase even further, or the property investors will need to have a bigger deposit.
Some property investors have already revised their strategies, turning away from the traditional single let house for higher yields. For instance, converting commercial properties into residential accommodation and single lets into HMOs, as both offer higher returns than single lets.
Nevertheless, try not to think about what’s happening to house prices. Unless you’re wanting to sell or refinance, it’s not relevant to getting through the downturn in one piece. What is relevant, is maintaining a solid rental income to keep up with your bills and mortgage payments.
Last updated: 12 November 2023
You may also find helpful
- A Guide for Success for New Landlords
- How to shop around for competitive landlord insurance
- How to succeed in property investing in 2023
- Which repairs must a landlord carry out?
- How to avoid 5 classic landlord refurb mistakes
- What landlords need to know about energy efficiency and EPC rating
- How to find renters without letting agents
- How to self-manage your rental properties