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Prepare for a potential rent arrears spike: Experts’ best practice advice

Buy-to-let landlords are being urged to prepare for a spike in rent arrears ahead of changes to the furlough scheme this weekend. 

The furlough scheme has seen the government pay the wages of millions of workers throughout the coronavirus pandemic, but the first set of changes are soon to come into effect.

From Saturday 1 August, firms will be asked to start paying National Insurance and pension contributions for the first time since April. 

From September 1, companies will be required to contribute 10% of furloughed staff’s wages, rising to 20% in October before the scheme finishes at the end of that month.

The concern is that closing the government scheme which is paying furloughed workers' wages could push up unemployment, leaving many renters in financial difficulty and unable to pay their rent. 

“Rent arrears may spike again in the coming weeks and months as tenants’ finances are affected by a combination of changes to the furlough scheme and easing of lockdown restrictions,” said Neil Cobbold, Chief Sales Officer at PayProp.

“The job retention scheme has helped to keep people employed and subsequently allowed many tenants to continue paying rent but as it starts to wind down, letting agents and landlords should prepare for more tenants to fall behind on rent again – or, in the worst-case scenario, not be able to pay at all,” he added. 

PayProp analysis shows that the average tenant in arrears owed almost a fifth more in May than they did in January.
 
Having a high number of tenants behind on their rental payments is problematic, but if the percentage of monthly rent they owe continues to rise, this will compound the pressure on landlords’ finances.
 
Cobbald continued “An increased number of tenants in arrears combined with rising debt per tenant presents a double whammy of lost revenue with landlords losing out on monthly rental income and agencies potentially losing out on management fees. 
 
“Agents need to focus on how they can recoup tenant debt and reduce the chances of arrears getting worse in a way that is affordable for both tenants and landlords. This will help them to protect their own income as well as that of their landlords in a sustainable way, given the increased financial difficulties that renters are facing.” 
 
To help ensure rent arrears are recorded and managed effectively, PayProp advises landlords and letting agents to digitally record all payments and missed deadlines.
 
Cobbald added: “It’s important that agencies track arrears on behalf of their landlords so that they can attempt to recover debt and don't have to write off the tenancy as a lost management fee in the future. 
 
“Chasing arrears may seem like hard work with uncertain chances of success, but if this process is automated it can free up time and ensure no communication is missed – as well as building a clear paper trail for a potential eviction process in the most extreme cases. Opening up a dialogue with tenants is key to reducing the impact of rent arrears. 

“In the long-term, agencies can manage arrears more effectively by ensuring all tenants are thoroughly vetted, while having the technology in place to record all payments and deliver automated reminders to improve payment rates.” 

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    Surprise, surprise! yet another blow, and probably the death knell for many landlords.
    Better get out of the ever-increasing and horrendously risky business of letting out your property, before total bankruptcy and losing everything you saved and worked for..Games up!

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    The game could be up for highly leveraged landlords, but those of us that own our properties are better placed to weather the storm, I've said for a long time we need to be very careful who we rent to, no benefits, no one under 25, no single mums and no all day curry eaters, better an empty property than a property with a rouge tenant in, and there are plenty of good tenants out there.

     
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    If I was in that position, I would prepare as much of the red tape as possible and be ready to go and assume that these stinking robbers and thieves will certainly NOT pay and just evict them anyway, before the Govt. makes any more changes and before Sec. 21 goes.

    And then be VERY careful and vigilant of your choice of future tenants....

    And DO IT NOW!

  • Paul Barrett

    Feckless tenants with reduced costs whilst being furloughed should have built up some savings so that they can pay rent.

    But most such tenants will just refuse to pay rent.


    They know they will be able to live rent free for years as the eviction case backlog will take that to clear.

    Unless leveraged LL are able to resource mortgage payments then many will be bankrupted.
    Rent defaulting tenants know there is little chance of any LL being successful at civil recovery of rent arrears from them.

    The ending of significant furloughing will signify the end of BTL.

    BTL LL will finally realise that it is simply too risky and that to survive they need to reduce all properties to unencumbered status and if they can't they will need to sell.......................if they can!

    For unencumbered LL it will just be annoying not having the rental income they are rightly used to.
    But they will never face repossession.
    Unfortunately many LL will be having their BTL properties repossessed.

    The feckless tenants walk away scot free!

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    You have confused me somewhat with your previous posts. In one, you claimed you weren’t making a profit. In another, you claimed that your properties were profitable. Which is it?

     
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    I think the problem will lie with those FECKLESS landlords who have over leveraged in the hope of making profit without having a sense of prudence. Instead of purchasing that extra property, they should have anticipated that something like Covid may occur and kept that money to save for a rainy day. Too many feckless landlords are overextending themselves and when they go bankrupt, the taxpayers will have to pay to feed them and house them. Feckless, feckless, feckless.

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    Up to a point I do agree with you Lee, It is foolish to borrow too much, however tenants are expected to pay their rent, they signed the contract, private sector landlords are not charities .

     
  • Paul Barrett

    Surely it is lenders being feckless!?
    In light of things now lenders perhaps should have only lent what the LHA rate could afford.

    It seems the industry average of 75% LTV is now feckless.
    But irrespective of that tenants signed a contract which they should comply with.
    They should have resources to pay rent in the event of sudden income loss.

    In light of what has occurred I wouldn't consider it unreasonable that the PRA insists that any BTL lending must be supportable by LHA.

    They should certainly insist on this for all new lending.
    Of course this stricture would essentially destroy the BTL sector.
    I'm fine with that.

    I personally wouldn't mind selling off properties to reduce to one that LHA could support.
    I reckon for all my costs to be met by the available LHA would require me reducing to about 20% LTV.

    LHA rates for my flats are about £700

    Out of that with no profit element I would need to deduct £200 in SC and GR.
    Plus an amount for repairs
    Then the ridiculous S24 taxes.
    I reckon out of that lot I would be left with about £350 to support a mortgage.
    With such an amount my LTV would need to be reduced massively.

    It seems relying on tenants to comply with their contracts is indeed feckless.
    Govt supports tenant fecklessness.

    It won't allow LL to try and operate their business.
    That is feckless in itself.

    LL certainly need to make themselves far more resilient.

    The only way most LL can achieve this is by selling off properties.

    Certainly if I was wishing to remain in the AST PRS I would now reduce my leverage to that which could be afforded by LHA and to cover costs.

    My rents are currently double the LHA rate.
    That just about services all my costs.

    Clearly I am in a very vulnerable position.
    Whilst being currently profitable I fully appreciate how tenuous that situation is.

    Based on what LHA can afford if I was staying in the PRS I would be working to having no more than about 20% LTV.

    If LL adopted such sensible financial resilience strategies there would be mass tenant homelessness but that would be just tough.

    Leveraged LL have now seen how exposed they are.

    The current lender criteria needs to be revised to reduce leverage to that which can be supported by the prevailing LHA rate for that property type.

    This CV19 crisis has fully exposed the flakiness of relying on rent to pay mortgages.

    I believe for business resilience it should be the object of LL to substantially reduce leverage mostly achieved by selling off properties.

    Remember LHA is like a guaranteed Govt contract.

    There are of course all the well known hassles of LHA but still if LHA is payable and supports a LL business then that is better then nothing.
    It is just LL will need to rejig their business so that LHA will get them through things until they are able to charge market rents.

    That of course would result in LL being far more profitable as their leverage would be far less.

    That would mean tenants would have resilient LL who could survive on LHA rents.

    But achieving this will mean a vastly reduced PRS and many more homeless.

    That is fine with me.

    I DON'T object to being forced to be more financially resilient
    It will just be tough on all the tenants who won't have so many properties to choose from.

    In extremis perhaps the PRS should return to how it used to be.
    So cash only.
    The BTL sector houses about 3 million.
    If LL start to reduce to unencumbered status who will house those tenants!?

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    Well Yes Paul the lenders have been freckless but that is how lenders work until things start going wrong, I have had banks and lenders wanting to throw money at me, but I'm not that daft, and your last sentence, who will be housing all those tenants ? local councils are going to have a big problem aren't they ? not my problem though

     
  • Paul Barrett

    Ultimately if LL did take steps to be really resilient I can't see Govt allowing millions of homeless.

    As the Govt has found a magic money tree I believe Govt will ultimately buy the property from the LL leaving the tenant in situ and perhaps forgive the CGT by say 50%.

    It cannot allow tenants to be homeless.
    Providing the offer to the LL is effective then there could be a very expensive but vital expansion of the social housing sector.
    Most of society would support such massive expenditure.

    But by doing this Govt would be destroying its own ridiculous mantra that getting rid of LL frees up property for FTB.

    Completely bonkers ideology of course because BTL properties haven't prevented any FTB from buying.

    We all know it is lack of deposit and mortgage affordability.

    This CV19 situation will occur again.

    LL need to ensure resilience.

    I intend to achieve that by not being a LL.

    LHA I believe should be the maximum rent allowed to support a BTL mortgage.
    Effectively this would require a massive deposit which few LL could source.

    In all but name it would mean the end of the BTL sector.

    Govt could easily buy up all the BTL mortgaged properties for the Social housing sector.



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