Interest Rates Piece

I find it fascinating.

Investors are shouting from the rooftops about how their property portfolios are making great cash flow.

The Question is?

Am I the only person in this country that sees all this as artificial?

With interest rates at the lowest for 400 years and such demand for rental property it wont take a lot to reverse this fact

Let me explain it this way to you

If you are a landlord you need to read this now!

A scenario for you!
You have a BTL mortgage. It nets you strong positive cash flow. You’re pretty pleased with yourself and everything is hunky dory.
The mortgage payment is low.
The rent is high and as you know is governed by supply and demand.  And there is HUGE demand from the rental sector at the moment.


Here’s the truth

You and I know rates will rise don’t we?  The experts are predicting 2013-2014 before rates go up.
Well I can’t predict exactly when they’ll rise but I know they will when everything is stable and lending gets back to some sort of normality.

Then you are aware rates are going to go up so what will that do to your cash flow?
Well I hear many experts wisely advise investors to stress test their portfolios at 7% and I strongly recommend this too.


Before you do, think about this.

What happens when things get back to normal?

The property market starts to heat up with all that pent up demand!

Remember when I said that rents are high, why do you think that is?
Because people couldn’t get mortgages they rented instead
so when will they start buying again?
You are ahead of me!
They will be buying when everything gets back to normal.
So what will happen to rents?
Come on don’t fool your self!

We have to remember supply and demand.

Two things will happen

1.    Rents will drop from the highs you and I see now.

2.    The quality of the tenants will drop dramatically. Which I will explain why in a moment

It’s interesting to hear people’s views on this as I was speaking to a very well known property expert the other day.


He said
“We are an island, rents are getting stronger because the population is growing thus causing rents to rise”.

Now on the surface this makes sense.  But he forgot to include psychology in his equations.

You see…
As tenants, people have no rights to tenure, 
In other words they have NO certainty when renting.  Now put yourself in their shoes, the shoes of a reasonable person who wants to get on in life, the sort of tenants you would want.
They are thinking of starting a family and when people do that they usually want a lot of security. The last things they want is an AST for 12 months where the Landlord at any time could give notice.

They have no choice but to buy a house.

So rents tumble and so do the quality of tenants.
Now think about that magic cash flow – rising rates, tumbling rents plus voids and non-payers.

Does it seem as special now?
But I’m not trying to put you off…
Far from it…
Only setting the possible scenario, which in my view is realistic.
So what can you do to protect yourself?
Well here is the answer!

Build more cash flow from other sources!
More businesses go bust because of lack of cash flow than lack of profit.
It will kill any business quickly.
What options do you have as a property professional?
And that’s the clue… in the question, you’re a pro
If you are a landlord you are a property professional!
So do what other pro’s do?
Trading gives a chance to make massive cash flow and cash that help ‘s you in the future.
There will be times when maintenance, lower rents, high borrowing and voids all eat away at your current position.
It’s all about covering and there is no better way to do that.

Filed under: Property | Posted on May 7th, 2012 by PaulRibbons

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