List of the ways I could lose money

[BlueSkies]

Hi
Maybe I'm being negative, but what are all the downside risks (ways of losing money) from property investing?
And the way to manage that risk so you lose as little as possible.

Here is my list - please comment/advise!
1. Increased interest rates.  Manage by making sure you are still cash flow positive even if they increase by +1%

2. Property market crash.  Manage by making sure I wont need the cash that would force me to sell during a crash.

3. Reduction in rent value.  Manage by working out what happens if rental income is reduced by 10% and make sure it's still cash flow positive.

4. Government make it even less profitable for private landlords.  Not sure!

5. Fire etc.  Manage by insurance.

6. Keeping up to date with the rules and regs.  What is a good website for that?

7. As a general tool, put the properties in limited companies in my partner's name so if something goes wrong, it doesn't infect the assets in my name.

[DezzaT]

Hi blueskies

For number 6 on your list, you could become a member of the new NRLA (previously the separate RLA and NLA). They help you keep on top of rules/regs and send out weekly newsletters. Other sources of information like networking events, podcasts, property magazines and forums may also help.

A couple of other potential money drainers...

• If you're refurbing/developing, another way to 'lose' money is underestimating amount of work needed or employing a cowboy builder. This risk can be minimised through research, contacts - through recommendations/network. 
• Dodgy tenants - whether they're non-paying or cause damage, you may need extra funds to repair the property or spend on legals to evict. Good referencing to minimise risk

[Dino V]

Depends on your strategy, but it sounds like you're looking at simple single let, so:

1) Mortgage lenders will stress test an application at 5.5% interest and 125% rental cover if ltd company, so if it passed at that, you'll be ok. The best way to protect against it is to fix your interest rate. You'll pay a bit more (and they don't stress test if 5+ year fix) but you get the certainty.

2) Only a problem if you need to sell or remortgage and the value would mean the new mortgage was less than you owed. A market crash is generally good if you don't, as rental demand increases hence less voids and often rent increases.

3) Unlikely, especially for a single let and rents usually rise at the rate of inflation, taken over a few year period. But making sure it works with lower rent (don't forget to allow for voids and maintenance) is sensible.

4) Who knows. But a Labour govt would have been worse, so hopefully nothing too serious in next few years. I also hope they've realised that the private sector is required unless they're planning on building hundreds of thousands of social houses. The rogue landlords need to be removed, but they could do that with their existing legislation rather than trying to bring in more that the rogues will ignore.

5) Exactly

6) Rob Dix's how to be a landlord is good and is going to be updated, although always tricky to keep on top of everything. For that reason, and not wanting to be at someone's beck and call, I'd suggest a letting agent. Sure, you're giving up 6-12% of the rent, but it's an allowable cost and makes property almost passive.

7) Bit more complex. Basically, if they're in a ltd company, you've got limited liability anyway, so it wouldn't matter who's name the company was in. But if you take out a mortgage, each director would need to give a personal guarantee, basically that the director's would be liable for any shortfall if the mortgage was defaulted. You could therefore put them just in your partner's name, but they would need an income of at least £25k outside the property to be eligible for a mortgage and, if you ended up in default, they'd come after your partner, which could well mean your assets as well. You'd also have more issues getting the money out, as there would be a single director. Might not matter so much short term if your salary is a lot higher, but longer term it would be easier to get the money out with minimal tax if you could both take it. Since you're being risk averse, you need to consider what would happen if you were to split with your partner - the properties would be in their ltd company, so nothing to do with you unless you could show you had a right over them, which could then leave you liable for mortgage fraud. Basically, do whatever is right for your circumstances, not to try and avoid a potential theoretical problem.

 

One issue with all the mitigations you are planning is that you may find that no property works. If that is the case, consider what the risk of everything happening is - mortgage rates increasing and rents falling, for example. Chances become much less, so make sure you're not double counting the risk or you'll never start 

[BlueSkies]

Advice very very much appreciated thank you!

Couple of comments:
1. Regarding the limited company, good advice that it's what works in your situation.
Mine is that my partner and I are not legally married although we've been together for nearly 20 years, and my salary is in the 40% income tax bracket. 

So the limited company works assuming we trust one another and she has a lower tax bracket for getting the money out, plus you can deduct the interest 100% in a limited company.

In general, I do also have a huge concern about the whole economy and a sudden shock, causing high interest rates, inflation/deflation etc. etc.  I know everything feels OK now, but from what I know there is a huge bubble waiting to burst.

So the putting the BTLs in my wife's name is really just to help protect against that - the limited company is for the interest tax deduciton.

2. "One issue with all the mitigations you are planning is that you may find that no property works. If that is the case, consider what the risk of everything happening is - mortgage rates increasing and rents falling, for example. Chances become much less, so make sure you're not double counting the risk or you'll never start"

I agree!  My objective is to make sure I know what they all are and manage away as much as possible.

[Kent614]

You could add political / social unrest. 

Maybe it seems very unlikely, but possible and does happen. 

I have a property in HK. The property value and rental demand has fallen after 6 months of protests. I didn't see it coming and it didn't seem likely before it happened. 

Completely out of expectation and out of my control

[BlueSkies]

6 hours ago, kent614 said:

You could add political / social unrest. 

Maybe it seems very unlikely, but possible and does happen. 

I have a property in HK. The property value and rental demand has fallen after 6 months of protests. I didn't see it coming and it didn't seem likely before it happened. 

Completely out of expectation and out of my control

That's a really good example thanks! 

My view is that you don't even think about those things happening as they seem so unlikely, but within a 30 year investment horizon, extreme things are definitely going to happen at least once. 

[Conrad_Paton]

Hi Blue,

If you are thinking of the risks that can effect your investments in the next 15, 20 or even 30 years or so...the main one I see is this...

BELIEVING PROPERTY INVESTMENT IS EASY!

doing minimal or no research and doing the following:

Paying to much for your property and/or one that is not suitable to your prime rental market.

Spending too much on your refurb (if any)

Believing everything that the agent selling the property is saying.

Not paying off you debt/mortgage and spending your rental income on lifestyle choices (giving up work because you have a property or 2 producing positive income etc)

Banking and hoping that your property goes up in value over the term of your investment strategy or mortgage.

Hoping you tenant is a good one.

Hoping your letting agent is a good one.

Hoping your conveyancer/broker/builder/accountant/handyman etc is a good one.

Or anything else you are basing on Hope!

Selling for less than your property is worth.

Etc etc etc...

To combat these I advise research over guesswork.

You will be surprised how many people I meet or advise that believe all the hype about property investments, and cannot see any negatives because the media (both social and conventional) are full of success stories.

For everyone that is buying below market value and winning, there has to be a vendor that is selling for less than their property is worth. It sounds simple...but people forget about the losers in property.

You are very wise to bring this subject up! 

I congratulate you.

Conrad Paton