I remember when I almost bought my first rental property, back in around 2009. This was just after the credit crunch of 2008 which rocked the global financial markets. As a result of this, fear rippled through the world. Banks were bailed out by governments and they became more reticent to lend money.
As a result of all this, house prices dropped by around 15%. This was a big hit, but the world didn’t end. It was a massive opportunity for investing, if you knew what you were doing. This was my moment; interest rates dropped, as central banks tried to shore up confidence and lower house prices meant more affordable investments. I had enough deposit saved to really go for it.
One particular property I found was up for £55,000. It needed a bit of work doing to it. It was an ideal starter for me. A two-bed semi on an estate near me. I had dialogue with the estate agent and gave them the proof of funds required. Then fear took over. I didn’t put an offer in. The property eventually sold. Today, 17 year later that property is worth £200,000. Ouch.
So, what were those fears that took over? I’ve done some soul searching over the years and as I have a portfolio of properties now, I’ve obviously allayed those fears. Here are the 3 biggest fears that stop people investing in property and which I also had.
1. Interest Rate Hikes
The first fear that usually strikes is that interest rates might rise to such a level that you would struggle to pay off the monthly mortgage.
The stress test
This is a valid concern but you need to realise that mortgage companies do what is called a mortgage stress test or Mortgage Affordability Test before they lend on a property. This is designed to see if you can still pay off the mortgage if interest rates rise.
On a home purchase, the mortgage lender will look at your personal income to determine if you could afford the property if, say, the rate doubled. However, for a rental property, the lender assumes that payments will be met from the proceeds of the monthly rent. The truth is that they would not offer a loan if the rents wouldn’t cover the mortgage payments, in the case of an interest rate rise.
Always speak to your mortgage broker to get the best mortgage deal for you. They should be able to give you a steer as to what interest rates will do in the future. In uncertain times this might mean having a fixed rate for 2 or 5 years.
Why rates go up and why that’s good for you
If the lender accepts your loan application, that’s a good sign. The bank has calculated that they will receive their payments, because you will be able to afford it. However, let’s look at another angle to interest rates rising.
Interest rates rise for a reason. It is because of rising inflation. The Central Banks role is to set interest rates to be able to keep inflation at between 2-3%. If inflation rises, they will increase the interest rates to dampen inflation. So, the fact that the banks are raising interest rates is good news for you. It means that inflation is rising and your property value will also be rising i.e. the relative value of your loan is dropping. Inflation is paying of your debt in real terms.
Rents will also go up. There may be a lag between you seeing rents rise in your local area, but they will rise. It is inevitable. Even though you may not be allowed to increase your rents during a tenancy period, you will be able to review them at the end. I would always recommend rent increases a little and often, i.e. if you can raise the rent by at least the level of inflation once per annum, the rent will remain the same in real terms. Remember also that if you have fixed your interest rate, your mortgage repayments will remain the same. A double win.
2. House Price Crash
The next big fear is if there is a housing market crash otherwise know as a ‘correction’. This is a legitimate fear but I need to tell you that you are investing in property for the wrong reasons if a market crash is going to affect you. If you do your due diligence properly then you can sail through a market crash with ease.
18 years market cycle
As you will be buying for the long term, rather than the short term, any market fluctuations will be irrelevant. There is, however, what is known as the 18-year market cycle in property. Over a roughly 18-year period, there will be several phases of this cycle. From the previous crash, there will be a period of stagnation, where nothing much happens and prices remain low. Then market confidence improves. People start buying property again. They feel confident in their financial position to want to move house or invest. Prices therefore start to rise. This in turn creates a boom. You will know when this happens as any taxi driver or bloke down the pub, will tell you to get into property. You can also tell more scientifically with the affordability index of house prices versus income. This is calculated by dividing the average house price by the average annual salary to measure how affordable a home is relative to income. The higher this is, the less affordable property is, or the more overpriced it is.
Eventually the market plateaus as prices stagnate at the new elevated level. The next phase is inevitable. Confidence trickles out of the market and there is usually some external trigger, like a recession, which results in a mass exodus out of the market. The market corrects back to a more realistic level, but not before crashing down to a lower level first. Prices are now under-priced. We are back at the start of the cycle.
This market cycle throughout history lasts on average 18 years, but here’s the important thing. The average house price at each crash is always higher than the previous trough. Therefore, if your time frame is longer than this, whatever happens you will realise capital gains.
A problem for flippers
The 18-year cycle can be a problem for property traders and flippers. They will both need to understand at what point they are in the market. They don’t want to buy right at the high, just before a correction.
Your plan against a market crash
Remember time is your ally. Even if you bought at the height of the market, you would recover in time. You will be up at the next crash.
Also remember that capital growth is your long-term secondary benefit. Your immediate goal is positive cash flow. If you are still cash flowing positively you are good to go. Usually, interest rates also drop at the correction stage or just after. This is an opportunity to augment your monthly profits.
Keep an eye on the current Loan To Value (LTV) of each individual property. See my post Don’t let fear stop you investing in property, where I show you how to work out the LTV with example figures.
Finally, do have some spare cash to pay off capital if your LTV starts to rise above 75%.
3. The Hassle Factor
Tenants are your customers; they pay off your mortgage. Just like any other business with customers, you will need to treat them well and be grateful for them. Before you worry about that, though, you need to get tenants into your property.
Can’t get a tenant
A fear I had before I started, was what if I couldn’t rent out the property. This I’m sorry to say, is an irrational fear. If you can get a mortgage on a property, you can always get a tenant.
I always recommend using a lettings agent at first, to find your tenants for you. You can ask them to do all of the essential background references and credit checks for you. They will also advise you on what rent you will get, although you should already have an idea of what that would be, through your due diligence.
Nonpayment of rent
This is rare. In over 15 years of investing in property, I’ve never had an issue with nonpayment of rent. Yes, sometimes the rent might be late, but luckily it has always arrived.
As your Lettings Agent will be vetting your tenants for you, their reference checks should include former Landlords. They will soon be forthcoming if your prospective tenant has defaulted. You can decline their application if they have.
I’ve had an incidence where a tenant had a County Court Judgement against them. Now this could be a red flag, but there may be mitigating circumstances. In this case my tenant had disputed a bill, with someone else, and was taken to court for nonpayment. Instead of rejecting the tenant I decided to allow their application, but I took some extra insurance against nonpayment of rent, just in case. To date, the tenant has always paid on time.
Repairs and maintenance
Accidents happen from time to time, that’s life. Just like your own home, things break down. That’s natural. This will be more of an issue if you are letting your property fully furnished. I would advise against letting fully furnished, for simple buy to lets. With non furnished, there is less that can be damaged, although it can happen. You can mitigate against this by self-insuring i.e. always having a pot of spare cash available for repairs, for instance if a boiler needs repairing or replacing.
Alternatively, you can add accidental damage to your buildings insurance policy. If your tenant spills a pot of paint on your carpet, you will be covered. Really though, what are the chances of this happening?
For simple ongoing repairs like fixing a toilet or a leaking tap, I would factor in using 10% of your rental income to cover things like this. I have a Buy To Let Cashflow Checker, which comes with my book How to Buy Your First Rental Property. This will work out what your profits will be after all expenses and allowing for repairs and maintenance.
Malicious Damage
I’ve never had an instance of malicious damage to any of my properties and I don’t know of any other landlords who have, however in rare occurrences it could happen. The vetting process of gaining references will weed out the people who are inclined to this behaviour.
In the unlikely event this does occur you have powers to claim the cost of repairs from their deposit, take them to court for damages exceeding the deposit, or evict them by issuing a Section 8 notice.
Fear is Temporary, Regret Lasts Much Longer
If you’re letting fear hold you back from investing in property, you’re not alone. Every successful investor started where you are right now, staring down the “what ifs,” wondering if it’s the right time or if they’re cut out for it.
The difference is, they didn’t let fear win and you don’t have to either.
Yes, interest rates fluctuate. Markets correct and boilers break, but with the right knowledge, tools and mindset, all of these are manageable. The real danger isn’t in buying, it’s in waiting too long to start.
Remember that property I didn’t buy for £55K that’s now worth £200K? That single decision cost me £145K in capital growth alone and it was fear that held me back.
But I learned, adjusted, and went on to build my portfolio. You can too.
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