Each month, Tom Entwistle, a residential and commercial landlord since the 1970s and founder of LandlordZONE, the longest serving website for landlords in the UK, offers a landlord’s perspective on a topical issue.
This month, Tom shares his insights on strategies to help landlords and tenants cope with the cost of living crisis.
Landlord Newsletter
Whether you are a landlord or a tenant, the cost of living crisis is going to be a challenge – a period of increasing costs and lower living standards for virtually everyone.
We read the headlines every day about the UK cost of living crisis: inflation approaching double figures – the highest it’s been for 40 years. Rents, energy, food and building materials’ prices soaring, and the prospect of increasing mortgage interest rates.
And we all know that government debt is near an all-time high, leaving it little room for manoeuvre. Everyone is affected, landlords as well as tenants.
We’ve been through it all before of course, going back as far as the market cycle has existed – but most recently with the 2008/2009 credit crunch, the pandemic and now a post pandemic and Brexit hangover period, coupled with a raging war in Ukraine.
Seldom in the past though – apart from during the world wars – has a situation existed in the UK where one major crisis has piled on top of another, and so quickly.
We’re all waiting for the bills to come in to see exactly how we’ll be affected by this, but we can see it already in the prices of food in the supermarket and the prices of petrol / diesel at the pumps.
You can be sure of one thing: your bank balance will be put under strain. The war in Ukraine and a rising incidence of COVID in China will curtail the global economy, at least in the short term, and all our living standards are going to take a hit.
The forecasts are not encouraging either. It has been estimated that a minimum of around seven million people will fall into financial difficulties this year, perhaps rising to 15 million by the winter, if prices continue to rise on their forecast trajectory.
This is of particular concern for landlords and tenants.
Many tenants will struggle to manage their bank balance, and rent payments could become a major casualty, resulting in landlords struggling to keep up mortgage payments.
This has come at a time when a significant proportion of tenants and landlords are already facing hardship. Many were furloughed or lost their jobs during the pandemic, small businesses struggled to make ends meet and took out loans, and landlords suffered rental income shortfalls trying to help out their tenants.
Unfortunately, there’s no indication yet as to how long this period of hardship is likely to last. A lot depends on the progress of the war in Ukraine, whether it reaches a resolution soon, and the COVID situation in the far east, as well as how well the UK economy adapts in the long term to a post-Brexit world.
Interest rates will inevitably creep up over the coming months to try to get a grip on inflation, but the danger there is higher interests rates could slow down an already struggling economy, leading to what is known as “stagflation”, a situation where prices keep on rising at the same time as the economy slows down.
There’s a very fine and difficult balance to strike here for the Chancellor, given the measures the Government must take to ensure the country does not dive into another deep recession.
Any cost of living increase will hit the poorest households hardest because a far bigger proportion of their income is spent on paying for rent, heating and food, and it’s these very items whose prices are rising fastest. What’s more, the poorest households have the least amount of savings to fall back on.
When hard times come they have to rely on social benefits’ payments, government handouts such as the windfall fuel payments now proposed, and the largesse of their landlords.
The average savings per household in the UK are currently around £76,000. This figure takes into account the average total liquid financial wealth of households such as current account balances and savings accounts, ISAs, shares, bonds, trusts and other formal financial assets.
Most households, however, have far less than this as a cushion to tide them over the bad times. That’s because this “average” figure is skewed due to a smaller number of households having savings that are far above this level. The median figure is perhaps more helpful as a guide, and this shows that 50 per cent of households are above the median and 50 per cent below a median figure of £12,500. In fact, 30 per cent of UK households have less than £600 saved and 10 per cent (one in 10) have no savings at all.
Of course, landlords can’t just increase the rent whenever they like, or by any amount they like.
During the fixed term of a new tenancy the rent is fixed and the landlord can’t increase it. But on renewal, or when the tenancy is periodic, then the rent can be increased by agreement and by following the rules set down in the housing acts.
Tenants should think about locking in to longer tenancies so the rent remains static for longer periods.
Landlords usually appreciate the security of longer term tenancies as do tenants, especially those with children at local schools, so tenants should be encouraged to negotiate with their landlord for a long tenancy, and landlords should be open to this.
For landlords, there is absolutely no point in setting the rent at a level the tenant cannot possibly afford. If the market rent (the going rent for similar property in the same location) is more than the tenant can afford, then it may be possible to agree a payment plan in the short term that the tenant can afford to pay.
This can either be at a reduced rent as a loan or a gift, but in the long-term the tenant may be looking for something cheaper.
Landlords should try to help, and statistics show that most do, offering rent holidays or repayment plans when there are temporary hardships like redundancies, job changes, illness, marital problems etc.
Losing a good, reliable rent-paying tenant will cost the landlord more in the end. It costs time and money for a landlord to turn around a tenancy and install a new tenant, and there’s always uncertainty with new tenants, so both landlords and tenants should bear that in mind if they have to negotiate a temporary reduction.
Both tenants and landlords should make themselves aware of what the going rate is for similar types of accommodation in the immediate locality, so that they have a good guide when they approach their negotiation with one another about rent levels.
The short answer is perhaps to anticipate problems in advance and act as quickly as you can – procrastination is the worst thing to do when rent payers or landlords are in trouble. The longer answer is actually, you can do quite a lot.
Building up a savings cushion to see you through the difficult periods is a habit both tenants and landlords should pursue.
Saving money every month, for those that can, is an important part of dealing with your debts and avoiding them in the first place. Saving may mean cutting out some luxuries. Cutting some of your discretionary spending, if you have some, can keep a budget on track and cover planned expenditure, like an MOT on the car, or those pesky unexpected bills like an appliance breakdown.
The best way to budget – and I have always used this when I have been planning a project, and especially when finances are tight – is a cash-flow forecast or budget.
This is a fairly simple device anyone can use who’s familiar with building a spreadsheet. It is a 12-month forecast of your income and expenditure which tracks against your bank balance throughout the forthcoming year. It can be a rolling budget so as one month falls out, another is added at the end, so it is always for a full 12 months.
It lists an opening bank balance at month one, to which is added all your income: wages, salaries, pensions, rental income if you have any, etc. Deducted from all these items of income are your total cash payments out that month: rent, electricity, gas, insurance, council tax, miscellaneous spending – everything you pay out.
If you have set up monthly direct debits for a lot of items it makes the budgeting task easier. The opening balance, plus income, less expenditure leaves a closing balance, which is transferred to the opening balance of month two. It should also reconcile to your end of month bank balance. Eventually the whole forecast ends with the closing balance on month 12.
You can find rental property spreadsheet templates online, for example here.
Usually, your future income is easy to estimate reasonably accurately, it’s your future expenditure that’s more uncertain.
Most expenditures can easily be worked out monthly, but some payments are “lumpy” and come at different times in the year, or are totally unexpected. You need to have enough cash ready to pay for these when they occur, for example, car service, school uniforms, gifts to buy.
As you complete your forecast you need to work out or estimate just how much extra to add to your outgoings each month to cover these occasional costs. By gradually building up a savings reserve you will plan ahead for these costs and have a cushion of cash behind you.
If you are running a landlord business, or any other business for that matter, one great tip I picked up from John Timpson of shoe repairing business fame is: compare your bank balance today with the balance on the account the same day last year.
It will, if you make allowances for exceptional items, give you an accurate picture of how your business is doing – improving or the opposite. Good businesses gradually build cash balances.
Keeping costs low does not mean skimping on essential items. Whilst all successful businesses keep a close eye on costs, and minimise them wherever possible, items like insurance and essential maintenance should never be skimped on.
Your insurance policy needs to reflect the replacement value of the property at all times, so index linking the cover is a sensible precaution. Essential maintenance items like leaking roofs, gutters, downpipes and drains should be tackled without delay because they have the potential to cost you far more in the long-run.
Make a point of visiting your property when it’s pouring with rain and also light rain: are there any signs of leaks? Water running down walls will deteriorate masonry very quickly and any water leaking through to the inside will necessitate re-decoration. Remember, a stitch in time…!
The other thing I would not skimp on is paying for a professional inventory when starting and ending a tenancy. A good independently prepared inventory and check-out is essential if you want to stand a chance of recouping losses through a deposit claim.
Perhaps the biggest saving landlords can make is by managing the property themselves, rather than paying an agent to do it for them. Ten to fifteen percent of the rent is a big item.
But of course you need to weigh up whether you have the time to self-manage. It may not be a practical option if you work full time and/or live a distance from your rental property.
Other big savings can be made by learning to do it yourself (DIY) – maintenance, repairs and cleaning / decorating during change-overs are all tasks that can potentially be done by any landlord and can save a considerable amount of money.
If you are dealing with shortfalls, a budget like this will help you identify the gaps in advance, so you can take the appropriate action.
For example, if you are a tenant and things are getting tight six months out, where can you cut expenditure? Can you cut out those visits to the cinema for a while? Can you quit smoking? Can you approach your landlord for a temporary rent holiday? Can you claim more social benefits?
If you are a landlord, can you cut costs on travel? Delay refurbishments? Can you manage your properties yourself instead of paying someone to do it for you? Can you re-mortgage at a lower rate or negotiate a mortgage holiday? The cash flow budget will make sure you are being proactive and on the front foot, always an advantage when negotiating with officials.
The so-called “cost of living crisis” is going to be a tough time for all of us.
As it stands, and as I write this, there is no end in sight, no real light at the end of the tunnel, so we don’t know how long it will last. It will certainly be with us through next winter, but we live in hope that the gloom will start to lift soon after that.
Tom Entwistle has been investing in and developing commercial and residential properties for over 40 years. Tom founded the first landlord website, LandlordZONE, in the UK back in 1999. And has been a regular contributor to the website, real estate journals and a speaker at property events for over 20 years.
