5 lessons from the ‘crunch’
A landlord’s life is full of lessons.
“I wish I’d bought there or not bought that property or invested in more properties here. I wish I hadn’t let to that tenant. I’d wish I’d taken out rent guarantee insurance ”
I’ve decided to reflect on the major lessons I’ve learnt as a landlord now that we are several years on from the start of the credit crunch about managing a letting and investment business through a downturn and beyond.
1. Don’t trust ‘nobody’ especially politicians!
Firstly, trust your own judgement. If you think something ain’t right but you don’t always know why – just get out!
The credit crunch has reconfirmed my belief that you can’t entrust your financial future to anybody else other than yourself.
From 2004 onwards I felt that the property market and the economy was living on borrowed time. The abundance of cash being thrown at property and the arrival of numerous individuals into buy-to-let with the attendant ‘scammers’ and ‘spivs’ made me very uneasy, but equally I didn’t quite know why.
However, after several more years where things appeared to be carrying on without interruption I dropped my guard believing that things would just carry on in their sweet merry way. I even to my shame started to believe Gordon’s claim that he had put an end to boom bust economics. I continued to invest in UK plc and in particular the concept of global expansion thinking that economic growth was a given.
The crunch has reminded me; it’s no good believing in a politician’s ability to run anything, especially the economy. After all it was the government’s responsibility to ensure that the banks were adequately regulated; a fact they seem conveniently to forget when berating the bankers for the financial mess that we are in. Politicians and especially the current lot will mostly tell the poor unsuspecting electorate what they want to hear and avoid the inconvenient truth.
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2. Always expect the unexpected
It’s a bit of a cliché. But when running an investment and residential letting business, even when the business appears to be plodding along nicely and smoothly then don’t rely on this. Around any corner there is likely to be a banana skin or obstacle waiting to trip you up. A tenant that suddenly stops paying their rent; a leak; a boiler that blows up or a tax inspection or even a global economic meltdown.
The lesson to draw from this, is that you can never completely relax and become complacent. When it comes to financing your investment don’t bank on the fact that profits today will continue forever. Just as ever increasing house prices looked as if they would never end. Historically low interest rates are a welcome blip for landlords; but they inevitably will rise and rise significantly during the next few years. Landlords just can’t afford to be complacent.
The ‘credit crunch’ has taught me and many other ambitious landlords that property investment is cyclical. There are peaks and troughs, good times to invest and bad times. Following a great feast we will inevitably face famine and following a famine we can look forward to another feast. For those landlords that are constantly looking to expand their portfolio they should never feel guilty about hanging up their hard hat and taking stock from time to time. They should take the opportunity to consolidate, have a holiday, bank the profits and enjoy themselves and above all, not to feel guilty. Sometimes doing nothing, or very little can be the most productive course of action a landlord can take.
4. Trophy assets hold their own
I’ve discussed before the relative performance of trophy assets.
One thing that has become apparent during the down turn is that certain areas and certain properties have been less exposed to the down turn than others. Quality property in desirable areas has continued to sell even during the darkest days of the ‘credit crunch’.
The reason? Even in bad times there is always somebody making money, even if it’s pawnbrokers and undertakers. Where properties are limited in supply then the unique nature of these properties location and restriction on availability will mean that they are far more likely to retain their values and that demand will exceed a limited supply. Poor quality property or ubiquitous property in large developments and estates will see their values hit first, longest and hardest. We only have to look at the city centre apartment market for evidence of this.
On the flipside a listed property, with fantastic views in a highly desirable location may not even have seen a dip in their value.
5. Resilience of the residential property market.
Landlords are all reeling from the falls in the residential property market. The latest figures from the Halifax show that the average UK house price is only down by 20% since the peak. However, this compares to falls in commercial property according to the latest IPD monthly index of over 40%, and equities that when the market hit its low of just above 3500 the market was down from a pre credit crunch high of just under 6500, a fall of almost 50%.
This just indicates the resilience of the residential investment compared to the investment alternatives. It reminds us that when a global melt down occurs no asset value is guaranteed, but your money is probably safer in ‘bricks and mortar’ than any other asset apart from ‘cash’.
We can never go back!
All we can do is learn the lessons and hope that we make better and smarter decisions next time round.