Recent figures showed that over 100,000 tenants are now in severe financial difficulties, up nearly a quarter on the same period last year, with landlords becoming increasingly stretched by non-paying clients.
A study released last week by LSL estimated that 9.3% of tenants either paid rent late or failed to pay at all during July, with unpaid rent amounting to nearly £300m over the course of the month. A huge amount of money which could have been spent improving properties or investing in new ones.
This is posing a major problem for buy-to-let landlords, with the National Landlords Association admitting that an increasing number of tenants are struggling.
Chris Norris, head of policy at the NLA, says that despite recent improvements, nearly half of landlords have experienced rental arrears in the past year.
“In the first three months of the financial year we reported the first fall in rental arrears in a long period of time,” he said. “But as the incidence of arrears has bounced back to 49% of landlords, it seems that more tenants are struggling to meet their rental commitments.”
Norris points to the increasing number of long-term lets as one way of helping landlords avoid such problems.
“Our recent tenants’ index found that 24% of tenants have lived in their current let for between two and four years, and a further 46% have lived in their current home for more than four years.”
He adds that as the number of tenants struggling rises, landlords need to make sure they can provide as much support as possible. “If the problem is dealt with collaboratively, landlords may well see longer, more enduring tenancies.”
The NLA suggests that landlords keep a close eye on their clients and remain alert to any problems, as this will prevent tenants falling into a debt spiral which could financially hurt both parties.
It suggests that if tenants are struggling, landlords should discuss the situation and make sure they’re aware of the range of housing benefits they may be eligible for. This means landlords must keep abreast of changes to government housing benefits.
“Whist the increase in arrears paints a negative picture, landlords are remaining positive with 66% rating their businesses’ expectations for the next three months as good or very good,” Norris added.
Yet the knock-on effect of non-paying tenants can push a buy-to-let mortgage itself into arrears, a problem that is amplified for small and accidental landlords, those who are not professional property investors.
Research from BDRC Continental found that around 16% of landlords with a single property were now losing money; with 9% of landlords experiencing voids that lasted over two months during the second quarter of 2012.
Landlords with multiple properties fared better, their increased size allowing them to spread the risk over a bigger portfolio, this meant that just 3% of landlords holding over 11 properties were in arrears.
For those smaller landlords who cannot afford to increase their portfolio there are few options, so it’s at times like this where landlords must become more ingenious.
While it may seem like a backwards step, temporarily charging a lower rent rate could allow a tenant the breathing space to overcome their financial problems and prove better for the landlord’s profitability in the long-term. In most areas of the country, voids between tenants are on the up, so taking a slightly lower return for a few months is preferable to having a property sit completely empty.
But if things get too bad then landlords should also consider negotiating with clients to end the tenancy early, preventing losses from mounting up and allowing landlords to start afresh.
While the warnings about tenant arrears should be heeded, landlords who are smart with their investments should be able to prosper in the market, regardless of current conditions.
