For landlords with smaller portfolios than that, letting income tends to ‘top up day job earnings’.
Only 5% of the 1,100+ landlords interviewed as part of our regular Landlords Panel research programme reported they were making any kind of a financial loss at the end of 2014.
Scratching the surface of this reveals that most losses can be attributed to costs associated with refurbishment of one or more properties. Although void periods and arrears do play a part, the same wave of research indicates that the incidence of both of these issues are now at historic lows, reflecting the general health of the private rental sector and underlying tenant demand for property.
Most landlords borrow to fund their letting activity and a typical buy to let borrower owes almost £430,000 to a range of lenders. However, pay rates are low, with an estimated average mortgage interest rate of just 3.3%, and highest average rates of 4.1% being repaid.
It’s not just about mortgage repayments, though. Most landlords are savvy enough to squirrel away a proportion of their income to cover planned and unforeseen events and, typically, 17% of gross rental income or £8,500 is set aside as a contingency fund.
More broadly, landlords employ a range of coping strategies when faced with void periods or tenant arrears, all of which ultimately help to insulate them against the risk of missing a BTL repayment. Of course, many tactics are inherently linked to the size and sophistication of a landlord’s portfolio.
For smaller landlords there is a greater reliance on ‘day-job’ income and/or personal savings, whilst further up the portfolio ladder landlords are able to move income into the problem property(ies) from other units that are performing well. Reassuringly for lenders, landlords report that they could cope financially for 17 months on average with their current exposure to voids and arrears before it became a serious enough issue for them to consider divesting the impacted property(ies).
It’s clear from our survey that many landlords have reasonably well developed plans for coping with the unexpected and, to some extent, planning for it. As we look ahead into 2015, and three in ten landlords gear up for portfolio expansion, we’ll keep a close eye on their continuing ability to meet their commitments to both their tenants and their lenders.
Mark Long is a director of BDRC Continental