The Corona Virus; Our Thoughts for Landlords

The last year has been crazy – starting with Chinese bats; toilet roll queuing and hand washing guidance to happy birthday (twice)…

Then escalating in the property world to heated debates about mortgage holidays and, very extreme legislation changes such as no evictions for 3 months… Although everybody is sick of the word now – it has certainly been unprecedented.

This virus has had a dramatic effect in not only the property industry, but every single industry and it is now a truly global worry.

So how should our Landlords view their property investment and what does this all mean

The Coronavirus pandemic is a major worry for many property investors. This article looks at how residential landlords can manage their rental business and survive this turbulent period.

The following are the key aspects to focus on to mitigate the disruption caused by the CV19 outbreak.

Manage your tenants and rents

Property is a people business … Real, live human beings live in rental properties! Many landlords have investment spreadsheets, calculators, grand plans … but in many ways property investment is more of a people business than an asset-management business.

Now is the time for landlords to show their people skills.

Be flexible, but not TOO flexible

Most tenants are going to be affected by Covid-19, and a flexible approach to rent payments is likely to be needed in the next few months. A lot of tenants will just continue to pay the rent in full – some landlords have started to panic, thinking that all their tenants will completely stop paying the rent, all at the same time – this is highly unlikely.

The challenge is to manage the cashflow position across the portfolio to prevent a critical lack of cash while being realistic that almost all landlords will see some impact.

Some landlords will proactively contact tenants, others will wait to be contacted and then respond. There is certainly an argument that contacting a tenant could weaken the landlord’s position as the tenant may not even have realised that paying less rent was an option!

Many tenants will have savings, overdrafts, friends, and family to help, so it’s not a given that all tenants will need financial help from their landlord.

Start by trying to understand the tenant’s situation, to understand what amount could be paid based on their lower income. Ensure that you point the tenant to the available Government support packages, to ensure that they are aware of these, and taken any necessary action.

Golden rule – tenants still have to pay SOMETHING

The golden rule is not to let the tenant pay nothing at all – try to negotiate a figure that is as high as possible, but that the tenant can manage. The outcome for the tenant shouldn’t be too comfortable as the tenant is still responsible for paying their rent, and their landlord shouldn’t be expected to simply agree to anything a tenant asks for.

A negotiation should involve give and take on both sides to reach a mutually-acceptable solution.

And, if you do agree to a rent reduction or deferral, don’t feel shy about asking for some evidence to prove the tenant’s income has dropped significantly – this can help to deter tenants from taking advantage.

Ultimately, the landlords who are most successful at managing these conversations will likely be those that suffer the least impact. However, Government has put in place a strong package of financial support available to tenants, who like everyone should firstly see if they are able to get themselves this support.

Government has introduced a 3-month option for landlords (and owner occupiers for that matter) to take a mortgage ‘payment holiday’. This is an agreement with a lender for payments not to be made for a set amount of time. The time is initially 3 months, though this may be extended.

Consider applying for a mortgage payment holidayThings to consider before applying are:

The payments due are added to the loan balance, and interest is charged on these
The interest charged is incurred, so tax-deductible just as if the payments had been made, albeit subject to Section 24 finance interest restrictions
A payment holiday is only such when agreed to by the lender – don’t just cancel the direct debit, as otherwise this could mean a missed payment, and credit history damage
Assuming a payment holiday has been agreed with the lender, the FCA have issued clear guidance to lenders that taking a payment holiday should NOT negatively affect a person’s credit history

Note that some lenders are easier to deal with than others regarding taking a payment holiday.

It is prudent to take up the option of a payment holiday with each lender if it is on offer. The missed payments can be set aside as extra contingency funds, and with interest rates so low now, the interest charged on the missing payments is very small.

Once Covid-19 is resolved the reserved funds could be paid back to the lender to reduce the loan balance. The FCA have already stated that taking a payment holiday will not negatively affect borrower credit ratings – which, since the FCA have mandated it, can be relied upon.

Government has announced that the second payment on account for the 2020 tax year – due on 31 July 2020 – is to be deferred to 31 January 2021. This applies to all payments on account and is automatic. No interest or penalty will be charged because of the payment being made by 31 January 2021 rather than by 31 July 2020.

This allows an extra 6 months to pay the 2020 personal income tax bill, and it’s worth noting that the next round of payments on account (for tax year 2021) can be reduced if a landlords thinks that 2021 tax year rental profits will be reduced – which is likely.

Check the impact of the Bank Base Rate reduction on your mortgage payments

The Bank of England recently reduced the Bank Rate to 0.1%, so for landlords with Base-Rate tracker mortgages, there will be a significant reduction in mortgage interest payable for the foreseeable future, which is likely to take effect for most direct debits from 1st May onwards.

Payments on a £100k mortgage tracking Bank Rate would see repayments fall by 0.65%, which equals £54 per month. Many landlords have multiple Bank Rate tracker mortgages and will see a significant reduction in their mortgage payments – the unknown now is whether this will offset any uncollected rent.

Clearly the effect on landlords will be to cushion the impact of any rent collection issues, however it’s worth noting that while there may be a temporary dip in rents received, all being well full rents will be received eventually.

Check if you may qualify for “The Coronavirus Job Retention Scheme”

(for furloughed members of staff) – if you run a company AND have a PAYE scheme

The new Coronavirus Job Retention Scheme (JRS) covers 80% of the cost of the salary (not including dividends) received from a company.

Many property investors now run a company, whether to buy property within, or as a property management agent, and if there is a PAYE scheme in place the JRS could provide some additional support.

For directors who receive a salary the scheme will pay a grant to the company of 80% per month of the regular salary paid.

However, to be eligible for the scheme, a director must not undertake any work for the company during the period i.e. if the company is continuing to generate income, or the director carries out significant administrative work then the company is unlikely to be eligible for the scheme as the purpose of the scheme is to enable the company to continue paying a salary to those who are unable to work.

Check if you may qualify for “The Self-Employment Income Support Scheme

(however most landlords will NOT qualify)

The new Self-Employment Income Support Scheme unfortunately does not cover landlords, as landlords are deemed by HMRC to be investors and so are not self-employed. This often comes as a surprise to landlords, as it seems odd to neither be employed nor self-employed (or unemployed for that matter)!

In consolation, at least rental profits are NOT subject to 9% Class 4 National Insurance, as self-employed profits are!

The scheme applies to individuals who have trading profits that make up more than half of their overall income – this means even for the occasional landlord that has a small sole trade, it is unlikely to be more than half of their income, and so they won’t qualify.

Think about raising personal loan & credit card finance as a contingency fund

Personal loan rates are at an all-time low, and the Consumer Credit Act allows up to £40,000 on a single personal loan. Lenders such as Tesco and Sainsburys offer rates as lows as 2.9%, on repayment terms of up to 7 years with no arrangement fees, and via an online application requiring no supporting paperwork (unlike mortgage lenders), meaning rapid lender decisions and loan advance.

Many lenders offer up to the maximum £40,000 as a loan maximum but increase the rate significantly for loans of more than £25,000 or for long repayment periods.

It is worth having a play with the loan calculators that are found on most personal loan lender’s websites, to see how each lender changes their loan criteria depending on the loan amount, and repayment period.

Given the current restrictions on mortgage finance, in terms of both the practicality of obtaining any mortgage (surveyors not visiting properties, lenders withdrawing products and lowering LTVs etc), it may be that now is a good time to bolster cash reserves by taking a personal loan.

Once the crisis is over, the loan itself could just be re-paid prior to a new mortgage application, so that mortgage lenders’ sensitivity to excessive unsecured borrowings isn’t an issue.

In a crisis scenario, there is a case to be made for drawing a personal loan, even if it is just left on deposit, with the monthly repayment direct debit taken from the bank account – at 2.9% per annum, the interest cost of the extra liquidity is very minimal.

You could also consider using 0% credit cards where possible – many will allow up to £10,000 for 24 months, with just a 1% direct debit required which sounds like rather a good deal.

As always, however, care needs to be taken to not over-borrow and strike a balance between having sufficient cash reserves and not having unnecessary funds on hand which aren’t cost-free to hold.

The new 2021 tax year begins on 6 April 2020, allowing money to be invested into ISAs and pensions:

ISAs

Money invested into an ISA (up to £20,000 per year) can be drawn back out within the same tax
year if required, and then re-invested before tax year-end. This is a useful feature as it means the benefit of ISA-investing isn’t lost if the current year contribution needs to be drawn back out – if the funds are re-invested by tax year-end.

Many investors will take the view that now isn’t the time to be contributing to an ISA, given that this can be done by 5 April 2021.

Pensions

A major drawback of pension investing is the lack of access to invested funds once a pension contribution is made. Although pension-investing provides tax relief, and investing into the current depressed stock market could result in extra future profits, it’s worth thinking carefully about whether having liquid cash on hand is more important.

Don’t forget that the 2021 tax year pension contribution could be made any time up to 5 April 2021, and even if it is missed, there is still the option to use the pension ‘carry-back’ rules in tax year 2022 and beyond to ‘mop up’ any unused pension contributions from 3 previous tax years.

Defer any non-essential repairs

As most landlords know, there are essential repairs (fixing & replacing heating, windows, roof leaks i.e. anything involving heating and water!) and more discretionary repairs (general periodic upgrades & replacements of kitchens, bathrooms, floorings, decorating etc).

Clearly, now isn’t the time to spend on discretionary repairs that could be done at a later stage – both because of the cost of repairs, and the likely reluctance of many tenants and tradespeople to have such work done.

The priority for all landlords is to ensure that serious hazards are dealt with promptly, using a pragmatic and common-sense approach. Local authorities are instructed not to unfairly penalize landlords who are unable to deal with minor and routine repairs issues.

However, repair work carried out on rental properties by landlords and tradespeople can be done, provided that the person is well and has no Covid-19 symptoms, subject to the ‘2-metre distance’ rules issued by Public Health England.

No work should be carried out in any household which is isolating, or an individual is shielding, unless an emergency.

Check if you qualify for any cash grants

Cash grants of £10,000 will be paid to all businesses occupying commercial property, and who either pay business rates or receive Small Business Rates Relief. As most landlords run their property business from their own home, this won’t apply, however for landlords who operate from commercial premises will qualify – grants are payable automatically by local authorities, so no application is needed, and grants are based on a property’s rateable value rather than the actual amount of business rates paid.

Note the VAT deferral for March to June 2020

VAT payments from 20 March 2020 to 30 June 2020 are deferred until 31 March 2021. This means that one quarterly VAT payment between these dates can be deferred until 31 March 2021. This will apply to property companies and individuals who are VAT-registered.

No application is required, VAT returns are still to be filed on time in the usual way, and businesses need to cancel their direct debit via their bank (and reinstate the direct debit for the next VAT payment to be collected).

Gather together any spare cash or amounts owed to add to your cash pot

It’s important for landlords to understand how much cash they have on hand, to gauge their own cash reserves and so whether there is a need to request a payment holiday, how much leeway they may have with tenant rent negotiations etc.

Check all bank accounts and gather together any spare funds into a main bank account
Draw down on any Further Advance mortgage offers, check on funds offset to ensure the bank transfer option is functional, so cash can be drawn at short notice
Consider taking the 25% tax-free lump sum that can be taken from most pensions at pension age (currently 55, but could be 60 for some final-salary schemes) – bearing in mind it’s possible to receive just the tax-free lump sum and leave the remainder within the pension, to be drawn down in the future
Collect any monies owed by other investors, any loans that are ongoing but that could be collected, sell any non-core assets (old shares, antiques, trinkets, anything that could be sold on Ebay etc)
Consider requesting overdraft facilities on business and personal bank accounts – many banks will offer a small amount without a formal application and personal guarantee, so it seems a shame not to take up the option … in other words, do a ’cash audit’ of your life

The Covid-19 pandemic is with us, perhaps for some time. Although unexpected, it will act as a ‘stress test’ for many landlords and will require a hands-on proactive approach to be taken. Maintaining income is the main challenge, and this may mean negotiations with tenants, and will certainly mean keeping a close eye on cashflow management.

The two key changes to benefit landlords directly are the reduction in Bank Base Rate to 0.1% and the option to take a mortgage payment holiday, tax payment deferrals, and possibly in some cases the furloughed-salary option for landlords with a company.

However, as well as focussing on ourselves, it’s important to emphasise that Government has put in place a lot of measures to support our tenants – and it is these that we are effectively relying on to support us as landlords, by ensuring that most tenants are able to pay most of their rents, so that cashflow is maintained until any unpaid rents are collected.