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Property Boom or Bust – either way – Cash is King to Landlords!

March 19, 2010

Right now there are so many contradictory reports; house prices are rising, estate agents claim renewed interest and offers close to asking prices…yet in the same breath house prices are falling, there is a mortgage drought and first-time buyers don’t have a deposit!

Whichever story you choose to believe right now, probably depends on your position – whether you are a homeowner or not – and of course, whether you need to sell.

Landlords, by the very nature of their investment are more long term optimists.  The most common mantra is to buy a property (hopefully BMV) which will rent to suitable tenants, avoid as many voids and maintenance costs as possible, and hopefully in years to come, the property will have gone up in value and can be sold for a good profit.

Now the issue with being a landlord is the time period in-between the buying and the selling – which is the renting.  And this is where it gets fun as landlords are then dealing with tenants (also known as other people).  And remember what Sartre said: “Hell is other people.”

So if you’re a current landlord, or are thinking about being a landlord (even in this market!) the key thing to remember when renting to other people is that things will go wrong. Yes. It is not a matter of “if” – just when and by how much.

This means that being a landlord means planning for currently unplanned eventualities which you should expect to happen at some point. That means – tenants from hell who either don’t pay rent for months on end or who trash your property beyond all recognition. You should also factor in a dripping tap that ends up bursting a pipe, flooding the property and ruining all semblance of interior design and any belongings that were in the way. You should count on the bank increasing their charges and changing practices ala Mortgage Express with the screw tactic of demanding sale proceeds to pay off other mortgages.  Finally, you should also take into account the red tape and constantly changing legislation and regulations which the government and any other council body or nosy busy body who wants to make money, imposes on landlords.

Trying to plan for all this unplanned stuff that you know will happen at some point is why it is critical to have cash reserves.  Whether the property market moves up or down, when you’re renting out property you are going to have problems at some point – the key is, to have cash to pay your way out.

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4 Comments leave one →
  1. March 19, 2010 3:29 pm

    Here here!

    And to seek out opportunities to maximise the return on your cash whilst keeping it liquid.

    Jo

  2. March 19, 2010 9:51 pm

    Isn’t the idea from Rich Dad Poor Dad to get assets and hold on to them?
    The long term plan – is it best to work out how to pass an income generating asset on to your children so they don’t have to work for a living either?

  3. March 24, 2010 1:13 pm

    Di, you are correct. Hang on to your assets and use old assets to finance new ones is the mantra that real investors will state. However, cash is king, the idea of keeping cash back for the just in case will go against the true investor as they could be using the cash for other projects.

    The key is to get sufficent funding (or better still a flexible facility) that you can draw on in need to trouble (i.e. this will increase your loan to value).

  4. March 24, 2010 2:30 pm

    Ian and Di I agree with what you are saying – you need to ensure you are leveraging your cash the best way possible. This blog has spun out of a discussion on a property forum I started where I considered switching some of my mortgages to repayment (to pay down debt) rather than re-investing as I am currently. The results of that made me realise that cash is king – equity cannot pay bills!

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