Flammable Cladding: Won’t anyone think of the BTL investors

I read this article yesterday and it nearly turned my stomach “Retirement in ruins: Cladding scandal sees buy-to-let investors left high and dry – with plans in tatters and properties almost worthless” It goes to show that investing in property is far from a one way bet. 

I’m going to leave aside the tragedy of Grenfell Tower, that was a truly horrific thing to have happened and as someone who’s home once burnt down before, I know that losing a home is traumatic. To lose your life, or your family’s or friends and neighbours is something that I can’t quite imagine. This article isn’t quit from the human / emotion point of view (unless you think that people farmers are human and have feelings)

However, what I want to highlight here are 3 things:

  1. “Investing” in property is inherently risky especially as your pension
  2. Chasing yield is risky
  3. We need more and better building of housing

The article is worth a read in itself, because it does sort of screams “WON’T ANYONE THINK OF THE INVESTORS” at you. These are older people who bought flats that have cladding that requires fixing and their flats are now “worthless” apparently.

There’s the story of how one couple bought a flat 18 years ago in Leeds for their retirement and now aged 72 the increase in costs like insurance, safety measures and an £8 million bill to remediate the cladding will dent their finances. What sort of pension is that? It’s more like a reverse lottery where you get paid each month for a ticket (rent received) and maybe, just maybe you’ll hit the jackpot and be asked to pay back £100,000. The couple in question say that they can afford it but many others can’t.

The fact that the average property costs the same as several years salary or to put it another way, the cost of property is maybe twenty times the rental income means that hoping to sponge off rental income requires owning a massive value of property. If you aim to afford all this property by getting a mortgage, the use of leverage makes things several times worse if things don’t go to your Panglossian plan.

If I only had 3 shares in my pension: Diageo (booze), BP (petrol) and Unilever (food) then chances are I would be ok most years. Dividends could come and I’ll be fine. But at least there’s over 50,000 people working at each of those companies for me (the shareholder). Owning a clutch of properties and expecting to have an reliable income stream is daft. If a Deepwater Horizon event happens (and they will), that’s where diversification comes in handy but putting all your eggs (plus borrowing more) in the one property basket is unnecessary risk taking.

Conventional wisdom tells you that over time, rents increase. However, I am not sure that is particularly the case when it comes to certain types of property. Once swanky new build luxury apartments become rundown flats. Modern bathrooms, kitchens & furnishing become dated and require replacing at considerable expense. In this light, hoping to buy something now and have a steady income for the next 25+ years from property seems foolhardy and it is this yield chasing that is risky. Yields on cheaply built flats that have a high yield now (or even worse the “guaranteed rent” schemes that just inflate the sale price to pay you that rent back for the first few years) but it’s not sustainable. I’ve not even mentioned voids which can be a big trouble if your flat is in an area of oversupply. Borrowing money only makes this worse as your cashflows worsen over time as ground rent, factoring, maintenance fees and everything else only go up over time, so by the time you need to retire for real you are left with an asset that is not making you much money.

If there is a place for investing in property, the risk to the individual investor is just too high in my opinion to own a few houses and hope that everything works out. Also, it neglects the fact that owning property is not the same as building it and we need more homes. Quite frankly, many of the flats built in the last 20 or so years are not fit for living in, with cheap fittings and poor quality build. Cladding is of course a major concern but future building needs to not only be safer but greener and better quality. I’d welcome funding from pension funds to build and manage housing projects if the government is unwilling. You’d ideally have professional management of property maintenance instead of the DIY BTL brigade. Having a system where developers build, investors buy and tenants rent doesn’t work – it’s only now that the savvy investors are getting hurt that the likes of the Daily Mail start caring. The interests of the developers, owners and renters needs to be aligned. Change the incentives and  it might give the pensioners fewer sleepless nights too.

Thanks, FDD

7 Comments

  1. I understand their pain but it’s madness to have all their pension eggs in one basket.

    Yes, property investing is a risk but government safety regulations weren’t fit for purpose so us leaseholders are now having to pay for the cock-up which sadly resulted in many deaths.

    My original plan for FIRE included income from my BTL but a few years back, in my own calculations, I adjusted my goal (and subsequent FIRE number) to not include it because I wasn’t sure about keeping it or, whether to sell it and use the proceeds to purchase my own home.

    That said, it’s not like I could sell now if I wanted to, (except at a rock bottom price to a cash buyer) so I’ll wait and pay the increased maintenance charges for now.

    Still waiting to find out what the full cost will be for replacing the cladding and hoping I won’t need to dip into my FIRE funds to cover it all.

    Liked by 1 person

    1. I suppose that the perception of risk is something we should educate ourselves on.
      The risk of investing in a Real Estate Investment Trust (BBOX.for.example) is a different kettle of fish from a single flat.

      Goodluck Weenie with your own adventures in property.

      Liked by 1 person

  2. Is this a good moment to say that I find the English leasehold system awful. I would never want to buy a flat in England. It’s much inferior to what I remember in Scotland but Engllshmen will reply that’s because Scots Law is so substantially different.

    However we’ve lived in South Australia where the law is basically English law yet they long ago sorted out their law on owning apartments. I dare say that’s true for the US and Canada too.
    https://lawhandbook.sa.gov.au/print/ch23s07.php#Ch2096Se300225

    We once had an opportunity to invest in BTL but Herself vetoed it. I think she was right – undiversified investment in one property would have been far too risky. It’s also likely that I wouldn’t have had time to do all the handyman tasks myself.

    Liked by 1 person

  3. My partner bought a “new build” flat a number of years ago and it’s been more trouble than it’s worth.Tenants are generally younger and some take less care of the property than you’d hope for. The fittings aren’t great spec and so far it’s needed a new oven, new heating system and has had a number of leaks over the years. She’s also advised me she is currently paying for a waking watch as the building has cladding issues.

    Discussing her flat causes rather an emotional response so I choose not to get too involved. My “accidental” BTL ( first house I bought and I kept it when I bought the next one ) has been less of an issue as I kept it well maintained. My tenant viewed me in a quizical fashion when I did the pre-winter checks and cleared out the gutters etc.

    Diversification is key and also being able to manage / fix the property yourself can allow you t cut out rental agents who can take a significant cut of the rent.

    Liked by 1 person

      1. Indeed, void periods, problematic tenants, changes in taxation rules etc The consent to let on my “accidental let” property ends in 6 months. Financially I’d probably be better off evicting the tenant, taking possession and then using some of the funds in the fully offset mortgage for investment purposes.

        I’d consider selling it but I find it handy to have an emergency house just in case of domestic “issues”

        Lots of talk about students going on rent strike and tenants defaulting are potentially keeping many awake at night.

        Liked by 1 person

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