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  • Debt & Negative Equity

    Surviving a recession with your portfolio

    Dear wonderful people of PT,

    I have been following a very interesting discussion today on facebook and a spin off was a discussion relating to banks seizing property portfolios and selling them off during a depression/recession and it really got me thinking.  Clearly the best way to survive with your portfolio intact is to buy everything for cash but this is just not possible for many investors starting out.

    I was wondering what experiences you have all seen of portfolios being seized and sold by banks?  And why certain portfolios have been selected, clearly not everyone had their leveraged portfolios sold off by banks during the credit crunch, would it be down to size of the portfolio, LTV, location of properties, etc?

    I read a very interesting article recently called 'A House of Cards : How property investors can survive future recessions' written by Ed Atkinson in 2015.  I thought so long as you have sufficient cash reserves and the properties yield highly enough your portfolio will survive as it will continue to pay the mortgages over the tough times, but hadn't considered the banks may sell off properties anyway because they need the cash.

    Thanks in advance for your thoughts.

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    Banks are more likely to repo outside of recession - depending on degree of leverage - as auctioning property in a recession will not garner the best return.

    That said - there is the old cliche that if you owe £500k to a Bank you have a problem - but if you owe say £50 million to a Bank - the Bank has a problem.

    Fergus Wilson with his 1000 odd portfolio around Maidstone has admitted that they were only saved from bankruptcy by the fall in mortgage rates.

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    On the contrary, in a recession lenders will do everything they can to repossess earlier. They will be elected to show a degree of forbearance to struggling homeowners but it's hard to see that translating across to portfolio landlords. Every day they wait gives other lenders (with whom you may have other BTL properties) the chance to get there first. In a recession house prices (and rents) generally fall, as demonstrated in 2008/2009, so this further increase the risk for a lender of they were to wait. Repossessing early means they are more likely to get back what they lent you...

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    Firstly it does depend on how things are setup.

    Most normal BTL mortgages are safe in a downturn as long as the LL pays the mortgage each month.

    For some limited company mortgage it is different story as there are also clauses in the loan stating the LTV has to stay within a certain % if not they can call the loan in or your need to pay the difference. There are also clauses on a min rental income. This is of course an issue in a downturn as the value of the property can go down.

    Funny enough the normal BTL are a lot “safer” in a downturn than all the LL with properties in a limited company with a mortgage.

    Also there are no regulation on limited company mortgage and no protection.

    During the financial downturn the banks were told to help customers in financial stress and this is one of the reasons we have seen so few repo.

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    Another good reason to beware of Ltd Co - unless you have deep pockets.

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    I still maintain that to combat all these issues  the simple  recourse of reducing ALL  mortgage debt to current 50% LTV is probably about as far as you need to go.

    Even more ideally start to be unencumbered.

    Reducing leverage is a sort of insurance policy you have set up.

    Hopefully no further  LTV reduction would be required no matter how bad things get.

    After the RBS scandal I don't believe banks will want to foreclose on any LL where the mortgage debt is being serviced.

    To do so would generate a self perpetuating downward spiral.

    It is a lot easier to service debt at 50% LTV than 75%.

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    Agreed - in same way residential homeowners with no mortgage can take more flak from a boss - without getting stressed out - as they do retain the option of resigning - while a heavily leveraged owner may not feel able to give up a highly paid job.

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    How would you scale up with a LTV of 50% in the current climate PB? The plan I am currently working on is to increase to a reasonable size (10 houses) then pay down the mortgages.

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    The traditional piggy back upscaling model has relied heavily on rising prices - which is no longer a given - due to all the economic uncertainty.

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    As Landlordy states what you are suggesting to do is I suggest a bit risky at the moment.

    But of course it is your business view that counts ultimately

    I would just suggest that with the BoE seemingly hell bent on stupidly increasing IR that having fewer properties at lower leverage would be wise.

    More can be less!!

    More is something that used to be a very viable thing to do before S24 etc.

    Having more when prices are increasing makes eminent  sense.

    I consider that for property to even recover to where they were a year ago will take about 10 years.

    There are great storms ahead and for me I consider battening down the hatches is a far more viable business strategy.

    It is of course just my opinion and no more valid than anyone's else's

    But as has been suggested never has the PRS been undetermined attack like this since 1945.

    I suggest there is a lot more to come.

    I intend to reduce my property  debts and it is highly unlikely I will return to buy more.

    I am on a debt reduction strategy.

    If you intend to be in the game  for another 20 years then perhaps expansion could be considered.

    If you want to do that wait for the full effects of S24 and then a possible Labour Govt and watch prices collapse.

    Then you can pile in and buy double from what you can buy now.

    Keep that powder dry!!

    You will be able to use it very effectively when all the highly leveraged S24 LL are forced to sell up.

    Highly leveraged means 75% LTV!!

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    I am in London, struggling to see anything going up much is the next few years locally, everything seems overpriced already, but I can see things going up slowly in the NW of England once Brexit has been done and people have more confidence in the market.  I didn't really consider leverage such a risk, I am trying to understand why a bank would seize a portfolio and sell it off if the debt is being serviced every month, whether it would be due to a high LTV, or what?  I could be massively naive but I don't see a mass exodus of landlords in 2 years time and prices falling massively other than a minor blip.

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