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  • Debt & Negative Equity

    Zombie Landlords

    Paul Barratt made a comment about "zombie" landlords on another thread.

    It's a relatively new expression I think?

    I have heard about zombie rentals. Properties that the owners can no longer afford to live in themselves, so they rent them out and move into a smaller rental property.

    My understanding is that zombie landlords who are only surviving because of low interest rates.

    There must be many hundreds of thousands of landlords in this position.

    As none of us can predict the future, it's hard to know what actions to take.

    However, "zombie" suggests someone not actively involved with the activity.

    I would suggest that most landlords don't see themselves like that.

    The latest prediction is that interest rates will not rise until 2016.

    That gives zombie landlords three years to take some action to protect their portfolio.

    What advice would you give to zombie landlords?

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    My take on Zombie in the context of a LL would not necessarily be someone that is not actively involved (doing anything) but rather those that think (may be incorrectly) that there is nothing they can do about their situation.

    There may well be little that 1000s can do other than sit and wait.

    I would suggest that they have a real hard look at what got them in the situation thef now find themselves in and then look at all the options. There will be a whole host of reasons why the LL may be trapped; loss of income, fall in value, change in lender criteria etc...... Speaking to a really good broker that is also an investor would be a must; that way you should get an honest opinion of both the finance options and the what to do with the actual property options. Only then will the LL really know what could possibly be done.

    If the property was in a decent enough area finding a tenant buyer might be a solution but that would only work if the LL was confident they would be able to cover the mortgage payments whilst be TB is in place. If it was a good renter but not suitable for TB or owner occupier (OO) getting some one to put in some cash to bring down the LTV might be a solution. The reward for the cash injection could be monthly payments or an equity share. There should eventually be some!

    There are lots of options but it may just be that handing back the keys is the only realistic option; whether that be now, when the mortgage moves to SVR or when interests rates actually start rising. In the mean time any profit could be used to improve the property (increase the value), squirreled away out of reach of anyone or used to fund a lifestyle now before bankruptcy comes along and destroys that lifestyle. I am glad in a way that I just missed the MX gravy train as if I had not I may well have been sitting on a lot of property that I now regretted buying. Although I could not see myself doing it I can see the logic behind Paul Barrett's take on things in this regard.

    Thanks for commenting Steve.

    I think that the future being so uncertain should be looked at as being a positive influence as well.

    Maybe a zombie landlord will get a better job, get promoted, get a windfall, inherit some money .... things that they could not anticipate now, but that happen in the future to secure their financial position?

    At the end of the day, the worst that can happen is to go bankrupt and that is not the end of the world as Donald Trump and others have proved...

    Spot on. Change brings both the potential for crisis or opportunity! Be positive!

    Interpretation of what I was intimating by calling myself a 'zombie' LL was nothing to do with the involvement or not of being involved in the management of my properties.
    I meant that like many other businesses; small and large; they are through low interest rates only able to service the interest only of a loan but cannot pay down any capital.
    They have no possibility of raising any finance on their assets due to reduced capital values and also changed lender criteria.
    They are therefore living a hand to mouth existence which will be unaffordable if interest rates went up.
    There would mass unemployment if this ever occurred.
    Which is why govt won't change IR for decades.
    Zombies effectively just mark time; they cannot invest further and there is very little chance of reducing the debt burden.
    Lots of zombies of all shades and in all areas of the economy are only kept going by lenders' forbearance who do not want to show up their bad debts as this will require even more capital to keep the banks going.
    If this situation ever occurs the govt would have to bail out banks yet again!!
    Govt knows all this which is why it is cheaper to keep the whole illusion of an economy working by keeping IR low.
    If BTL LL were stress tested for IR to double; most would be bankrupted.
    Same with resi mortgage holders.
    Zombies are no good for an economy to grow; but there is little choice whilst everyone is trying to deleverage as much as they can.
    Most homeowners and LL cannot do this; so are reliant on inflation to inflate the debt away in about 25 years.
    Somebody did suggest that the BOE could move a few figures around and reset everyone's debts to 50 % of what they were.
    That would immediately boost the economy as people would have spare cash to spend rather than just servicing previous debts.
    If Govt can buy bank debt why not some of my debt!!??
    I think Steve makes a good point about my logic.
    It is NOT something that I choose to adopt; it is something that circumstances have forced; and as I suggested, I don't believe I am the only one facing such dilemmas!:-(

    Thanks for your detailed explanation Paul.

    That all makes perfect sense.

    Do you think zombie landlords should pay down debt?
    NO I do NOT think LL should pay down cheap mortgage debt at even barely affordable mortgage debt at present IR.......................................................................BUT they should try and build up an untraceable slush fund.
    This so that they can determine whether to pay down debt or walk away taking their slush fund with them.
    I'd love to have a slush fund; but it seems that such a facility is incompatible with being a good LlL which I am.
    In the past 3 months I have had to spend over £2500 on repairs; and new appliances and still there is more to spend soon.
    So I am trying to build myself up some monies; but as soon as I do the demands of my properties tend to dissipate those funds!
    I just wish I wasn't such a good LL; then I might make some money!!!!
    But one has to fix things especially when it is NOT the tenants' fault!
    They are paying for a service and expect and should receive that full service they are paying for!
    One reason why I don't think i will EVER be able to pay down debt............................................joys of being a LL eh!!?

    I also do not think zombie LLs should pay down debt unless it would definitely solve their problems; once you have given it to the lender it is lost. Keep the cash to one side (squirrelled) and then it can be used to the LLs best advantage when the day of reckoning arrives.

    My advice to zombie landlords would be to find other income streams not related to their property - when rates do rise hopefully the extra income will cover the rises - look at rtb but set all the deposit monies aside incase they have to be repaid - hopefully values will also have gone up which could seriously help the situation - try to look on the bright side but also be realistic and don't bury your head in the sand - some lenders will work with you to find a solution ( if there is one ) others will just want the keys back - know when to quit and quit as much as possible on your terms - whatever happens it won't be the end of the world
    Charlie Burnett
    Holburn Energy Services
    Paul and Steven, I agree. Charlie, that is exactly what I was thinking.
    In this scenario though, as has been touched on, it's vital and cant be emphasised enough that cash reserves are kept in a totally seperate institution to one who lent money.

    I am currently trying to help a LL who has had a significant sum taken from his personal savings to fund a supposed breach of terms in his Ltd Co, leaving him in a difficult situation.

    Phil Stewardson.

    Stewardson Properties.

    Stewardson Developments Ltd.

    Burson Land Ltd. & Jennings & Gilchreaste Ltd.


    Follow me on twitter - @philstewardson

    My advice to zombie landlords would be to find other income streams not related to their property

    Very good advice Charlie, thank you.

    But there are other income streams to be made from property such as becoming a lettings agent, deal sourcing, undertaking inventories etc.

    Do you believe that people should hedge risk by doing something entirely away from property, or do you believe it is okay to diversify within the wonderful property arena ... or maybe both?!