Reducing the Risks of Buy to Let

By John Keynes


Investors in residential property, known in the UK as "buy to let", generally put their money in this asset class because they view it as lower risk than buying shares on the stock market. Yet without proper landlords insurance and the right buy to let mortgage, the risks of this asset class may in fact exceed those of others that are generally perceived as riskier.
The main reason for the inherent riskiness is that a residential property investor is taking not only market risk, which is the worry that property prices or rentals may decline, but they also take on a range of additional risks. Foremost among these is interest-rate risk. Most buy to let investors in the UK take out interest-only variable rate mortgages. This sort of mortgage generally has the lowest monthly repayments and is the most efficient from the perspective of tax planning. But it does leave the property investor at the mercy of prevailing interest rates. With official central bank policy rates so low at the moment, many people are short-sightedly overlooking the fact that central banks will start to tighten monetary policy once the world economy stabilises or at the first sign of inflation returning.
A second category of risks relates to idiosyncratic risk. If one was to buy shares in only a single company on the stock market then one would be exposed to the risk that the company was run by crooks and had cooked its books, for instance. It is for this reason that most rational stock market investors buy shares in 50-100 companies. If one turns out to be a bad apple then the impact on the overall portfolio will be minimal.
Yet when it comes to buy to let property investing, many amateur landlords have only one or perhaps two properties. Trouble such as unexpected maintenance bills, tenants who don't pay their rent or who damage the property can cause immense financial loss.
In both instances landlords can insure themselves to some extent against these risks. In the case of interest-rate risk it is possible, for a price, to obtain a mortgage with a fixed rate of interest. These are generally fixed for periods of three to five years, but some with longer fixed terms are available. The trade off for the certainty that they provide is that they cost somewhat more than variable rate mortgages.
A range of landlords insurance policies are also available that help cover many of the idiosyncratic risks involved in leasing property. Buy to let home insurance policies will often include cover for deliberate damage to the property. Options include legal expenses cover, to cover the costs of evicting tenants and rent guarantee cover, under which the insurance firm will pay the rent that would have been received should tenants abscond or stop paying their rent.
A sensible buy to let investor will carefully consider the range of buy to let mortgages and look at several landlords insurance policies to ensure that their investment is indeed as low-risk as they had hoped it would be.
You can read more about landlords insurance and and fixed rate mortgages by clicking on the above links.

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