January 28

What Should You Do If Your Buy-to-Let Property Is in Negative Equity?

The Answer Could be in Your Cash Flow

Negative equity – when the value of your property is less than the mortgage you owe on it – can affect property investors as well as homeowners. For the homeowner, negative equity could halt moving home. For the property investor, it could spell financial disaster.
In this article, we examine what your options are if your buy-to-let investment property is in negative equity.

Does Negative Equity Matter?

For many property investors, owning a property in negative equity does not pose an immediate threat to their property investment business. Providing you can service your monthly mortgage payments and have no need to sell the property, the immediate effect is negligible. Indeed, if you haven’t reviewed your property’s value for a while, you may not even know that you are in negative equity.
However, there are problems that might arise from negative equity. These include:

  • If you wish to remortgage or move to a new lower interest rate mortgage, most mortgage lenders will not entertain lending on a property in negative equity
  • If you wish to sell the property, you will need to find the cash to pay off the existing mortgage
  • If your buy-to-let mortgage is coming to its maturity date and you have been paying interest only, selling your property will not raise enough cash to repay the mortgage

If your buy-to-let property is in negative equity, there is no need to panic. Instead, review your property’s full financial situation to assess what you should do.

What Is Your Cash Flow?

This is the first thing you should examine. Is your negative equity property making a profit?

Your Property Is Cash Flow Positive

You could own a property that is in negative equity but that is making a profit every month. Would it be right to sell the property in this situation?
The rental income is covering your mortgage payments and your other costs, and putting money in your pocket. If you sold the property, you would need to make up the difference between its value and the mortgage from other resources. Probably either from your own savings or by remortgaging another property. Whichever you choose, it’s going to reduce your monthly income.
In this situation, it makes sense for you to hold on to the property and ride out the negative equity. Remember, every time you receive rent, it is putting cash into your account that you could save to close the negative equity gap.

Your Property Is Cash Flow Neutral

If you are neither making a profit nor a loss each month, then your mortgage is being serviced and you aren’t having to dig into your own savings to subsidise owning the property.
In this situation, you have several options. For example, you could:

  • Increase the rent to create positive cash flow
  • Reduce your costs to create positive cash flow
  • Pay down some of the mortgages to close the negative equity gap and increase your cash flow

You should consider if your property is likely to increase in value in the future and what rental income you might achieve in the coming years. Often, it is worth holding onto a cash flow neutral property for the potential longer-term returns it could pay you.

Your Property Is Cash Flow Negative

This is when you have a real decision to make. The rental income is not enough to cover your mortgage costs after other costs have been paid.
Firstly, owning a negative cash flow property is not necessarily a bad thing. I know many investors who are happy to own a negative cash flow property because a negative cash flow property could make you a wealthy investor.
If you are investing for capital growth, you may be comfortable subsidising negative cash flow from other resources. If you expect your negative equity position to be temporary and improve, then there will be no need to sell.
You might also consider ways in which you can increase the cash flow on your buy-to-let property.
If you believe that the property value will recover, and you can afford to subsidise the mortgage payments, then it is usually worth holding onto the property.
If you can improve your cash flow, or believe that future rental increases will improve your cash flow, then it is usually worth holding onto your property.
However, if you think that the location’s property fundamentals have turned so negative that your property’s value will continue to fall and it will become increasingly difficult to track down top-class tenants for consistent rental income, then it may be time to bite the bullet and take a loss on your property. You’ll take a short-term hit to your finances, but the improvement in the cash flow on your property portfolio will help you recover faster.

What Should Your Decision be?

To decide what is best for you, it is essential that you assess your property’s potential and your current financial position. The options above are not carved in stone, and what is best for you cannot be advised without understanding your position more fully.
If your buy-to-let property is in negative equity, get in touch with Ezytrac at +44 0 1522 503 717 We’ll help you review all your options and discuss how you might be able to improve your property’s cash flow. Property investment is a long-term strategy, and we are here to support you through all the ebbs and flows of the property market.
Live with passion
Brett Alegre-Wood


buy-to-let property, Negative equity

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