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buy to let cash flow

Owning and running a residential buy to let is like owning and running any sort of business. And just like any business, you need to ensure that it is sustainable and profitable long term. In order to do this landlords need to focus on keeping accurate records and books to gain a solid and nuanced understanding of the property portfolios financials. With this data to hand landlords can identify weaknesses, opportunities for growth, and the potential for increasing rental property cash flow.

Buy to let cash flow is, in simple terms, the cash profit on a monthly basis and is one of the key metrics that investors need to look at to ensure that their rental property business is sustainable.

Having negative cash flow means you’re putting more money into the property than you’re taking out. And unless the property appreciates significantly, you could be stuck with a hefty loss at the end of the day.

Additionally, with a negative cash flow situation, you will be forced to put more hours in to come up with solutions to make your let profitable. Meaning, not only will you become cash poor but you will also become increasingly time-poor.

The extra positive cash flow income provides the funds that can be used to deal with maintenance emergencies or unexpected void periods as well as to supplement your other regular income that will be saved for retirement. In this article, we take a look at how to calculate your buy to let cash flow as well as outline six essential steps to maximising cash flow for your buy to let investment property.

How To Calculate Buy To Let Cash Flow 

Buy to let cash flow is, at a basic level, pretty simple to calculate.

Rental income – buy to let expenses = cash flow

However, while this is a simple calculation it is often miscalculated and is one of the primary reasons a property investment will go bad. This is especially challenging if you’re analysing a potential deal and you don’t know all of your costs.

Common buy to let allowable expenses that you will want to make sure you include are:

  • mortgage payments,
  • estimated maintenance costs, vacancy periods,
  • council tax,
  • utilities,
  • EPC,
  • gas and electrical safety.
  • advertising and referencing costs.

Read our article: Should You Track Allowable Expenses On A Spreadsheet

How To Maximise Your Cash Flow When Investing In Property.

1. Change the date of your mortgage payments. 

Very simply, you want to ensure that your mortgage payments go out after all of your income for that property has been collected.

There’s a significant amount of money flowing both ways which could easily exacerbate cash flow issues. By phoning up your mortgage provider and switching the date from the first to the middle or even the end of the month you can ensure that income has been collected when the mortgage payment is due.

2. Rental increases

You can write an annual rent decrease increase into your Assured Shorthold Tenancy Agreement. Typically, this should be in line with inflation between five to 3% per year.

You don’t actually need to create a new tenancy agreement every time you raise the rent. Instead, include into the tenancy agreement a rent review provision that enables you to increase the rents annually up to 5% at your discretion.

When you do increase the rents, make sure to do so in line with the market and inflation. Additionally, notify the tenant in advance of the change and offer the reasoning for the increase. For example, you might explain that you undertook market research and determined that the current rent was X% below market value, and you are bringing it back in line with current market standards.

3. Collect your rent via direct debit. 

Having a proper established rent collection process will help you ensure that your rent payments are made on time every single month. The easiest and most efficient way to collect rent is via direct debit, have your tenant set up payments on the specified day.

4. Deal with maintenance issues quickly. 

When a tenant reports a maintenance issue, it is vital that either you or your letting agent responds fast, within 24 hours. There are two potential impacts that not responding quickly enough could have on your cash flow.

  • The first is an unhappy tenant. An unhappy tenant is less likely to want to stay long term meaning you’re more likely to have vacancies.
  • Secondly, the faster you deal with the problem, the less likely it is to evolve into a more costly issue.

Another thing to keep in mind is that when you are dealing with a maintenance issue, it is recommended that you get multiple quotes. This will ensure that you don’t overpay for the work.

5. Use software to become more efficient

There are various ways new technology can help you optimise your processes and cash flow. First, is a system to keep up to date and accurate books, one that allows you to digitise and store receipts, reconcile bank statements, and run reports for tax time. Ideally, this will also fit in with your plans to stay MTD compliant.

Secondly, make sure that you’ve got an inventory taking system in between tenancies. If you are going to make a deduction from the security deposit this will be absolutely vital. Without a good system in place, your deposit deduction may not be honoured, and you may end up footing the entirety of any repair bills.

6. Consider “rent to buy” options

If your residential let is not performing, with negative equity and poor cash flow it might be an idea to look for exit strategies.

You can use “rent to buy” as an option to offload your property fast and cost-effectively. It allows you to sell the property to an existing tenant, saving money on real estate agent feeds and avoiding the property being void whilst you are looking for a buyer.

An additional benefit is that rent buy tenants generally have the same mentality as homeowners, meaning that they will treat the property as if it is already their own. This will help you minimise maintenance costs, and they may even make improvements to the property. This mentality will also likely be reflected in their rent payment reliability.

Final Words

Over the last few years, it has become increasingly hard to make buy to let properties a feasible and profitable investment. The implementation of minimum EPC requirements, the restrictions on mortgage interest as an allowable expense, and even the tenant fees act have all meant landlords have more costs to bear and fewer avenues for mitigating overheads.

Property though can still be a great investment. However, you need to be armed with the right tools and data. Landlords need to be able to analyse their portfolio’s performance in order to long term appreciation and capital gains and promote ongoing cash flow to ensure it remains a viable long term investment.

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