How to deal with rental income fluctuations

Void periods and how to avoid them

Property investment certainly has the potential to make you wealthy. If you’ve done your property investment research, conducted due diligence, and read our investment guides to discover the best places to invest in UK property, you’ll be well positioned to benefit from both capital gain and rental income. However, if you overestimate your cash flow, your cold investment can come unstuck.

Successful property investors understand that rental income is variable. It’s affected by the local market, loss of jobs, your tenant’s changing circumstances, and a whole host of other things that are beyond your control.

In this investment blog, I’ll look at the effect of variable rental income on you as a property investor. You’ll also discover how to maximise rental income by getting the right tenant, and strategies to reduce potential void periods.

Who cares about your rental income?

In our property investment blog series about mortgage brokers, we discussed how lenders want to see a rental income of around 130% of your mortgage payments. Once the mortgage is up and running, all the lender cares about is that you make those mortgage payments.

Similarly, utility companies and local councils don’t care if your investment property is tenanted or not; they only want their bills to be paid to them when they are due.

In fact, it’s only you and the property manager that really care about your investment property tenanted and the rent paid.

Whether you have a tenant or not, and whether that tenant is paying the rent or not, you’ll have bills to pay on your property investment. If you can’t keep up the mortgage payments because you don’t have sufficient, rental income, you could have the investment property repossessed.

The effect of void periods

Left with an untenanted property, you’ll have negative cash flow for every day of the void period. That could be disastrous. For example, let’s say you’ve made a property investment and have rented the property for £1,000 per month. The tenant pays all utility bills. Your mortgage payments are £600 per month. For the sake of this example, we’ll ignore other costs such as property management, insurance, and maintenance costs.

From the table below, you can see that without tenants, instead of having a positive cash flow of £400, you’ll have to find £750 per month to pay for the property investment.

Income/Expense Item Tenanted (£) Untenanted (£)
Mortgage 600 600
Utility Standing Orders 0 50
Council Tax 0 100
Rent 1000 0
Net Income Position 400 -750

Void period of just two months in this example could cost £1,500. Once the property is tenanted again, it would take almost four months to replace the loss. In the meantime, you’d probably find yourself having to work a lot of overtime (or even working a second job) to keep on top of the mortgage payments.

As I discussed in our last investment blog, you need to plan for tough times and take advantage of the good times.

How to reduce void periods and keep on top of cash flow

The three key property investment strategies that will reduce your void periods and maintain your cash flow:

  1. Maintain contingency cash (and continue to build on it)
  2. Get the best tenants
  3. Be flexible with rental expectations

1.      Maintain contingency cash

When you’ve got steady and positive cash flow, put some aside for a rainy day. Build up a contingency fund and maintain an amount equal to three months of expenses and mortgage payments. Hopefully, you’ll never be short of a tenant for this long, but it pays to err on the side of caution.

2.      Get the best tenants

The best way to protect your property investment is to get the best tenants. If you know your way around the system and have the time, knowledge, and expertise (and cash) to market your property and vet tenants, then with luck you’ll find great tenants.

For most property investors (including myself), the way to go is to use a property manager and letting agent do all the heavy lifting for you. They’ll have access to tenants that could be waiting for a property like yours. They’ll know exactly how to market the property and may have links with other agencies to find tenants. Some property managers, like Ezytrac Property Management, offer national coverage with local expertise.

Once a potential tenant has been found, and you’ve accepted their rental offer, the agent will vet the tenant. It includes checking current and previous employment (if necessary), running credit checks, and contacting previous landlords.

3.      Be flexible with rental expectations

Sometimes getting your investment property tenanted simply comes down to being flexible with your rental expectations. If you’ve had a lot of viewings but no offer of tenancy, then try dropping the rent by £25. Having done this, insist that your agent contacts everyone who has previously viewed the property to tell them of the revised rent. If another week goes by without an offer of a tenancy, repeat the rent drop. Make sure the agent gets on the phones and re-contacts all those potential tenants again, as well as marketing the property to new tenants with your property in a new price range.

Remember, it’s better to have your property rented than to have a void period. Sticking out for the highest possible rent is a strategy doomed to fail.

Let’s say you’ve done your homework and have priced your investment property at a rent of £700 per month. A prospective tenant offers you £650. You turn the offer down.

A month later, another tenant offers you the £700 you were holding out for. You pat yourself on the back and take yourself down the local for a celebratory pint.

Really? You lost a month’s rent at £650. If you’d rented your property to the first tenant for 12 months, your gross rental income would be £7,800. After 11 months of letting the property at £700 per month, your gross rental income is £7,700. Only after 13 months of the tenant paying £700 per month will you be in the same financial position you would have been in had you accepted that first tenant’s offer.

Remember who has control and who has responsibility

The final point I want to make in this investment blog is one about taking control and delegating responsibility.

Manage your agent, delegating responsibility to them for finding and vetting tenants. It is where you have to be on the ball. The difference between a competent agent and a slacker could be the difference between a two-week void period and a six-month one.

If your agent isn’t producing despite your instructions, then there’s only one course of action to take – sack them and find a new agent. Don’t be afraid to have a couple of agents competing against each other. Call them regularly and ask for updates and feedback from viewings. The more you hassle, the more effort they’ll put in. Here are some questions to ask:

  • How many viewings have there been?
  • What feedback is there from the viewings?
  • What marketing strategies are being used (newspaper ads, flyers, website, etc.)?
  • How good is the agent’s knowledge of the area?
  • Is the market changing?

Keep your agent under control, and make sure they do their job – and that’s finding the best tenant to get your property investment paying its way as soon as possible.

In the next part of this property investment blog series, I’ll discuss the property taxes that you’ll need to plan for and the investment structures you might decide to use to make your property investment.

Chat with the team on +44 (0)207 923 6100 today.

Live with passion

Brett Alegre-Wood

Brett Alegre-Wood
October 17, 2016

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