Prepare financially for investment opportunities

Nasty surprise from bad cash flow projections

There are plenty of property investment opportunities across the UK. With good research skills and the help of property experts, you’ll be able to pinpoint the best places to invest in property UK. However, unless you get your cash flow projections right, even the best investment opportunities could turn out to be investment nightmares.

It’s important to prepare financially for your property investment. Some property investment companies pay little heed to what happens after you’ve completed on an investment property. We understand that your property investment is a long-term commitment, and why cash flow is important to the buy-to-let investor.

If you don’t properly assess your cash flow by accounting for all eventualities, you could find yourself in the same situation to the one in which Amanda found herself – and it won’t be pretty.

When repairs put investment finances beyond repair

Amanda wanted to invest in property. The economy in the town where she lived was booming. There was a new railway station planned, and the new services would encourage growth in the commuter populations.

It would be her first property investment, and she wanted an easy-to-manage property. She didn’t want the hassle of maintaining gardens, fixing roofs, rendering and painting walls, or any other outside jobs that she’d heard take up so much time and cost so much money. An investment in an apartment sounded ideal.

Her plan was to buy an apartment, rent it out for a year, and then sell it to pocket the uplift in value.

Having done her research, Amanda bought a two-bed apartment in a block no more than a 15-minute walk from the new station. It was cheaper than buying on a new development. The service charges were manageable, and the gross rental yield worked out at around 6%.

After all her expenses, she believed the property should produce a marginally positive cash flow. It wouldn’t be enough to change her life (she’d still have to put in five full days of work every week), but income wasn’t her objective. She figured that after three or four years the property’s value growth would give her a very healthy profit.

Rental income disappointment

The first blow to Amanda’s wealth creation strategy came when it took her a little longer than expected to get her first tenant. She’d anticipated spending two weeks redecorating and preparing for tenants but hadn’t accounted for a further void period of four weeks.

Still, when her new tenants were in place she had the small positive cash flow she’d calculated. After a year, the cost of those four extra void weeks would be recouped, and she’d have broken even. A disappointing start to her investment, but not a major problem.

Great tenants provide valuable income

Those first tenants were fantastic. They paid their rent on time every month, and never missed a payment. There were one or two minor issues in the apartment – the central heating suddenly stopped working one January weekend, for example – but they were always reported promptly.

The tenants made sure they were available for when maintenance was required, and they looked after the property well. Whenever Amanda inspected the property, it was spotless.

At the end of the first year of her investment, property values had increased exactly how Amanda thought they would. She considered selling and pocketing the profit she had already made, but when the tenant said they wanted to renew their tenancy for at least another year, Amanda decided it was too good an opportunity to miss. It’s not every day you get the perfect investment property with the perfect tenants, she thought.

Amanda renewed the tenancy at the same rental price, convinced that her investment would have grown appreciably more after a further 12 months.

An unexpected repair bill

You may have seen or read ‘The Hobbit’, which opens with Gandalf knocking on Bilbo Baggins’s door and inviting him on an unexpected journey. Less than a month after Amanda had renewed the lease with her tenant, she received a similar knock on her door. Except she wasn’t invited on an unexpected journey – she was required to pay an unexpected repair bill.

All the owners of apartments in the block were being asked to fork out £7,000 each for essential repairs to the roof and external walls. The type of issues that Amanda had wanted to avoid when she considered what to buy as her first investment property.

Amanda didn’t have the money to pay the bill. Besides, how could the management company controlling the apartment block simply present such a demand to an owner?

Amanda took the letter she had received and her lease agreement to a solicitor. He confirmed the worst. She had to pay half the repair demand within one month, and the balance within a further two months. It wasn’t the first time he’d seen flat owners left broke by unexpected repair bills and unwarranted service charge increases.

When she had bought the property, Amanda had not bargained for major repairs to be needed so soon. As the solicitor explained her obligations to her, she recalled reading about what might happen if repairs were required more than a year earlier. She hadn’t paid attention to it, thinking such an event wouldn’t happen for years, if at all.

Running out of options

Amanda considered putting the apartment up for sale. It had, after all, increased in value. She approached an estate agent, who gave her some bad news:

First, because the flat was tenanted, the potential market of buyers was limited to investors. The majority of investors were now only interested in the new build properties being developed nearer to the new railway station.

Second, the demand for a large repair bill was well known. Some of the owners had gone to the press about their predicament. A buyer at this stage would take on the liability for payment of their portion of the total cost of repair. Consequently, the value of Amanda’s apartment was about £10,000 less than she had estimated. If she managed to sell, and once taking into account her costs, she’d be left out of pocket despite the general rise in property values in the town.

What did Amanda do next?

Amanda had no option but to arrange an expensive loan to cover the cost of repairs. It meant her cash flow turned negative. She couldn’t increase the rent to make good her shortfall, and so was left with an investment property that didn’t start making the money she thought it would for three more years.

She was forced to wait out that period. Previously, Amanda had planned to sell and move on to a new property investment opportunity. Because she couldn’t, she missed some real corkers.

If Amanda had been more conservative with her cash flow projections, and properly prepared her finances for investment – for example, by having a contingency fund waiting in the wings for such emergencies – she would have been more profitable, more quickly. She’d have had the chance to cut and run if she wished, with more strategy options available to her.

Contact one of our team today on +44 (0)207 923 6100, and we’ll walk you through how to prepare your finances for profitable property investment. We’ll give you our two-year cash flow projection spreadsheet, and help you identify every expense, cost, and tax saving that will affect your property investment performance.

Live with passion

Brett Alegre-Wood

Brett Alegre-Wood
December 28, 2016

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