London and UK Property Investment Blog

By Ritesh Patel | [fa icon="calendar"] August 28, 2018

Why is cash flow important to the buy-to-let investor?

investment-blog-investor

Cash flow in a nutshell

When you listen to buy-to-let investors, you’ll often hear the words ‘cash flow’. There are two types of cash flow: positive and negative. Positive cash flow is what you’ll aim for as an investor even though at certain stages of the cycle it may not be achieved.

In this post, I’ll look at what cash flow is and why it’s so important to the buy-to-let investor. I’ll also take a brief look at how to manage cash flow.

What is a property investor’s cash flow?

Put simply; cash flow is the amount of money coming in versus the amount of money going out. If your rent is higher than your costs, then you’re in a positive cash flow position. If your rent is lower than your costs, then you’re in a negative cash flow position. Obviously, having positive cash flow is where you want to be. However, for reasons we’ll explore in a moment, this ideal isn’t always possible.

Whilst I always try to maintain investment property with a positive cash flow sometimes I am happy with negative cash flow if the capital growth potential is much more appealing. Now sure, I have to rely on property prices to rise for me to be in profit. And as we all know, property prices can go down as well as up. It is how the property cycle works, and can be good news for the canny investor. However, that is a subject for another post.

Take care of cash flow, and it will take care of you

Even if your rental income is more than your mortgage payments, this doesn’t mean you’ll have positive cash flow. You have to take into account other costs, too. These include repairs and maintenance, finding tenants, and the legal issues that come with being a buy-to-let investor.

I’d recommend paying for professional property management, too. Some investors prefer to become buy-to-let landlords and do all the property management work themselves. Personally, I’d rather be researching my next profitable property as a buy-to-let investor than mending a dripping tap at two o’clock in the morning.

Overestimate your costs and underestimate your income

Always be conservative with the cash flow projections for your investment property. Overestimate on costs. Underestimate on income. Allow for a few weeks’ vacancy, when you don’t have a tenant. If your mortgage rate is 3.5%, calculate your mortgage at 4.5 - 6.0%. If your investment research shows that a rent of £900 is achievable, work your numbers out at £850.

Doing these simple mathematical tricks will give you plenty of contingency in your cash flow projections. Any slippage from expectations or reality is quickly absorbed. And if you don’t have any vacant periods, it’s a big bonus to your cash position at the end of the year.

How cash flow affects the buy-to-let investor

Let’s say you have bought a property for £200,000, with a £50,000 deposit. You pay interest only on your mortgage at 3.5%. The rental value is £900 per month. The table below shows the difference between a conservative and optimistic cash flow estimate:

 

Conservative

per Annum (per month)

Optimistic

per Annum (per month)

Rent

£10,200 (850)

£10,800 (900)

Property Management Fees

£960 ( 80)

£840 (70)

Mortgage

£6,756 (563) @4.5%

£5,232 (436) @3.5%

Maintenance & Repairs

£840 (70)

£600 (50)

Void Periods

£675 (56) – 1 month vacant

£0

Net per Annum (per month)

£969 (81)

£4,128 (344)

                                                                                              

You’ll see that in the example given you end up with a net positive cash flow. If you base your calculations on the conservative scenario, then anything more will be a bonus. You have also allowed for an increase in interest rates, and a vacant period, with lower-than-market rent. Knowing that you’ll still have positive cash flow even if all of these scenarios happened all at once will certainly help you sleep at night.

There will be some tax to pay on your rental income, but with positive cash flow you should be able to repay the mortgage quicker and increase your positive cash flow even further.

Dan’s story

One of our clients, Dan­, who was a gas inspector and serviceman, – had his negative cash flow turn into a £2,000-per-month surplus. Despite his business being decimated as a result of the recession, he found himself in a position of not having to work. As interest rates fell, his net rental income rose. The positive cash flow from his property portfolio was enough to sustain his lifestyle. Now, for someone who had worked six days a week every week just to keep the wolf from the door, this was something of an eye-opener. But he didn’t rest on his laurels. Dan managed to get a job with British Gas, working fewer hours than before and banking most of the £2,000 surplus as he builds up his personal wealth faster than he could ever have dreamed.

Contact us on +44 (0)207 923 6100 to find out how cash flow as a buy-to-let investor could positively impact your lifestyle.

Cheers

Ritesh Patel

Topics: Property Cash Flow

Download your free copy of The 3+1 Plan today

We believe that investment education is the number one activity you can do to increase your returns on property investment. Your guide to a successful property investment, with just 4 properties...
3plus1-3D-PPC-lp-right.png
Download The 3+1 Plan 
Back to Investors Homepage
 

Get full access to all our Education

 
Back to Investors Homepage