Three fundamental tactics to prepare for negative cash flow on buy-to-let properties

Don’t be caught short and lose your investment

In my investment blog, I described why you should invest in buy-to-let property for positive cash flow and not capital gain. Most of the property investors I know buy with the aim of reaping the rewards of a constant stream of long-term rental income.

The property market can be a fickle creature and sometimes acts out of character. When this happens, your cash flow positive investment properties could start costing you dearly.

Temporary negative cash flow doesn’t have to destroy the value of your investment. It doesn’t have to leave you scratching around for cash every month. There have been many occasions when one or more properties in my portfolio have turned into cash flow negative. I’ve been able to manage this and come out stronger when the trend reversed, and they started producing the goods again. Not once have I had to cut back on my lifestyle.

Here I’ll explain the four strategies I use to prepare for negative cash flow on my buy-to-let portfolio.

Prepare for negative cash flow and never be caught out

‘Plan for the worst and hope for the best’ is a great mantra for all buy-to-let investors. If the worst does happen (an unexpected and expensive repair, or a sudden spike in interest rates, for example) planning in advance will ensure you’re able to cope with a property with negative cash flow. Here are the three strategies that you must put in place to prepare for  unforeseen negative cash flow:

1. Project your cash flow conservatively

The first and most important thing to do when you’ve identified a potential investment property are to run the numbers. Calculating the return you should expect from your investment property will identify how valuable the property will be regarding income and yield.

Our 2-year cash flow worksheet works so well because it includes every expense you’re likely to suffer. It also allows for a rise in interest rates. I’d always recommend that you overestimate your costs and underestimate your income on your rental properties, and allow for a void period of four to six weeks, too.

2. Invest with a cash reserve ready

My parents always taught me to have some rainy day money. When you’re investing in property, the same principle holds true. With a cash reserve waiting in the wings, you’ll be prepared for any event. If you don’t have a cash reserve you could find yourself putting up with below-par tenants, using less capable tradesmen to complete emergency repairs, or struggling to meet mortgage payments.

Don’t put all your spare cash into a property investment. If you have to stretch your finances to raise the deposit, you’re likely to kid yourself that the investment is better than it is and be short of cash when the proverbial hits the fan.

3. Use positive cash flow wisely

While your buy-to-let property is producing positive cash flow, make it work for you. Don’t look upon it as a windfall, a mini lottery win that can be spent on a new wardrobe or a couple of cities breaks in exotic countries. Put the money into a high-interest account with easy access.

The extra cash reserve that you build up by using positive cash flow in this way will enable you to be flexible through the tough times.

If you have invested for cash flow and not appreciation and you’ve prepared for negative cash flow, you will probably breeze through it.

Contact the team at Gladfish on +44 (0)207 923 6100 to discuss how you can cope with negative cash flow while benefitting from a buy-to-let property that attracts the very best tenants.

Live with passion,

Brett Alegre-Wood

Brett Alegre-Wood
October 26, 2016

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