Five cash flow considerations you can’t afford to ignore
Property investment for positive cash flow is an investment to produce income. This type of investment could allow you to reduce the hours you work, pay a child’s school fees, retire early it’s life-changing. To take advantage of all the benefits of positive cash flow property investment, you need to know these five fundamentals to identify your perfect positive cash flow investment opportunity:
1. What is and how do you calculate positive cash flow?
Cash flow is simply the amount of money that is left over from rental income once all your costs and expenses have been taken out. When your rental income more than covers all the expenses, your cash flow is positive.
You might ask why anyone would buy a property with negative cash flow – when expenses outweigh income. Well, negative cash flow can make you a wealthy property investor if your objective is capital gain. For most investors, however, the objective is to create an extra passive income flow.
When you’re working out a property’s cash flow, don’t forget to allow costs for maintenance, void periods (when your buy-to-let property sits empty between tenancies) and service charges. Watch my video that explains our cash flow worksheet to learn about all the costs and expenses to include.
2. Investment property management is a value-added cost
When you put the numbers into your cash flow worksheet, you might be surprised that they’re not as high as you thought they would be. Your highest cost is probably your mortgage. If you plan to use an investment property manager, its cost can hit cash flow. But before you’re tempted to become a DIY landlord to cut this cost, consider the value you receive from an investment property manager.
A good investment property manager will ensure that your tenant looks after your property. If things go awry, property management services have the muscle to act quickly and use the law to evict (if necessary). They’ll ensure your rent is paid, respond to tenant queries about maintenance and repair issues, and field the silly o’clock calls that every landlord receives from time to time. Perhaps most importantly, the best investment property managers could reduce void periods and lease your property to the best tenants.
3. Be conservative in your cash flow considerations
‘Plan for the worst and hope for the best’ is a great saying, and never more true than when you’re calculating what cash flow your property investment will produce.
Overstate your expenses and underestimate your rental income. If you think you’ll have, say, four weeks per year of void period, allow for eight. Instead of calculating with your mortgage at the interest rate being charged, add a couple of percent on. Allow for higher maintenance costs than you think are likely.
By being conservative in this manner, if you don’t suffer a void period or interest rates stay put, or maintenance costs are lower than allowed for, you’ll find the extra cash flow is a big bonus.
4. How much positive cash flow do you need?
Obviously, the higher the positive cash flow, the better. However, before you invest, you should figure out how much cash flow you need. I don’t mean cash flow for income purposes. What’s most important in the short term is the ability for you to sustain your property investment.
As time passes, you’ll be able to increase your rent. It will increase your cash flow. In the first few months, perhaps a couple of years or more, you should consider what level of cash flow is needed to ensure your property remains viable as a buy-to-let. For example, there is always the possibility of an unexpected maintenance cost or void period. If you have a substantial emergency fund, then you don’t need as high a cash flow as you would without that money in reserve.
Hopefully, as well as positive cash flow, your investment property will increase in value.
5. You should use cash flow wisely
Before you invest, be certain of your objectives and sure of how you will use the positive cash flow your property produces. I’d recommend that you put some away in your emergency fund, save towards a deposit for another buy-to-let investment, or pay down your buy-to-let mortgage.
There’s no doubt that positive cash flow could change your life. If not today, then in the future. Let’s say you bought a £50,000 property 20 years ago, with a buy-to-let mortgage of £30,000. Today, that property would probably be worth around £200,000. The rent would probably be in the region of £900 per month. With mortgage payments of around £120 per month, you’ll benefit from extremely healthy positive cash flow.
Contact one of our team today on +44 207 923 6100, and take the first step on the road to life-changing positive cash flow.
Live with Passion
Brett Alegre-Wood
