Landlords: Debt get you stressed? It’s time to stress test your debt.

Almost every Landlord I know has debt. It’s that big fat thing called a Mortgage, whose monthly payments probably wipe out half of your rental income each month. 

Im not going to argue today whether mortgage debt is good or bad. The answer to that is something that will be specific to each Landlord based on their personal preferences, mortgage terms (interest rate, term etc) and how it compares to the value of the property and rent you receive. Although if you want my opinion:

“I see mortgage debt as good. It facilitates me running my property business”.

Instead, I want to talk about something accountants and other fancy Finance people call a “stress test”. And how Landlords can and should apply this test to their Mortgage debt.

Seriously? Are you just making this up?

Trust me, its a real thing. Let me start with a Wikipedia definition of a “stress test”:

“A stress test, in financial terminology, is an analysis or simulation designed to determine the ability of a given financial instrument or financial institution to deal with an economic crisis. Instead of doing financial projection on a “best estimate” basis, a company or its regulators may do stress testing where they look at how robust a financial instrument is in certain crashes, a form of scenario analysis.“

That sounds complicated. What does that really mean?

Put simply and applied just to property debt (aka mortgage), a stress test calculates the financial impact of possible changes in your mortgage payments. Time to get number crunchy. 

Let’s say for example your monthly mortgage payment is £1,060. That’s based on a 20 year capital repayment mortgage of £200,000 with an variable interest rate of 2.5% (base rate + 2.4%). Rent is £1,400 and other costs are £140 so monthly profit is £200.

Now, here’s the stress test part. You just need to ask yourself a few questions to test out possible scenarios and then calculate the impact. Something like:

  • What happens if interest rates go up by 1%? (A: Mortgage payments become £1,160, monthly profit becomes £100)
  • What happens if interest rates go up by 2%? (A: Mortgage payments become £1,165, monthly profit becomes a £5 loss!)
  • What happens if interest rates go up by 5%? (A: Mortgage payments become £1,611, monthly loss of £351 – ouch!)

How do I calculate this impact?

Easy. Use one of the many free online mortgage calculators and simply enter the number. Here’s one link you could use:

https://www.moneysavingexpert.com/mortgages/mortgage-rate-calculator/

Would interest rates really go up by 5%?

Probably (hopefully) not. But they could do. More likely is that it will go up by say 1%. The good new is that the stress test is not trying to predict the likeliness of each scenario. Instead you are just checking the impact on a few different potential scenarios. So no need to try and apply weighting to the answers based on likeliness of occurrence, or anything complicated like that.

Ok fine. That’s pretty easy then. What do I do with the results?

1) Firstly, check how much buffer you have for adverse movements: 

 – If even a tiny rise in interest rates results in you making a monthly loss – you don’t have much wiggle room – time to start planning for this (ACT)

– If you feel you are pretty well covered for a rise in interest rates – thats great. You can sleep easier knowing you are in control of your finances. (still worth reading point 2 below though)

2) If you need to ACT – do it, and do it now:

 – Its time to look at how to make your property more profitable. There are many way to do this (yes, yes, its coming in future blog posts) but the business as you are running it now has too much risk for the returns you receive

 – Buffer up. Put money aside. Rainy day fund. Call it what you like. You need to put money aside regularly to protect yourself for any future movements.

I’m on a fixed rate mortgage so this doesn’t impact me does it? 

Correct. Sort of. For now a change in interest rates won’t impact you. But unless you have a lifetime fixed rate at some point you will need to remortgage, and then you will move to a new interest rate. How will that impact your overall property profits? The stress test above will tell you that.

What’s more, I’m just looking at mortgage debt here. But you can go further and stress test more than your mortgage debt. You can calculate how your property finances would be impacted if, for example:

  • What if my tenant defaults and doesn’t pay rent for 6 months?
  • What if the property requires £10,000 of major refurbishment work that isn’t covered under insurance?
  • What if there is a major global flu / virus outbreak (surely this would never happen?) which causes rents to plummet 50%?

Get creative (Accounts like myself struggle with that). Think of some possible terrible scenarios. Then think how that would impact your property finances. What fun!

So to conclude

 I’d recommend that Landlords stress test their mortgage debt payments. You don’t need to obsess over the results (as they are just future possible scenarios) but it’s important to have an idea how these might impact you. You can then plan and prepare accordingly should the scenarios ever play out.

Don’t let debt stress you out. Take control of that debt stress by understanding it and then using that knowledge to plan accordingly.

Property is not just an Investment, it’s a Business

Being a Landlord. It all starts with Mindset.

Let’s start with how we think about property. We need to ensure our mindset is right here. So a property is not just a property. Its an asset. Its also an investment. Per Investopedia,

“An investment is an asset or item acquired with the goal of generating income or appreciation.”

In other words, its something you purchase to make money from.

Whether you are buying a property to then rent it out (Buy to Let, aka “BTL”), or to live in yourself, that property purchase represents an investment. The majority of Landlords are looking to generate income, for future capital growth, or preferably both.

Other reasons to invest do exist (i.e. diversification, to house a relative, charitable motives etc) but primarily the decision to purchase a property is driven by financial motives.

However, as a Landlord, property is more than just an Investment. It’s a Business, regardless of how many properties you rent out. A Business is defined as:

“an organization where people work together. In a business, people work to make and sell products or services. A business can earn a profit for the products and services it offers.”

Reading through that description, its easy to see why your rental property should be treated as a business:

  • It requires people (you and other stakeholders) to work together, be it tenants, mortgage lenders, cleaners or handymen.
  • You sell a service (a home for a tenant to live in).
  • You (hopefully) earn a profit for the service you offer (be that recurring income or future capital gain – or both).

I’d also add that owning and renting out a property involves making strategic decisions, deals with cash inflows and outflows and requires time input from you as the owner – all things, along with many others that I’d associate with a running a Business.

As a Landlord, it’s vital to think of your Property as a Business. For starters, a property purchase for most represents the biggest investment they will ever make. Its also a decision made with a view to generating income or capital growth. These represent two very important factors in most peoples lives. As such, a property should be given the same time, resources and respect as if you were running a Business.

Key point: As a Landlord, you have a Business.

Having this mindset is key if you want your property business to perform well.

How time consuming is it being a Landlord?

THE BAD NEWS: I can’t answer that question for you. 

THE GOOD NEWS: You could (and should!) answer it for yourself.

This blog post will explain how and why you should track how much of your time it takes up being a Landlord. And then what you can do with that information.

Let’s start with why I can’t answer the question for you

It’s because the answer is “it depends”. The time spent being a Landlord depends on many factors, including how many properties you have (obviously!), whether you self manage or let via an estate agent, the age of the property (older ones = more repairs), how far away the property is (assuming you visit once in a while) and importantly, whether you have processes in place to automate the tasks involved in managing the property.

So the answer to the question in the blog title could vary from almost no time at all, to it being a full time job requiring 50+ hours a week.

However here’s the good news:

As landlords we are in a position to know exactly how much time we spend being a Landlord. The even better news is that it’s super easy to do this. Here’s how I do it:

“Each month, alongside recording all my financial data, I write down how much time I’ve spent on each property, to the nearest hour”.

It takes only a few minutes to do this each month, as I don’t worry about it being 100% accurate to the nearest minute. Instead I simply think back over the month and guesstimate the time spent on each property (in another post, I’ll explain my system for recording all the property related tasks I do which makes it even easier to track my time).

The result? 

Using this simple process means I have a wealth of “time” data. I know how long I spend on each property every year. I know which properties take up more time, how this compares to prior years and how much time I spend overall.

That data is powerful. Think back to me likening a profitable Investment Property to a healthy fruit tree. Well data is to Financial Performance like what roots are to a tree. It’s the core. Its the fundamentals which ensure not only the survival, but also health and success of the tree/property.

I appreciate the irony of it taking extra time to record time! But it’s really important for Landlords to record their “time” data as you can use this to make strategic decisions which optimise the financial performance of my properties.

How so? I want to know how to save time, not add to it.

I’d agree. But think of it as time investment, not spent. 

Let me explain it this way: I think we’d all agree that us Landlords want to make money out of our properties. But making money is no use if it consumes all our time. Or even if it consumes our time inefficiently.

For example, lets say a property provides a yearly profit/cashflow of £5,000. That sounds nice right? Well if that same property requires you to spend 1000 hours (I’m exaggerating to show a point), then really it only makes you £5 an hour. Would you sacrifice your time for £5 an hour? Probably not. Definitely not once you factor in the extra stress and worry that comes with running your own business (property).

How does that “per hour” return compare to a property that provides a yearly profit/cashflow of £2,000, yet only takes up 50 hours of your time? I’ll let you calculate the profit per hour on that one and decide which property you’d prefer. 

What can you do with that data?

Armed with this “time” data, you can make changes to how you run a property (perhaps its time to stop doing the repairs yourself, or hire an agent, or even sell a property if its too time consuming). That decision part is up to you, based on your own situation and preferences. The key message is that without tracking your time, you won’t know about any time inefficiencies or potential enhancements you could implement!

And thats why I want to know exactly how much time I spend on each property, each month. I compare this to the monthly profit that same property provides (FYI I also track other metrics such as stress and tasks done but I’ll save that for another post). Its only by collecting this “time” data that I truly know how well a property is performing.

I’ll say it again: Data is powerful. A little time invested tracking time spent could save you a lot of time/money in the long run!

A day in the life of a Landlord: Worry, Risk and Admin. But wait, surely there is something else?

I’ll openly admit, being a Landlord often gives me sleepless nights. There are days where I lose money. That pile of admin just keeps on growing. *sigh*

So why the hell do I do it? Why does any Landlord do it for that matter? Surely it’s better to just sell up and stick the money in a Bank account?

Well as the title of this blog posts suggests, Worry, Risk and Admin are not the only things that Landlords get to experience. There are actually many positive benefits to owning an Investment Property that explain why Landlords sacrifice their sleep, risk their own money and spend countless hours of their own time.

What are these benefits? Please tell.

To answer that, I asked some Landlord friends to explain in one short sentence why they own an Investment Property – here’s what they said, including my own response:

“For long term investment / future pension”

“To supplement our state pension in retirement”

“Passive income”

“Income stream to facilitate earlier retirement”

“pension supplement/ earlier retirement!”

“Long term investment”

“An investment where I hope to make long-term financial gain”

Some fairly consistent answers there. I’d lump all of those into a “Financial Benefits” category. These Landlords are expecting a Financial return from their Investment Property, either now or in the future. Which makes perfect sense. Wherever you have risk (I’d extend “risk” to also include worry and admin!), you should get return. 

The risk-return relationship: Generally, the higher the potential return of an investment, the higher the risk. 

Stick all your money in a low interest savings account is easy and requires minimal effort. But it also won’t give you the same financial benefits that owning an Investment Property can provide (please note, Im not saying putting money in a Bank account is bad thing!). Being a Landlord might give you a few grey hairs, but those should be more than offset by the rewards on offer.

Lets break those Financial returns down a bit:

In property terms, the Financial Returns referred to above arise in the form of cash in your bank account both now and in the future. Specifically:

  • Source of income (means don’t need to rely 100% on your employment / pension income)
  • Passive income (Property doesn’t require a set number of hours like paid employment) 
  • Investment (can give rise to future capital gains which can be converted to cash on sale, or passed to future generations)

What will you do with the Property Income / Capital gains? Thats up to you.; Retire earlier, more holidays, less work, better lifestyle? You chose!

Believe it or not, there are even non-financial types of “Return” for Landlords that can explain why they own an Investment Property:

  • Property is a people business. It’s enjoyable working with different people.
  • Interest / passion / purpose – Property can be interesting. Its everywhere we look. Its tangible. Its real!
  • Helping the Community (despite what press have you believe), as a Landlord you serve an important purpose providing a home in the Private Rental Sector.

So is it worth it?

Absolutely. As Landlords we will frequently feel worried, be snowed under with admin and can even lose money. But there is (or at least should be) a very good reason you are a Landlord. Id encourage every Landlord to have a quick think what their reason is. And then every time your property feels stressful or takes up your time, just remember that reason with a smile.

Would you agree with benefits Ive added in thus post? Would you put something different?

Anyway, I’m off to book a holiday (joke!)

What’s the name of that plumber again?

I’ve spoken before of the purpose of this blog: To help Landlords optimise the financial performance of their properties. I liken this to growing a healthy tree which produces tasty fruit for you to enjoy. 

But what I don’t want is for Landlords to spend all their day watching or tending to the tree. You wouldn’t have time to enjoy eating the fruit which defeats the purpose of growing it in the first place.

So how do we avoid that happening? We implement processes which allow the tree to continue growing healthily on its own – without us watching it 24/7.

Let’s touch on one of these today. Here’s the good news: Processes don’t have to be complicated or require expertise to implement. In fact, the best ones are usually the simplest. Here comes today’s process tip (more blogs posts to come on others):

Store contacts efficiently:

How many times have you tried to remember the phone number of a handyman? Or the email address of the solicitor you used 4 years ago? Or the name of your estate agent who deals with the finances?

It used to happen to me a lot. And each time it was annoying, stressful, time consuming and inefficient trying to go through old emails, documents or my memory to locate the contact details. No wonder I don’t have much hair.

I agree, it’s annoying. How can I fix it?

How about if you have all your property contacts categorised and listed in one place? Imagine that, any time you need to remember / contact someone, you can go to that same place and find the phone number, email, address  and even website for them immediately.

Life would be easier right?

That does sound good. What Application or system should I get?

Here’s the best bit. You don’t need a fancy App, website or system to do this (although there are ones which exist if you really feel it’s needed). Instead you could use:

– The notes section of your phone/laptop

– Your phone contacts and sync this with laptop / other devices (this is what I do)

– Maintain a contacts document (excel spreadsheet?)

– Use social media (Facebook?, Google?)

– You can even hand write them down. Old school! But if that works for you then go for it.

There’s lots of other ways you can do this. You don’t need training or specialist skills for any of these. Just a few hours for the initial setup and then ensure you a) keep a backup, and b) use consistently and maintain the list going forward.

Go premium – want to take it one step further like a pro?

 – Why not add speed dial functionality for your key contacts. 1. calls the tenant, 2. calls the estate agent etc

– Add  key references to contacts. No point having the number of the electric company if you don’t have their reference stored in the same place. Same for insurance, mortgage references. 

– If you have multiple properties, categorise contacts according to property. 

So what do I do next?

So if you are not already doing this, my advice is to think about a contacts storing process that would work best for you, schedule in a few hours to set this up and then give yourself a pat on the back. At the bare minimum, just promise me one thing….any time you find yourself cursing that you can’t find something property related, ask yourself: How can I avoid this happening next time?

The result of doing it?

Without spending a penny, you have improved the financial performance of your property. How? Well you won’t have to waste time searching for contacts, so you’ll have more time to work on the strategy / optimisation part of running the property. Or you can just relax and enjoy your extra free time.

Happy fruit eating!

P.S. Im always hunting down new and improved ways for making my properties more efficient. If you have a good way of managing your contacts which I’ve not mentioned above, please let me know in the comment section below…

P.P.S Its only fair to share my Contacts Process. Enjoy!

 – Contacts are all stored in my iPhone contacts App. This will include number, email and company name. This is backed up to my laptop.

 – I categorise these by including a property short name in the contact title (i.e. MHead = Maidenhead flat) This allows me to search MHead and all my Maidenhead contacts pop up.

– References / documents are NOT saved in same place (embarrassed face emoji) – I have a separate excel spreadsheet which lists all my references – its on my list to merge the two – I promise!

My contacts for each property include (in no particular order):

– Tenants

– Mortgage provider

– Plumber

– Handyman

– Electrician

– Solicitor who I used to purchase property

– Estate agent (usually numerous contacts for maintenance, lettings, finance)

– Freeholder

– Managing agent (service charge provider)

– Concierge

– Council tax provider

– Electricity supplier

– Water provider

– Gas provider

Landlords: Is it ok to be scared?

Confession: As a Landlord, I regularly feel scared. Wow. It feels better to write that down. Is that normal? Is that acceptable? 

I feel the answer is “Yes” to both of those questions, although with a caveat for the second question. Here’s why…

Is it normal for Landlords to worry?

A big fat capital YES. There’s 1001 different reasons why Landlords might worry / feel scared.

After all, we own an expensive asset (a property). That means we have more to lose.

As I’ve argued before, owning an investment property should be thought of as running a business. You need to adopt that mindset, and run an investment property like a business to ensure you optimise the financial performance of your business (property). 

However that comes at a cost. A property business has rent to collect, bills to pay, risks to manage, clients (tenants) and other stakeholders (lenders, suppliers etc) to keep happy.

Each of those tasks brings risk. Which quite rightly brings worry (and the feeling of being scared). That is perfectly normal. Don’t shy away from that. You run a business. Things can go wrong. It would be worrying if you didn’t worry about it! It’s a natural human emotion.

But how much worry is acceptable?

Here’s my caveat (gosh I loved that word). Whilst feeling scared is perfectly normal when you own an investment property, there’s a limit to how much worry you should have.

You can’t spend your whole life worrying. That’s like growing the perfect fruit tree and then  watching it every day and night in case a leaf falls out of place. 

Instead you need to adopt this mindset:

1) Put in place processes to reduce the worry associated with property risks – here’s a few examples: 

– Reference prospector tenants

– Have a process for collecting rent on a certain day by Direct Debit

– Maintain a cash buffet to cover unexpected costs

– Carry out detailed financial due diligence using a range of tools / metrics on any decisions (new investments, refurb, restructures etc) 

– Regularly check the property and fix repairs quickly

– Have a list of contacts saved in an accessible place

– Have good Landlord insurance 

– Set up financial controls and checks to ensure cash inflows / outflows are analysed 

There are so many more I could list, but you get the point.

If you implement the above suggestions, along with many others future blog posts will cover, you can sleep easy (easier at least) at night knowing you have done everything possible to reduce risks associated with your property. That fruit tree will still be there in the morning.

But…

2) Even with the best processes in place, you need to accept that things will always go wrong at some point. That’s unavoidable. There’s no point worrying over something outside of your control or that you can’t predict. That part is not healthy or acceptable worry.

So to conclude, if you find yourself scared, ask yourself: Have I put in place processes to manage this risk?

– If yes, then don’t worry. You’ve done everything you can. Go to sleep. 

– If no, you are right to worry. And see the worry as good because you can use this to focus your attention on an area which requires improvement. Then you can stop worrying once it’s fixed. 

As a Landlord, do you worry? What keeps you up at night? What’s the best way to mitigate this? Let me know!

Why is an Investment Property like a Tree?

Why do I keep referencing “tree” on this blog website? And not just any tree. A money tree. It’s time I spilled the beans….

But first, a quick reminder that I run this blog with the primary aim of helping Landlords optimise the financial performance of their investment property. How do I do that? Simply by writing blog posts which teach financial skills and knowledge which can be used Landlords to make your property, make YOU money. 

Yeah yeah, I get it. Property Finance knowledge. But why reference a tree?

Well a tree is the perfect analogy of the financial performance of an investment property. 

Trees are big sturdy things that, if well maintained, last for years. Think of a grand oak tree. Trees are everywhere. They are constantly growing and changing in different seasons and require external factors like water, sunlight and soil to grow and thrive. In the right conditions trees produce leaves and some even bear fruit. 

Does that sound like an investment property? 

Let’s break the tree down (not literally):

Mindset: If you own a tree (investment property) you need to firstly acknowledge you own a tree. You can’t just sit back, forget you’ve got a tree and hope it drops food through the front door every month. Don’t say it (money doesn’t grow on trees)!

Roots: Any healthy tree is supported by strong, reliable roots. Financial performance can’t be optimised without having good financial data (the roots) available to rely on, that you can analyse and then used to make strategic decisions which make your property, make YOU money. 

The tree itself: A tree trunk and branches is like a balance sheet. A snapshot of your net worth in that property. Usually an asset (house) less a liability (Mortgage). It needs to be strong and healthy in order to produce leaves and fruit.

Leaves: A healthy tree should produce leaves. An investment property should produce profit. You don’t eat the profit/leaves of course, but it’s a sign of good health and important factor in the financial performance of your property.

Fruit: The end goal for any healthy tree, producing tasty and generous fruit for you to eat. This is like cash which you can consume (not literally), but in the sense that it can pay your bills, income stream etc. It’s the tangible end result.

How do you give yourself the best chance of your tree growing more fruit (money)?

If you had a tree in your garden and wanted that tree to be as healthy as possible, and produce juicy fruit year-on-year, you would take an active interest in that tree.

In fact, you’d get yourself the best garden shed and toolkit around and use that to lovingly tend to that tree. You’d know that tree inside out, branch by branch, leaf by leaf.

An investment property is exactly the same. You need a powerful financial toolkit to help it thrive. That toolkit would enable you to know just how strong the tree trunk is. How many leaves exactly are you growing each year. What branch provides the greatest ratio of fruit. Do some branches require trimming? Only by knowing everything about that tree (property) will you know if you can enhance the fruit it produces. 

Perfect. My tree is covered in fruit (money). What do you I next?

That’s depends on you. Maybe you want to grow an orchard. Maybe you have too many trees (properties) in your garden (portfolio).

Perhaps you have just the right number of trees, but you can trim some of the existing branches to produce more leaves or fruit in future years. How do you predict future years? These are similar questions Landlords face (Refurb, Refinance, Streamline, Tax efficiencies to name a few). Luckily your newly acquired financial toolkit skills will put you in the perfect place to make these strategic decisions so you maximise the financial performance of your property.

Love it. So I’m done right?

Not quite. I said at the start you can’t ever fully sit back and relax if you want consistent and high quality fruit (money). You have to work for it.

The tree will need watering. It may need weed or insect killer applied, or nearby trees trimmed back to offer more sunlight. Trees are ever growing and changing which is similar to property. Think new tenants, enhancements or legal regulations over the years.

Saying that, you don’t want your entire life to be spent watering and watching your tree. You wouldn’t have time to enjoy eating that lovely fruit.

Which is why you need processes, systems and controls in place. These ensure your tree (property) receives the love and care it needs to reap fruit, but in a time and cost effective manner for yourself. Automate manual processes. Be efficient. Be effective.

You are the proud owner of a tree. Give it some love and enjoy eating that fruit!

Does that Tree analogy make sense or am I talking nonsense? Be great to get your thoughts…

Touching the Void: How Landlords should think about Voids

The word “Void” fills Landlords’ hearts with dread. It makes their knees go weak. But Voids are, well…unavoidable (see what I did there?!). If you rent out property, at some point (many points), your property will be un-tenanted. Vacant. A VOID! Cue dramatic music.

Here’s the bad news. I can’t wave a magic wand to help you a-void the voids. But what I can do is teach you how to calculate the impact of a Void period.

Yes, voids will still cost you money. But the information in this blog will arm you a few tools you can use to reduce those costs. Sound good? Let’s go….

Let’s start with a definition:

“A void period when your property is unoccupied with no rental income”

I don’t think I need to simplify that further. Voids generally occur between tenancies, but can also occur when you first purchase an investment property, or prior to a sale. Some are short, maybe even just a few days, but some can last significantly longer.

So what does it actually cost Landlords? Well there’s two things you need to calculate. For both, let me use the actual numbers from a property of mine that is currently unlet (void).

1) Actual cash outflow

This is easy to work out. Since the day when your last tenant checked out for which you had received rent up until, what costs are you actually incurring? Calculate this on a monthly basis like I’ve done for my property below:

  • Mortgage £290
  • Council tax £97
  • Electricity £45 (expected once bill received)
  • Water: £25 (expected once bill received)
  • Service charge: £190
  • Ground rent: £25 (monthly pro-rated amount)
  • Insurance: £13 (monthly pro-rated amount)
  • Maintenance: £0 (cleaning and repairs covered by previous tenant’s deposit)
  • Estate agent fees £0 (only pay these fees when property is let)

Total monthly cash outflow: £685

£685!! That’s a lot of money I’ve got to pay out. And that’s Every. Single. Month. That works out to be £23 a day and a whopping £8,220 a year.

So what can I do with this information? Well the key thing here for any Landlord is to check they have enough cash to cover their cash outgoings? In my example, I need to work out how many months can I pay out £685 before I run out of money. To do this, I’d take my total cash pot and divide by 685. I wont give you my exact number, but I’m fine for a while.

2) What is the Void Opportunity Cost

In property void terms, Opportunity Cost is a fancy way of saying “what money am I missing out on by not having a tenant paying rent”. Its similar to the monthly calculation we did in Point 1, with a few differences which I’ll explain:

  • Lost rent £900 (this is the rent I wont receive each month the property remains unlet)
  • Mortgage £290 (N/A for Opportunity Cost – pay this regardless of whether I have a tenant)
  • Council tax £97 (only pay this for void period, tenant pays when tenanted)
  • Electricity £45 (only pay this for void period, tenant pays when tenanted)
  • Water: £25 (only pay this for void period, tenant pays when tenanted)
  • Service charge: £190 (N/A for Opportunity Cost – pay this regardless of whether I have a tenant)
  • Ground rent: £25 (pro-rated) (N/A for Opportunity Cost – pay this regardless of whether I have a tenant)
  • Insurance: £13 (pro-rated) (N/A for Opportunity Cost – pay this regardless of whether I have a tenant)
  • Maintenance: £0 (N/A as no additional repairs from property being void)
  • Estate agent fees -£135 (when property is let I pay approx. 15%, or £135 to the agent, so I save on this cost when property is vacant)

Total monthly opportunity cost: £932

Remember, this is not what cash I’m actually paying out (that was Point 1). Instead, Point 2 is showing me what its effectively costing me on a monthly basis by not having a tenant. It’s a huge number. £31 a day. £11,184 a year. I need to find a tenant fast!

And here’s where it gets interesting. This information allows to me re-assess the rental price I’m currently marketing the flat at.

Its normal for Landlords to want to charge maximum rent for their property, and often, spurred on by valuations provided by estate agents, Landlords will hold out for higher rents.

But is this a good idea in the long-term? Take my property for example, lets say someone offered £850 a month. My gut tells me this is too low. I may even get a little annoyed: how dare they value my flat at such a low value.

Well actually, if I was to accept £850 rent a month and they moved in tomorrow, that would reduce my yearly profit by £510 vs if I waited and let property out at £900 (12 months x (£900 – £850) x 0.85% for agent fees). That is roughly half of the £932 I lose each month for the property being void.

So actually, unless I think I can let the property at £900 within 2 weeks’ time, its better to accept a lower rent of £850. Even shorter if we agreed a rental of £875 etc. Obviously you don’t know how long it will take to let a property at a given price, but this technique does put you in a much better position to assess your expected rental amount.

I’ll show off a little by saying you can actually calculate a formula that shows the optimal rent vs void period to maximise overall profit / cashflow –based on assumptions on how long it will take to let the property. That’s for another day (or message me and we can discuss) as it probably over complicates the main point.

Key message: Calculate how much a void actually costs you (cash outflow and opportunity cost). Use that information to better assess rental price the flat is marketed at, as well as offers received below your expected valuation – a lower rental amount may actually save you money.

Before I sign off, let me add one final point, and slight benefit of void periods. Not having a tenant in the property is the perfect opportunity to carry out any refurbishment work required as reduces disruption and is easier to coordinate – use the time wisely.

That’s all folks. Make your property, make YOU money!

Louis

Rental Yield – Is it really that important?

This blog post will cover an often used term in property: Rental Yield. Search for this online and you will repeatedly read that Rental Yield is a key / important / crucial financial metric for Landlords.

But is it really? I’m not so sure. I believe it’s a financial metric that Landlords should be aware of and calculate for their own properties. But would I call it a crucial metric, or the key one Landlords should use? Nope. Frankly I think Rental Yield is overrated. Read on to find out why…

Hang on a minute, what actually is it?

Let’s start with a definition. Oh wait, its not that easy. Turns out there’s loads of different definitions of Rental Yield. That’s confusing! In that case, let me add a few definitions below:

“Rental yield describes your annual rental income, as a percentage of the total value of the property. To calculate, divide your annual rental income by the property value. Multiply the figure by 100 to get the percentage.”

Summarised as: Annual Rental Income / Property Value x 100.

“Rental yield is the return a property investor is likely to achieve on a property through rent. It is a percentage figure, calculated by taking the yearly rental income of a property and dividing it by the total amount that has been invested in that property.”

Summarised as: Annual Rental Income / total invested in the property x 100.

“Rental yield is the financial return you are able to achieve on a rental property. It is calculated by dividing your annual rental income by the total value of the property, including initial purchase and any improvements that you have made or need to carry out in the future.”

Summarised as: Annual rental income / total invested and future expected investment in the property x 100.

Everyone follow? Easy to spot which one is correct? Afraid not.  

Don’t worry, I’ve got some good news

IT DOESN’T MATTER WHICH CALCULATION YOU USE! You could argue all the above definitions are correct. The important point is that whatever method you use, make sure you apply it consistently to your own and any comparable properties. Chose one calculation, any one, and stick with it.

“For my properties I use: Annual Rental Income / Property Value x 100. Property Value is my latest valuation of the property.”

Fine, but I’m rubbish at Math. How do I actually calculate it?

Good news again. You don’t need to have a Phd in Mathematics to calculate this one. Let the Internet help you out. There is an abundance of sites where you can enter in your numbers and it will calculate the Rental Yield for you. Here’s a few you can try:

https://www.your-move.co.uk/landlords/rental-yield-calculator

https://www.landlordvision.co.uk/rental-yield-calculator.html

Got it. So what’s it useful for?

Let me give my good old friend Rental Yield some credit. It’s not a bad Financial metric. In fact, it can provide some handy information – here’s a few examples:

  • Comparison tool. As long as you apply a consistent calculation methodology, its useful for comparing the performance of different properties in your portfolio against each other, or vs a comparable property. Useful if you are buying a new property to check Rental Yield first.
  • Are rents set correctly? A low yield could mean you are not charging as much rent as you could be. Definitely worth knowing about – I’ll describe how this helped me below.
  • Mortgage affordability. Mortgage providers will use Rental Yield affordability criteria to to assess whether then will loan you money – that’s important!

Nice. What’s a good yield?

Here’s the bad news about Rental Yield (at least the start if it). I don’t actually know what a good yield is! There’s a whole range of factors that can influence yields, and make a comparison tool into something un-comparable (if that’s even a word). Here’s a few of reasons very generic reasons why they can differ:

  • Property size. Let’s take flats for example. 1 beds typically have higher yield than 2 bed flats.
  • Property type: An HMO (House of Multiple Occupant – loads of people living in same house basically) should get a much higher yield than a Single Let (property let to one tenant individual/family/couple).
  • Regional differences. Properties up North typically have higher yields than those down South.

Even within specific categories (lets say you were comparing two 1 bed single let flats in the same Town), you could have vastly different rental yields which may or may not be indicative of which property is “better”.

I sense you are just getting warmer up on the downsides of Rental Yield. Spill the beans.

Oh yes, there are other stronger reasons why Rental Yield should be taken with a pinch of salt:

  • Property Value is subjective: I might value a property at £250,000. Assuming £12,500 annual rent that’s Rental Yield of 5%. What happens if someone else (Agent, Buyer, Surveyor) values the same property at £225,000? Rental Yield increases to 5.6%.
  • Yield vs capital growth: Remember what I said above about North vs South differences. One of the reasons driving higher yield up North is lower capital growth, i.e. lower average property prices. You might have a really low yield on a property, but if the property value has increased 50% in the last 5 years, you are one happy bunny!
  • Macro market: Property values and rents and ever changing and impacted in different ways at different times by wider market events. Think generational shifts between people buying vs renting, Brexit uncertainty etc.
  • Doesn’t tell whole story: KEY POINT: Rental yield doesn’t tell the whole story. Rent contributes towards your profit and eventual cashflow (what you actually receive in your pocked) but it doesn’t capture your costs. To truly assess a property’s Financial Performance, you need to use more powerful Financial metrics.

Before I conclude, let me provide a recent example from my own portfolio where Rental Yield did however prove useful:

“The Rental Yields on my properties range from 3.9% to 5.1%”.

By calculating and reviewing my yields monthly, I was in a position to identify and investigate the reason for the property with the lowest Rental Yield of 3.9%. Rent had been static for 5 years due to good tenants renewing their contract and me choosing not to raise rents. The property value had appreciated well during this time. With new tenants now being sought, I was able to use Rental Yield as a way of helping me (not telling me) determine a new and increased rent level to advertise and eventually let the property at.

Conclusion

As a Landlord you need to know and be able to calculate Rental Yield. It has many uses. But it also has many limitations so don’t rely purely on this one Financial metric. There’s so many better ways to assess the Financial performance of your property. Want to know what they are? Keep reading this blog….that’s exactly what I plan on sharing in future posts 🙂

What do you think about Rental Yield? Time to wield the axe or give it a stay of execution? Be great to get your thoughts….

Deposit Deductions: How to avoid a dispute EVERY* time

* I’m exaggerating! That is highly unlikely as Deposit deductions are always a contentious topic.

However, in this blog post I’ll share a real life example of my own regarding deposit deductions which concluded last week, where I’ve put into practice some of my learnings from previous mistakes. My key learnings:

  • Compromise is key!
  • Be fair (but firm where needed)
  • Don’t quibble over small amounts. Time vs money.

“A study by the leading tenant’s website, The Tenants Voice, revealed that while 70% of deposits are returned in full, 17% are returned in part and 13% not returned at all. The survey of more than 2,000 private tenants also found that 35% of respondents had previously lost some or all of their tenancy deposit.”

Before we start, lets just state some of the obvious points regarding best practice on deposits:

  • Maximum deposit capped at 5 weeks of rent
  • This must be registered in a Government approved Deposit Registration scheme
  • Certificate must be provided to tenants

The above points are legal requirements. Make sure you comply. The next one is highly recommended – in fact you’d be foolish not to do this:

  • Have a detailed Inventory report completed by an Independent Professional Inventory clerk at both the checkin and checkout. This should be signed by both the Tenant and Landlord.

Anyway, let me summarise my experience ever the last few weeks. Every email is real, including numbers. Obviously no names or confidential data is included. Please read and share your thoughts.

Background

Tenant had been in flat for 9 months out of a 12 month contract, using the break clause to leave earlier than the full term. Monthly rent: £900. Deposit registered in TDS: £1,038. Inventory report completed by Independent Inventory clerk at checkin. The same clerk completed the checkout report.

Checkout Report Summary

TO BE NOTED

The check out was carried out using the check in report dated 21st August 2019.

The property is grubby & dirty, requires cleaning throughout. The flat was only domestically cleaned at the check in.

The following differences were noted at the check out (Ive only included key points):

ENTRANCE HALL

  • The walls have further shaded usage.
  • The carpet has further grey grubby shading to the walkway and additional grubby grey spots.
  • The built in cupboard is very dusty to the interior. A few small items of rubbish has been left.

BATHROOM

  • The walls have numerous brown grubby splashes throughout.
  • The walls tiles have some scaling and some black spots to the grout.
  • The WC & Basin is scaled and dirty.
  • The bath panel has heavier water damage and cracking.
  • The bath has heavier rust marks to the edge. Scaled & dirty. Heavier black stains to the sealant edge.
  • The shower hose & head & screen have further scaling.

BEDROOM

  • The carpet has further grey shading, assorted grey spots & marks, a few small heavy black spots to the end of the bed.

RECEPTION ROOM

  • The walls have a one foot brown grubby stain by the dining table.
  • The carpet has further grey grubby shading, assorted grubby spots & marks.
  • The sofa has heavy grey spillage stains to two seat cushions, a three inch hole to one seat, further grey shading and additional grubby spots.

KITCHEN

  • The woodwork has a rust mark and is dusty.
  • The vinyl flooring has a two foot yellow stain by the dishwasher and grubby marks.
  • The sink has some scaling & is grubby.
  • The work surface is grubby. Light white saucepan heat ring mark over the washing machine.

What do I do??!

Quite a few items requiring attention! After getting a quote from a cleaning firm, I went back to the Agent who manages the property with the below proposed Deposit deductions.

  • Sofa damage £100
  • Cleaning £155 (I will offer to pay half of the £310 quote)
  • Paint touch ups £150
  • Item removal £25

Total: £430

“The old me would have gone into much more detail, costing up individual line items and reaching a significantly higher deposit deduction.”

What happened next?

Copying in the next 3 emails discussing the deductions:

  1. Tenant reply via Agent:

“Your tenant has asked if you are prepared to waive the claim for the sofa damage and paint touch up.  This is due to them believing the paint and sofa were in a similar condition at the start of the tenancy. They have agreed to £155 for cleaning and £25 for item removal. Please let me know if you are prepared to accept the £180 offered?”

My reply back:

“My deductions were based on the independent inventory report which identified areas which were in a different condition at the end of the tenancy. So not something I can or should just write off I’m afraid. However, to try and avoid this dragging on too long, I’m willing to charge just 50% of what I believe the cost will be for the sofa/painting. So total deductions would be:

  • Sofa £50 (50% of £100)
  • Painting £75 (50% of £150)
  • Cleaning £155
  • Items removal £25
  • Total: £305

The response:

“The tenant have agreed to the claim of £305 so this sum will be released to you shortly.”

The Result / Learnings

Firstly, its worth noting that this discussion lasted just 3 days. That’s pretty quick. Deposit disputes can drag on for weeks, if not months if they go to arbitration. A quick agreement saves me and the Tenant significant time and stress.

Was it fair for both of us? We’ve both agreed it pretty quickly, so a good indicator we are both happy.

Will the deposit deduction cover all my expected costs to bring this property back to its state at the start of tenancy? No. I will need to cough up some of my own funds to do this.

But here’s my key learning over the years:

  • Compromise is key! Save everyone time and energy by trying to see their view point. Move towards that point as much as you can.

  • Be fair (but firm where needed). As a Landlord, you run a Business, not a Charity. So sometimes deductions will need to be made to recoup costs you will incur. Charge for those costs without guilt. But be fair. Don’t charge more than you need to, and be grateful that to the Tenant for being a paying customer over the months/yearly – so give them some goodwill!

  • Don’t quibble over small amounts. Time vs money. Seriously, small amounts are not worth fighting over. Drop them, take the hit and move on. Stay sane.

Did we reach a fair conclusion? Please share your thoughts on the outcome. Id also love to hear about others’ experiences. The more we share on how disputes work in real life, the less grey this area becomes 🙂