Month: May 2020

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How a “Strategic Decision” made me an extra £7,900 a year cashflow from just one property

You’ll often hear me refer to “strategic decisions which optimise the financial performance of my property”. 

That sounds a bit fancy. Exactly the kind of thing an Accountant would say to impress a date.

I’ll be honest though, these “strategic decisions” are rarely complicated. Nor require specialist technical skills. And are not even that fancy.

In fact, I’ve found the best “strategic decisions” are the most simple ones, those which are available to any Landlord, regardless of technical skills or experience.

However, what you do need is good supporting financial data for your properties, and then be able to understand and analyse that data. That’s what makes a decision “strategic”. It allows you to make it confidently. That’s something that will impress anyone on a first date!

The best way to demonstrate this? Well let me walk you through an example of one of my “strategic decisions” from last year. 

This decision improved my profits by £4,600 a year, increased my cashflow by £7,900 a year and helped me diversify my asset base – all in one go.

Let’s set the scene:

  • 1 bed flat. Valued at £225,000. 
  • Mortgage of £100,000 (capital repayment at 3.75%).
  • Rent of £900 a month (£10,800 a year)
  • Yearly profit of £1,000 (includes mortgage interest of £5,600)
  • Yearly cashflow of -£2,300 (includes mortgage capital repayments of £3,300)

Question 1: Do you have this financial data for your properties? (A: You should have)

How did this make me feel?

I felt frustrated. I’d owned the property for roughly 10 years. Time for some number crunching!

Here’s the Financial Analysis I did:

1) Cashflow:

The simplest analysis of all. I looked at my yearly cashflow, and asked myself: Am I happy with cashflow of -£2,300? The answer was obviously no! “Why not” I asked myself. Why is it so low?

2) Cashflow % split:

I look at each component (Mortgage payment, service charge, agent fees, repairs etc) of my annual cashflow outgoings as a percentage of rent to see what was driving the cashflow loss. 

Ouch. This showed mortgage payments as 54% (5,600 / 10,400) which seemed high. Even looking at just mortgage interest, its 22%.

3) Return on Equity %:

I decided to test it further and look at profits. What was my Return on Equity for this property (I’ll do a future post on this powerful ratio – I promise)?

As the name suggests, it’s my Return (annual profit of £1,000) divided by my Equity £125,000 (value of £225,000 less mortgage of £100,000).

Which equals 0.8%. This is a super low % compared to my other properties, especially considering the work I put into running the property (I know this because I track time spent on each property). I could sell the property and put the equity in a bank account at a higher return! I knew something had to be done.

– LTV %:

Finally, I looked at my Loan to Value. This is £100,000 / £225,000 = 44%. Thats pretty low. That gave me wiggle room.

What did I do with that analysis?

Cashflow was low and profits were low, mainly driven by high mortgage payments. It was time to remortgage. Nothing complicated or fancy about that. Only this time I did:

– Interest only Mortgage (improves cashflow)

– Lower rate of 2.35% (reduce mortgage interest costs)

– Pulled out £50k equity which I reinvested in a different asset class with higher returns.

The result:

– My new annual mortgage payment is £3,500 (all interest)

– I receive £5,600 profit from the combination of this property and my new investments (an improvement of £4,600!).

– My yearly cashflow is better by £7,900 – that’s huge!

– Ive also got a £50k investment in new asset class, diversifying my Risk. 

Not bad for one decision hey?

And what was the key to that? 

I had good data and supporting analysis that easily identified an area I could enhance. This type of remortgage was new to me so yes, I was nervous, but as I’ll keep saying, good financial data is powerful as it allows you to make these types of decisions much more confidently.

So what can you do?

Remortgaging like this is not for everyone. It’s depends on your risk appetite, financial situation etc. But it gives an idea of what can be done to improve the financial performance of your property. 

My key takeaway: Take a look at your property numbers (Cashflow, Return on Equity, Component split %s and LTV). Does something not feel right? Can you spot anything that looks low? You could just save yourself a lot of money.

P.s. Little bit of fun homework: After the remortgage, what was my new:

  • LTV %
  • Return on Equity %
  • Mortgage interest / Rent figures
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How often should you do your Property Finances?

Unless you are a Property Finance geek like me, doing your Property Finances is a chore you don’t look forward to. In fact, you’d probably prefer to hoover the house and finally fix that squeaky door hinge if it means avoiding your Property Finances.

I can understand that. For most, even if they have the most efficient financial process ever invented, doing your monthly property finances still involves staring at numbers trying to make heads or tails of what they show. Yawn. Pass the TV remote please.

“Personally I love it, as it provides me new data. That data is powerful and allows me to make strategic decisions which help optimise the financial performance of my properties”

Anyway, I’m a geek. This is about you. Love it or hate it, as Landlords we know we need to do our Property Finances at some point.

The big question for today is…how often should we do it? Let’s start with the extremes…

Maximum frequency:

If you are ultra super nerdy keen on Property Finances, or have a portfolio of hundreds of properties and a full time Finance team, you could work on your property finances Every. Single. Day. That’s a lot. 

Let’s face it though, doing Property Finances every day is overkill. It’s excessive. Want to grow a healthy fruit tree and then spend all day every day watching it rather than enjoying eating the tasty fruit? Nope, me neither.

Minimum frequency:

Jumping to the other other end of the scale, I can’t see how any Landlord can avoid doing their Properly Finances anything less then once a year. For the simple reason that Tax returns (yes, that’s a legal requirement I’m afraid) are due every year.

Can you remember back to what happened last year? And everything between now and then? Didn’t think so. You’ll miss things, simple as that if you only look at Property Finances once a year.

Also, and I’d argue more importantly, doing your Property Finances gives you POWERFUL DATA which you can use to make your property make you even more money. You don’t want to wait a whole year to get and then use that data.

So how to strike a balance?

Finding some middle ground is key. And here’s where it will differ for every Landlord, based on:

  • The processes they have in place to automate / control their Property Finances
  • How much they enjoy doing Property Finances
  • How good they are at preparing / analysis Property Finances
  • How good their memory is!
  • How much free time they have
  • How many properties they have

I can’t tell you how long you should spend on your Property Finances. Look at the above points and figure out what’s best for you. Then stick to it. I can tell you how I do mine though:

  • I look at property finances twice a month. 
  • The first time (1st of the month) I collate and prepare all my financial data for the previous month (approx 45 mins)
  • The second time (15th of each month) I analyse the data with a view to assessing what strategic decisions I can make to enhance the financial performance of my properties (approx 1 hr)
  • Its deliberately split into two sessions to ensure my brain knows what the focus is for each session.
  • Time spent on both tasks is less than 2 hours a month.
  • I have recurring diary alerts for both monthly tasks.
  • My monthly Property Finances are prepared in a format that links into my annual Tax return (meaning the time to prepare my Tax return each year is less than 1 hour!!)

Is my way the perfect way for everyone? Most definitely not. But it works very well for me: It takes very little time, I enjoy doing it and it ensures I focus more time on the value adding strategic part: Data analysis and decision making.

What do you think? How often do you do your finances? Add a comment below if you have any tips. And open up that dusty spreadsheet 🙂