Author: Bamberger.louis

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 🙂

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.

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

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 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…

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