Category: Landlord Experience

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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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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 🙂