Last editedOct 20223 min read
Investing in property is often looked upon as a sure-fire way of making money. The truth of the matter is that there is really no such thing as a certain money-maker. Even in a rising property market there are factors which can make a particular property a poor investment. A poor property investment is one which over the longer term costs the landlord more money to purchase or maintain than it actually brings in via rental income. Before taking the plunge and investing in a particular property, be certain that it’s going to produce a healthy cash flow. The way to have this degree of certainty is by using a cash flow forecasting model.
What is a cash flow model?
In simple terms a cash flow model analyses your regular monthly income and outgoings and uses these figures – alongside predictions of your likely expenses – to determine how healthy your cash flow should be in the future. For a landlord, cash flow modelling is a vital tool, allowing an analysis of how much a property is likely to cost beyond the initial outlay, and what level of rent it might bring in.
How to build a cash flow model
Calculating buy-to-let cash flow is very simple, consisting of your rental income minus your buy-to-let expenses. The key to ensuring that the calculation is accurate, rather than a rough guess, lies in making sure that you don’t forget any of the expenses. These expenses are likely to include the following:
Cost of an Energy Performance Certificate (EPC)
Gas and electrical safety test costs
Admin costs – such as advertising the property and checking prospective tenants’ references
In some cases, you might choose to hand over the day-to-day running of the property to a management company, which generally charges 10% of the rental income. In some cases, some of the expenses listed above – such as utility bills and council tax – are the responsibility of the tenant, but there are other potential costs to consider.
Calculating cash flow on rental property
Many rental properties take the form of apartments, which often come with service charges for maintaining common areas, landscaping and gardening, and redecoration costs. If this isn’t included in the original tenancy agreement, you can’t simply pass it on, and must instead take it from your income. Clearly, this impacts on the cash flow, and it’s not the only thing.
In a busy property market and with the media packed with tales of a profound lack of rental properties, it can be easy to assume that your property will never be empty. This is a mistake, since even in a healthy market there is likely to be a gap between one tenant moving out and another moving in. This is known as a ‘void period’. During this time you are responsible for bills previously paid by the tenant, such as council tax and utility bills. You also still need to pay any service charge. So a void period impacts on cash flow in a number of ways:
Rent income is no longer flowing
Expenses such as council tax have to be paid
Additional expenses arise from marketing the property and finding new tenants
Whilst you hope that void periods are kept to a minimum they are by their very nature unpredictable, A prospective tenant may drop out at the last minute, just prior to moving in, for example, leaving you liable for another month’s worth of bills and charges.
When building a rental property cash flow model, ensure that you’ve included all possible expenses and are honest about the impact any void period will have on your figures.
Direct debit with GoCardless
If the cash flow is still positive when all possible expenses plus void periods are taken into account, it may well be that the property represents a good investment. Safeguard your monthly cash flow situation by opting to collect your rent via GoCardless, using the Direct Debit method. This ensures that the money is taken directly from the tenant’s account, rather than relying on them remembering to pay, and that it always lands in your account on the same date every month. Factors such as these make it much easier to plan for the future and deal with any unexpected expenses.
We can help
GoCardless is a global payments solution that helps you automate payment collection, cutting down on the amount of financial admin your team needs to deal with. Find out how GoCardless can help you with one-off or recurring payments.