Cashflow & the Tenancy Cycle
Letting is not an “exact science” – because it involves people!
However, generally for a property, portfolio (or indeed any business) to be considered “viable” it has to generate a positive “cash-flow”, income or profit.
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Income vs Expenditure
Profit is obviously dependant on the difference between income and outgoings.
There are many factors which can affect both and we plan to make more information available on a business management / investment page shortly.
We’ll start here by looking at some of the more (and less) obvious things that affect your rental property income.
Working as agents, where we’re dealing with setting up new tenancies on a daily basis, certain things become much more obvious and here at Rosemount, we’d like to share our experience, explain our philosophy and, more importantly, help improve your income.
“Begin with the end in mind”
“Begin with the end in mind” are words of wisdom from our esteemed mentor.
They have a very specific relevance to finding and managing good tenants.
At the “beginning” of a tenancy, some of the most important things we try to take account of are things that will become important at the “end” of the tenancy – when the tenant eventually gives their notice and moves out.
These are considerations which will have a very direct bearing on:-
- the condition your property will be left in
- the time and money required for remedial work
- who will meet these costs
- will you experience rent arrears
- will your last month’s rent be paid
- the vacancy or “void” period – ie. how much time will elapse before a new tenant can view and move into your property
In truth, faced with a vacancy and losing rental, these considerations may not seem overly important at the start of the tenancy.
“Problem Tenants” – a useful “hypothetical” question
When considering an application for a tenancy a useful question to consider is this :-
If a judge or adjudicator ordered this person to pay you money – could you recover it?
Why hypothetical?
Well the point is this, if the answer is – yes, you could recover the money – chances are you’d never need to!
Of course, “if push comes to shove”, it’s good to know.
Conversely, if the answer is – no, you couldn’t recover the money – chances are, the applicant also knows this.
This knowledge may influence their actions at the end of the tenancy.
Profit and the “Tenancy Cycle”
By thinking about tenancies as a “cycle” it may become more obvious that the most important part of the cycle in relation to your profit, is the change-over.
The transition between the end of one tenancy and the start of the next is the part which can make the difference between your rental property (or entire portfolio) making a profit or making a loss.
If a new tenant can move in within a few days of the previous tenant moving out, this obviously maintains income.
Conversely, if delays are introduced before viewings can even be sensibly conducted, this can lead to months of lost rental. This can quickly run to hundreds, even thousands of pounds lost income.
Right here is where our fees can be off-set many times over!
Who should pay for cleaning and remedial works?
The other consideration is the time and expense of remedial cleaning and repairs and the impact for the next prospective tenants. Proper documentation, management and handling of deposits etc. can make a huge difference to the outlays you will be required to spend as the landlord. Here again this can run to hundreds or thousands of pounds.
This is big money and we’ve seen a number of examples where poor management has resulted in many thousands of pounds lost income. Often, the people worst affected are busy landlords with large portfolios.
Because of the “evidence based” nature of deposit protection schemes if you are to be successful in recovering legitimate remedial costs from outgoing tenants you will require to have the following administration in place:
- A well referenced tenant that cannot ignore their liability
- A private residential tenancy (PRT) agreement that specifies exactly (explicitly) what costs may be recovered
- An appropriately lodged deposit
- Deposit protection scheme “Prescribed Information” – timeously issued
- A comprehensive ingoing inventory
- An outgoing inventory report
- Photographic records as appropriate
Once again, if all of the above is in place (ironically) you probably won’t need to use it!
Amicable discussion and agreement with the out-going tenant is the norm.
However, this doesn’t mean it isn’t worth doing!
In our experience, where this isn’t in place, the “norm” is quite different – costly remedial works and a couple of months rental void. Again, I’ll leave the maths to you.