7 Strategies to Help Buy-To-Let Landlords Become More Profitable
Cash flow is the difference between income and outgoings. For property investors, it is calculated by deducting mortgage repayments and other costs from rental income. Positive cash flow is when rental income exceeds all costs. Negative cash flow happens when your costs exceed your rental income.
For many property investors, how to improve cash flow on a rental property is a constant goal. Whether your property is producing positive cash flow, or you find yourself subsidising your buy-to-let mortgage from your own pocket each month, improving your cash flow improves your wealth.
Here are seven ways that you could improve cash flow on your rental property.
1. Increase the Rent
The easiest way to improve cash flow on a rental property is to raise the rent. For many buy-to-let landlords, it is also the most difficult – they wonder if raising the rent of a good tenant is a bad idea. Mistakenly, some landlords go years without raising rents because they fear that their tenant will move on. That’s an error you should avoid.
The secret to raising rent successfully is to make sure that the increase can be justified. If the rent you charge isn’t in line with fair market price in the location of your property, then you should raise the rent. Consider the size and specifications of your property, and compare with others to learn whether you can increase the rent.
2. Review Your Buy-To-Let Mortgage
Your largest cost is likely to be your buy-to-let mortgage. When was the last time you had it reviewed? Do you know what interest rate you are paying? Are there any penalties on early repayment?
If your mortgage is, say, £150,000, a 1% reduction in the mortgage interest rate will save you £1,500 per year in mortgage payments. That’s an extra £125 each month into your cash flow.
3. Pay a Lump Sum Off Your Mortgage
Another way to reduce your mortgage costs is to pay a lump sum off your outstanding mortgage. Before you do so, you’ll need to consider if there are any penalties on early repayment in full or part.
You’ll also need to consider if repayment will make you better off financially and mentally. Using £50,000 of cash to pay down your mortgage could save you thousands in interest payments. At a mortgage rate of 4%, you’ll save £2,000 per year – almost £170 per month. Ask yourself:
- Is this more than your £50,000 is currently earning?
- Will you feel comfortable with £50,000 less in your cash fund?
You may also need to consider your tax position and tax liabilities, as well as where the money is coming from. For example, should you liquidate a tax-efficient ISA if you are a higher rate taxpayer? Our advice is to seek the advice of a specialised buy-to-let mortgage broker and your accountant before deciding whether to pay down your mortgage.
4. Reduce Your Other Costs
Consider all the costs associated with owning and maintaining your buy-to-let property. Can you reduce any of these costs? Do you currently pay any fees, utilities or council tax that you could ask your tenant to pay?
Review your tenancy agreement and think about what cost you could pass to your tenant. For example, if you currently include utilities in the rental payment, it may be possible to reduce the rental charge but put the utilities into your tenant’s name. Take advice before you do so – you don’t want to break any landlord laws.
5. Allow Pets
People love their pets. Sometimes more than their kids! Landlords tend to dislike them. By making your property pet-friendly, you could increase the rent. If you do this, you should make sure that the tenancy agreement includes clauses that detail the tenant’s responsibilities in relation to their pet – for example, cleanliness and pet damage.
See our article “Your Tenant Wants a Pet – What Should You Do?” for more information.
6. Upgrade Your Appliances
Updating and upgrading the appliances in the property could let you increase your rent. Including a dishwasher, washing machine and tumble dryer means the tenant doesn’t have the expense or inconvenience of supplying their own. You can increase the rent because you are supplying these appliances, and thus improve your cash flow.
7. Make a Home Improvement to Improve Cash Flow
Consider what it is that your target tenants want from their home. Simple solutions such as new carpets, redecorating, and modernising kitchens and bathrooms (with new fixtures and fittings, for example) make a home more appealing – and that should translate into the rent you can charge.
More expensive improvement options include investment in new bathrooms and kitchens. Such an investment could make your property more attractive than those nearby, and that allows you to increase your rent and improve your cash flow.
Another investment you might consider is adding a garage to your property. This is appealing to many tenants, especially on streets that are blighted by parking problems.
Making improvements to your property could allow you to charge more than other properties on the same street – ruling out lower-quality tenants searching for the cheapest rental option.
When Did You Last Review Your Cash Flow?
Many buy-to-let landlords neglect to review their property cash flow regularly, yet it is one of the most important tasks you should do. To maximise your profit, it is crucial that you understand the financial position of your buy-to-let business.
A regular cash flow assessment will help you ensure that you maintain your cash flow at the maximum – and this will ensure that you maximise the potential of each buy-to-let property in your portfolio.
Our effortless property management services include rental reviews – ensuring that your property always attains the maximum potential rent. We’re also happy to discuss ideas that could help you improve the cash flow on your rental property.
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