Getting your buy-to-let property cash flow projections right
In 2015 a study reported by The Daily Telegraph found that the majority of landlords fail to plan for tenancy voids when assessing the value of a buy-to-let property investment. This is one of the elements that we advise our clients to plan for and one we work hard to help avoid.
If you’re prepared for void periods from the off, you’ll be better prepared to keep them to a minimum.
In this post, I’ll examine what recent surveys show buy-to-let landlords, and why you must allow for them on your cash flow projections.
How long can you expect to keep a tenant?
Your first priority will be to make your rental property stand out from the crowd, and get a new tenant in place as soon as possible. Once you have the tenant signed and moved in, you’ll want to make sure they stay for as long as possible. Before I look at a few ways to do just that, let’s examine what the latest surveys say about landlords and tenants.
You can expect a tenant to stay for 18 months
According to a recent survey by Direct Line, you can expect a tenant to stay in your buy-to-let property for 18 months. If you rent out property in Birmingham you’re likely to do a little better – tenants there stay an average of almost two-and-a-half years. Landlords in Cardiff suffer the most, with tenants remaining less than a year.
On top of this, the same survey found that almost 10% of tenants would vacate before the tenancy agreement has expired.
Most damaging to the landlord is the need to find a new tenant quickly. Even in London’s vibrant market, lettings agents say that it takes, on average, 20 working days to replace one tenant with another after the property becomes vacant.
How much do tenancy voids cost the landlord?
The exact cost of a void rental period depends on how much rent you charge and how long the void period is; but if we take an average monthly rental and the average void period, we can make a good estimate:
In London, for example, the average rent is more than £2,000 per month. This 20 working days of vacancy will cost you around £1,841 in lost rent.
For a more precise calculation, work out as follows:
- (Monthly rent x 12)/365 = rental amount per day
- ((Rental amount per day x working days to find a new tenant)/5) x 7
- your rental amount is £1,200; and
- the average tenancy void period is 14 days; and
- the average stay is 18 months;
you can expect the cost to be:
- (1200 x 12)/365 = £39.45 per day
- ((39.45 x 14)/5) x 7 = £773.22 every 18 months
or £515.48 per year
Are you a cash flow king or a cash flow pauper?
By doing the above calculation, you’ll be able to place a realistic figure for void periods in your cash flow projections. You’ll be financially more prepared than 88% of buy-to-let landlords. The Telegraph report concluded that 12% of landlords made no allowances for void periods, despite six in ten landlords likely to suffer every year. These are the ones on their way to being cash flow paupers.
Watch this video to see how in-depth the best property investors make their 2 years cash flow projections
By allowing for void periods in your financial estimates, you’ll assess the investment opportunity more fully. You’ll be a better investor, and wealthier, too.
Please feel free to contact the team by phone on +44 1522 503 717 for information about our services.