Colordarcy has identified three principle ‘cash flow killers’ that it thinks buy-to-let investors should be aware of. Image courtesy of sxc.hu/ Nigel Patience.
Property investment company Colordarcy
has identified three principle ‘cash flow
killers’ that it thinks buy-to-let investors
should be aware of ahead of anticipated mortgage rate increases.
The advice comes following the recent announcement on June 21 by credit ratings agency Moody’s
that a host of major world banks, including a handful of the UK’s top lenders, had been hit with a credit rating
Since then, industry experts have voiced their concerns that affected UK banks including Barclays, HSBC, Royal Bank of Scotland and Lloyds Banking Group will be forced to pay billions of pounds extra to raise funds resulting in increased loan and mortgage rates
The first of the three ‘cash flow killers’ identified by Colordarcy is comfort. It refers to a situation when investors find themselves getting too comfortable and purchasing wasteful assets such luxury cars that lose thousands of pounds as soon as they are driven out of the showroom. The property investment firm argues that in order to avoid this potential pitfall, investors should remember that building a property portfolio is like building a business. Therefore investors need to keep their discipline, and that includes stringent accounting.
The second ‘cash flow killer’ it cites is a lack of planning with regards to future interest rate rises. It highlights that if an investor has buy-to-let finance secured on their properties and fails to consider that mortgage rates might rise, there will be an inevitable impact on cash flow.
Thirdly, it underlines that investors should do their upmost to prevent void periods. If an investor has too many properties without tenants cash flow will start to run dry, while costs continue to mount.
Loxley McKenzie, Managing Director of Colordarcy, explained: “All the predictions were that the base rate would stay the same, unfortunately this time, the low rate has been ignored by the banks and they are putting their own finance rates up regardless.”
“To avoid this, property investors must always consider future movements in interest rates. If they have reached an all-time low, then there is a possibility they will rise. Investors must always factor this in when calculating cash flow.”
Colordarcy suggests that the first thing property investors should do to avoid cash flow concerns is to ensure that the rental income of a property encompasses all of the costs associated with that particular property. Concluding that forward-planning, as in any business, is of the highest importance.