With the credit crunch in full swing, more and more landlords are falling into negative cash flow. This occurs when their rental income can no longer cover their ongoing property-related expenditures.
For example, if your rental income is £500 and your property expenses are £600, then you are making £100 negative cash flow on your property business. This means that you have to subsidise your property through other means.
Get help with calculating your rental income and expenses with our Rental Income and Landlord Expenses Manager.
The biggest expenditure landlords have is the cost of finance on the property (i.e. their buy-to-let mortgage) and the single biggest factor that is turning positive cash flow properties in to negative cash flow is the increase in interest rates!
How do landlords avoid falling into the negative cash flow trap?
Too many landlords don't know when their tie-in mortgage rates are expiring and they are falling onto variable rates, which are, in some cases, increasing their mortgage costs by 70-80%!
If you have fixed-rate mortgages (or any other kind of tie-ins), make sure that you are aware of their expiry dates.
Going from a fixed, competitive rate of, for example, 4-5% on to something closer to 8% could really stretch your finances and turn a positive cash flow property into a heavy negative cash flow property.
Start speaking with mortgage brokers and financial advisers about three months before your rate expires to guarantee that you are securing the best deal.
Published on: June 2, 2008