Understanding cash flow types that result out of buy to let property

The biggest benefit of any buy to let property is the resultant cash flow. There are four broad types:

Type 1 of cash flow: Monthly cash flow is cash, which flows into the business, less the cash, which happens to flow out, over a given period of time. This is not really the same as profit. For instance, depreciation is not mentioned on a cash flow statement, whereas it does appear on a profit and loss statement. Generally, the project will be profitable if the cash flow is positive.

Second type of cash flow: ‘Up front cash flow’ usually comes from upfront payments that your tenants provide for their tenancy.

Type three of cash flow: The third type of cash flow is termed ‘re-financing cash flow’ that comes when you take your property, which has appreciated in value and tap into the equity by refinancing it. This particular type of cash flow is tax free since it is deemed a ‘loan’ and not actual profit made; better still, it can be spent and can be invested. Fourth type three of cash flow: ‘Back-end cash flow’ appears when you happen to sell a property.

The bargaining power of home buyers improve

The increase in unsold property on the property market has improved the bargaining power of buyers that pushed down prices. This is likely to have some impact on the wider economic scenario. However, economists believe that the Bank of England (BoE) owing to rising oil and food prices would prefer to cut rates probably at a more gradual rate and pace than prospective homeowners might like.

Meanwhile, house prices in the UK have registered their first annual fall for 12 years, according to the latest figures available. Prices fell by 1.1 per cent in April - the sixth monthly fall in a row. Prices were down 1 per cent from the levels in April 2007, according to the survey that concluded: “The price declines amply reflected a weakening market that had been badly hit by tighter financial market conditions and poor affordability “.

An average home now costs close to £178,550, which is nearly £1,760 lower than April 2007 price level. There had been a rather steep decline in house buying in the last six months or so largely owing to deceasing demand from first-time buyers, tighter lending criteria and higher mortgage rates.

Make use of uncertain market conditions to negotiate prices

In the present mortgage market it is obviously tough to do anything. The problem is compounded by the fact that people do not enough research. It is necessary for a prospective or existing buy to let study to follow trends and study the figures to make a decision for themselves.  Essentially the buy to let winners are those who do their homework; the losers are those who rush in blindly.

Several mortgage products have been pulled out from the market, with those remaining on much stringent terms. Property prices continue to fall, and auction rooms are registering a rise in distressed sales. But for some savvy investors, the scenario is far from bleak. They must have noted the fact that rental yields are rising - away from certain saturated city centres – largely pushed up by rising demand from immigrants and would-be first-time buyers still priced out of the market.

On other hand, market analysts are beginning to see purchases - picking up among more experienced investors - with landlords making use of uncertain market conditions to negotiate prices, and pick up cheap repossessions at auction.

Practical cases of landlords who suffer owing to the lack of research

You should take into account a ground level scenario before making a ‘buy’ call. For example, you should be aware of the fact that rents on the Newcastle flat ware down partly owing to the closure of a footbridge linking Newcastle and Gateshead, tripling the walk into former.

Consider another practical example of landlord who did not do his research. He bought three off-plan flats about four years ago - one in Newcastle and two in Manchester. He originally bought them with a business partner, who happened to pull out of the deal before completion owing to debt problems, leaving the hapless landlord to carry on alone.

When they made their purchases, a rosy picture of the rents they could get was painted. Although the landlord planned to invest long term, the rent well fell short of his mortgage payments, and he was forced to sell the Newcastle property for avoiding repossession at a much lower value, resulting in substantial losses.
The point is, it is essential to work out realistic levels of market rents or prices on basis of independent research coupled with expert advice.

With the prices falling, the key lies in picking your market carefully

The correction was long overdue and had to come in the property market, but it should not hurt those landlords who have done their due diligence and are there in the market for the long term. There are still a lot of winners in buy to let. Analysts point out that it is not a great time for a novice to enter the market, but experienced landlords are still buying. According to a recent research by the Association of Residential Letting Agents almost 46 per cent of landlords intend to buy more property in the next year or so, while only 18 per cent plan to sell some.

The key is to pick your market carefully. For example, in cities like Manchester and Leeds, rampant development has led to a massive glut of apartments, forcing many landlords to cut down rents in order to attract tenants.

Also, ensure rental cover is at least about 125 per cent of mortgage payments, and make sure that you have enough equity – say about 25 to 30 per cent – to permit you to exit quickly if you are needed to. Maintaining a good credit profile is very vital. Lenders now meticulously check the credit profile of someone they lend to. Keep in mind the fact that even a missed credit card payment could go against you if you are remortgaging.

Buy to let investors who take a long-term view should get bailed out by rent rises

“The next couple of years are going to be rather challenging, no doubt. We are expecting house prices to fall further. But even the truly big bears are also talking about falls of just over 10 per cent or so over two years,” the chief economist for the Royal Institute of Chartered Surveyors (Rics), Simon Rubinsohn has been recently quoted as saying. According to their research, rents are rising in most regions.

“If tenant demand stays firm, we are likely to see void periods diminish as well. Those landlords who have done their homework, have quite a reasonable amount of equity in their property, and take a long-term view should get bailed out by rent rises,” he added.

In the near term though, things are not looking bright. Just as with any other type of borrowing, buy to let loans are not anymore easier to come by. In fact, lenders, who offer buy to let loans, are getting picky and choosy about their borrowers. Those who had piled into off-plan flats, in inner city ‘hotspots’, are said to be worst affected.

Their rental incomes in some cases are almost hundreds of pounds short - of both their mortgage payments and their expectations. Desperate to remortgage or sell, many have been however, prevented from doing either. They have got trapped in negative equity, as their respective property values have plunged to as little as half what they paid, in quite a few cases.

Buy to let market: Seeing an opportunity in times of adversity

There are both winners as well as losers in any given buy to let market, but certain market conditions and forces have impact on all. For example, the credit crunch has resulted in many buy to let mortgage products being taken off the market. Those still available remain need much bigger mortgage rental cover than say a year ago.

This scenario makes it much tougher for new landlords to secure a mortgage. This also makes it difficult for many of existing landlords to remortgage to a better deal. Individual responses to such challenging situations will largely decide who will survive and come out unscathed. According to a recent report released by the Association of Residential Letting Agents, almost 46 per cent of landlords intend to buy more property in the next year or so, while 18 per cent plan to sell some.

You can build a case to state that if the credit crunch does not ease, landlords could suffer. Yet, many landlords, as the survey indicates, are going ahead with their plans to buy property. Whether they are right or wrong, only time can tell, but at least, they are not panicking and seeing an opportunity in the times of adversity.

Make sure that your credit rating is in order while seeking buy to let loan

Prior to seeking a buy to let loan, get you credit report. Basically, you establish a credit rating by buying things on credit and paying back the money you owe. Your loan repayment history plays a big part in establishing your credit rating, but all your ‘credit’ dealings make up the history that is used to determine your credit rating.

You can get a credit report by contacting one of the accredited credit reporting agencies. To receive your free credit report, you will need to contact one of these firms a request with proper identification. After getting you credit report, check that it is in order. Ensure that there are no lapses on it – simply forgetting to put yourself on the electoral roll will mean an affected rating.

If you have a poor credit rating, you will need to take steps to repair it before trying to get a buy to let loan. While finalising a buy to let loan deal, look for the long-term benefits like reasonable interest rates repayment terms. An expert will play a vital role in securing you the best possible terms.

Price trends and indicators in the UK property market

Completed sales in the Midlands and northern England in the first quarter of 2008 were down almost 17 per cent on the corresponding period last year, according to a research report published in the leading UK publication Telegraph. In fact, it predicted further fall in transactions as buyers were getting deterred by tough-to-get mortgages.

Prices remained mixed but, according to another survey, but not universally down! The Halifax bank indicated that prices in the first quarter of this year went down by around 5 per cent in the West Midlands and half a per cent in Yorkshire as well as the North-West.

On the other hand, they went up by around 2.2 per cent in the East Midlands and 1.2 per cent in the North-East. Contradicting this, the Royal Institution of Chartered Surveyors reported fall in prices in invariably all regions - for the eighth consecutive month (and for the 15th in a row in the East Midlands).
In the present not too encouraging climate, the temptation to trim your losses and sell your property is rather strong. But it makes sense to stay put and make your existing portfolio work harder. There is potentially huge benefit in doing so. You just need to be patient enough!

The crunch is not necessarily bad news for every buy to let investor

Alert buy to let investors always keep looking for a bargain opportunity. The crunch is not necessarily bad news for everyone! There are good buying opportunities everywhere irrespective of the circumstances if you are smart and savvy enough to spot them and know where exactly to look.

Although many novice landlords have been scared off the property market in recent times, the savvy ones – with a definite plan and vision - are still keen on expanding their portfolios when and where they see opportunities to do so without overstretching themselves.

Falling prices in certain areas with a long-term potential have resulted in ‘lower than market’ values, especially on repossessed properties. This provides a definite window of opportunity. If you are in the property market for a bargain, it is worth haggling! Those desperate to sell off may drop their price, working to your advantage. You can leverage adverse circumstances provided you have liquidity and are willing to swim against the tide.