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 you property through other means.
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 I avoid falling into this trap?
Too many landlords do not 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 in to a heavy negative cash flow property
Our property management software solutions will automatically remind you when your mortgages/finances are due to expire.
Also, start speaking with mortgage brokers and financial advisers about three months before your rate expires to guarantee that you are securing the best deal.
