Landlord errors - and how to avoid them Part 1 Not working out your break-even point

For many landlords, rental profit is top of their list of investment priorities, with some capital gain over time. However, to make sure your property delivers over time, you need to be really clear on what your break-even point is – i.e. what changes to income or expenditure would wipe out or significantly reduce their monthly gains.

Although you’re unlikely to lose a whole month’s rental profit if you have a decent yield and your property is being professionally let and managed, it’s important to know how and why your costs and income could vary, particularly in the current economic climate.

The first step is to make sure you have a clear record of all your income and expenditure and know exactly what your rental profit figure should be each month. If your costs increase but you’re not able to raise your tenant’s rent, do you have a good enough financial ‘cushion’ to protect you against having to subsidise your investment?

To assess a property, it’s worth checking and ‘stress testing’ these five things:

1. Mortgage interest rate rises

If you have a buy to let mortgage, that’s likely to be your biggest monthly outgoing and an interest rate hike could make a significant difference to how much profit you’re left with. Rates were at a historic low during the pandemic – and, indeed, mortgages had been relatively inexpensive for a decade before that – but with the Bank Rate now at its highest since 2008 and experts predicting that it could rise to 4.5% by the middle of 2023, buy to let mortgage interest rates could rise.

So, although you’re most likely to have a fixed rate right now, test out some worst-case scenarios for what that could rise to when you come to remortgage. If fixed rates suddenly rose to 8% or higher, would that still be affordable for you? Our mortgage partners, Embrace Financial Services, can talk through your mortgage costs and advise you when it might be worth remortgaging – you can book a free initial consultation with them online via our website.

2. Mortgage interest rate rises

If you have a buy to let mortgage, that’s likely to be your biggest monthly outgoing and an interest rate hike could make a significant difference to how much profit you’re left with. Rates were at a historic low during the pandemic – and, indeed, mortgages had been relatively inexpensive for a decade before that – but with the Bank Rate now at its highest since 2008 and experts predicting that it could rise to 4.5% by the middle of 2023, Buy to Let mortgage interest rates could rise.

So, although you’re most likely to have a fixed rate right now, test out some worst-case scenarios for what that could rise to when you come to remortgage. If fixed rates suddenly rose to 8% or higher, would that still be affordable for you? Our mortgage partners, Embrace Financial Services, can talk through your mortgage costs and advise you when it might be worth remortgaging – you can book a free initial consultation with them online via our website.

3. One-off big works

If you don’t plan and budget ahead, the cost of larger ‘one-off’ works could wipe out your profit for several months or mean you have to dip into personal savings. So, right from the start, it’s a good idea to have a spreadsheet with a maintenance and repairs budget that covers the lifetime of your investment. If you plan to hold and let the property for 15 years, how often is it going to need redecorating? When might it need a new boiler or an upgrade to the bathroom and kitchen? When is the roof likely to need re-tiling? Then you can work out how much of your monthly profit you should be setting aside to cover those larger periodical costs.

4. One-off big works

If you don’t plan and budget ahead, the cost of larger ‘one-off’ works could wipe out your profit for several months or mean you have to dip into personal savings. So, right from the start, it’s a good idea to have a spreadsheet with a maintenance and repairs budget that covers the lifetime of your investment. If you plan to hold and let the property for 15 years, how often is it going to need redecorating? When might it need a new boiler or an upgrade to the bathroom and kitchen? When is the roof likely to need re-tiling? Then you can work out how much of your monthly profit you should be setting aside to cover those larger periodical costs.

5. Non-payment of rent

Probably the most damaging thing for a landlord’s profits is having a tenant who can’t or won’t pay their rent but stays in the property. While proper referencing and professional tenant management greatly minimises the risk of this happening, again, it’s wise to work out how many weeks of zero rental income your annual profits could tolerate. Given the potential impact, we’d suggest it’s well worth taking out relatively low-cost rent protection insurance that can cover 100% of your monthly rent for up to 15 months if your tenant defaults.

If you’d like to talk through your monthly costs, including your Buy to Let mortgage, insurance payments or anything else, our team are always here to help. Just get in touch with your local Reeds Rains branch to make an appointment.

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**A Mortgage in Principle provides you with an indication of what you can borrow, it is not guaranteed until you receive a mortgage offer from the lender.