Here we go again with another Property Core Skill. This one is all about managing the pennies, as we dig into managing our property budgets and cashflow.
We break the topic down onto three sections. Before acquisition deal evaluation, planning and set up; managing the budgets and cashflow of projects; and developments and managing our rental properties and portfolio.
Managing budgets and cashflow is more than just counting beans. If done correctly, it’s a great planning, control, decision-making, scenario testing, response and contingency planning tool, among others.
Look after the pennies and the pounds will take care of themselves!
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Transcription of the show
Here we go again with another Property Core Skill. This one is all about managing the pennies, as we dig into managing our property budgets and cashflow.
We break the topic down onto three sections. Before acquisition deal evaluation, planning and set up; managing the budgets and cashflow of projects; and developments and managing our rental properties and portfolio.
Managing budgets and cashflow is more than just counting beans. If done correctly, it’s a great planning, control, decision-making, scenario testing, response and contingency planning tool, among others.
Look after the pennies and the pounds will take care of themselves!
Property Chatter
Welcome to the property voice podcast helping you to navigate safely through the world of property investing, get the lowdown and updates, insights, and outcomes on all matters property with a splash of entertainment along the way, the property voice or voice to trust among the crowd. Now, let's get started with your host, Richard Brown.
Hello, and welcome to another episode of the property voice podcast. My name is Richard Brown. And as always, it's a pleasure to have you join me again on the show today, where we continue the series on property core skills. And this week is content week. So it's just me and we're going to be talking about managing budgets and cash flow as the core skill that we need, to master in this area. So it's one of these that I think how to put it, you can easily miss and put to one side, let's just say that. But I think it's vital that we get the discipline in place to be able to manage our budget, which is predict predicting the future effectively. And indeed, our cash flow, so that we can see the highs and lows or the sensitivities along the way. And essentially, I want to break down the discussion today into three broad areas. So we've got evaluating deals with projects. So that's really assessing them before we've actually bought them. So before we buy something that evaluates them and set up the budget at that point in time. Once we've done that if we decide to go ahead and buy it when we might go into a project phase. So if it's a Brr project, for example, you might set up some kind of budget evaluation, if it's a development project, you certainly would. So you'd set up the budgeting the cash flow for undertaking projects and developments. That's the second category. And the third category is really looking at long-term buy and hold. So rental property or rental portfolio, budgeting, and cash flow. So there are three broad categories that I want to break this down to. There's actually a lot of overlap, in fact, between them, but I'm going to just emphasize the key points in each particular area. So we're going to start with deal and project evaluation. So remember, this is looking at a deal before we choose to buy it or acquire it. And Stephen Covey says we need to begin with the end in mind. And so that means we need to somehow predict the future. Why are we looking to take on this property, we should have an idea of the outcome that we're aiming to achieve. So that could be a rental property that we're planning to a tenant, for example, or it could be a flip project that we're planning to resell? course, it could be much more complex, it could be a development project that we're you know, going to break down into separate units and maybe sell them or maybe rent them or maybe mix and match between them. But the idea is that we should know what we're aiming at right from the beginning. And we set up our evaluation with that in mind. So we know our target is we can measure that target, then we started to break it down, kind of work backward, if you like, and, and document, you know how the numbers are going to stack up. And so budgeting and cash flow is a forecasting tool, okay, because we're predicting the future. So it's a forecasting tool in this context, that neat later on, we're going to talk about how we also look backward. And so it's like using it to look in the rearview mirror as well as predicting the future. So it's like driving a car, you can imagine. So right now we're going to, we're predicting driving the car going forward, not necessarily looking back, but actually, we can look back to see our past experience, which plays a part in you know, getting accurate figures, for example.
So with budgeting and cash flow forecasting, we need to know what to expect, or it helps us know what to expect, in fact, so if we plot this out over a period of time, we can go Oh, okay, well, that's going to use this much money in, you know, in my works budget, or my holding costs, or my financing costs, for example. So we know what to expect in that sort of area. And it's going to help us make decisions. Is it a good deal? Is it a bad deal? What if I did this instead of that, so it's going to help us make decisions once we've plotted it out? And the other thing I really like, you know, especially with spreadsheets is the idea of scenario tests. Well, that sounds fancy, doesn't it? So just test out different situations. So whenever I look at a project, for example, if I'm if it's a project, I'm often looking at the rental or a flip, or a combination, so I've got at least two scenarios there. What if I sold it? That's the flip obviously, and what if I retained it, which would be the rental option, what if I had to take it out undertook a project to increase you know, standard and therefore the viability of this particular property versus What if I just do a lick of paint and rent it out as it is? What difference does that make to the rental? What difference does it make to my ROI? So it allows me to test if you like different scenarios and to plan that out. And once you've plotted this out in a spreadsheet, in particular, you can play around with it, you can create new tabs and different variations. So you can probably tell quite enjoyed this part of the role. And I was accountancy trained, after all. And so I guess these principles have stuck with me quite a lot, the number-crunching bit. Now if you don't like the number crunching BIT bit, and then you know, you can, you can either decide to get good at it, or you can decide to bring someone else around you who is good at it. So that might come at a cost, obviously, if you have to pay for that particular service. But it's worth doing. So we talked about forecasting, and then some of the principles that I wanted to outline in this particular area. Where that, you know, it will, first of all, allows us to plot different scenarios. And what I tend to do with my projects, in particular, is to look at the best mid and worst-case scenarios. Some people just look at, you know, you know, Best and Worst case or expected case, worst case, doesn't matter. The point is you're saying, What is my optimistic outcome, and what is my pessimistic outcome, there may be a middle ground there as well. So, you know, plot out different scenarios. And the idea is that we don't go in with just the rose-tinted spectacle view of how great this property deals going to be. We actually say, Well, what if we don't get that rent that the letting agent suggested I was going to get? What if my, you know, my project costs overrun? What effect will that have, so that's where you get different scenario planning into your into the into one of the principles here. The other principle is to use realistic market rates wherever possible. So you know, realistic cost of works, realistic rental values realistic, and you know, property values, refinancing costs, and rates, etc. So that involves a degree of test of market positions. And also, you know, experience. And if you don't have that experience, then you need to really find people who have the experience. So for example, you could talk to a letting or an estate agent to get an idea of and values whether it be rent or sales value. Bearing in mind, estate agents often talk about asking prices, not sold prices. So sometimes they can, you know, pick it up a notch or two, and that conduct your expectations when it comes to selling or refinancing in terms of what you actually get. So do you know, hint of caution, in talking to two people who maybe have a vested interest or slight bias, let's say, but you know, you can talk to builders about pricing a project, and I suggest you do, you can talk to other investors who might have done something similar, we had a conversation just last night, saying I've been quoted, you know, 12,000 pounds for a kitchen is, is that market rate, and then we all piled in with our experience and what we've been paying for kitchens. And it was a very different scenario. So you know, lean on other people's experience, you can also use tools such as price your job, I think it's price a job that similar ones, which gives an idea of how much it costs to do certain, you know, DIY, not DIY jobs, because obviously, they're not done by you. But certain jobs in your property you can do, you can, in a big project, you can hire a quantity surveyor, who can give you an idea based on market rates, both on materials and labor costs. And there are some services out there now, where you can also get jobs priced up, you know, and in-between phase of plans. So
I think I forgot what is billed aviator, that's what I was trying to think of build aviator is an example of that kind of thing. So, you know, test it and get real market rates. And the other thing a lot of people forget is to allow what they call for provisions and contingencies. So a lot of people go well, you know, I've just done a refurb on this project. So, and I'm talking more about the rental side of it going after this, but I don't need to maintain it, because I've just done a fancy refurb You know, there's no point allowing any maintenance costs in my figures. And by the way, you know, this tenants gonna stay there for three years, so I won't allow any voids. I wouldn't, by the way, you know, interest rates are very low, so I'm not going to predict them going up. So actually, I'd suggest not doing that and actually allowing for reasonable provisions and contingencies in your budgeting as one of the principles and if the deal still stacks up, having allowed a sensible provision or contingency for things happening, then, you know, great you can go in with confidence. And if those things don't actually happen, well, it's all an upside, isn't it? But it's worse, you know, it's much worse to try and go in and the other way round, where you go in thinking, I'm definitely not going to get any voids, but then you get one, I'm definitely on heavy maintenance costs, but you get some. So definitely have provisions and contingencies, it's going to help you as you're making good decisions and hopefully a better outcome. Know what your objectives, key performance indicators, or KPIs and targets are so that you can measure the results. And then you can actually make, you know, a good decision. So these are some of the principles when it comes to budgeting and cash flow management, with regard to projects, didn't really talk about cash flow so much, but cash flow is sometimes different to you know, your profit, but it is definitely different to your profit. You know, some things don't get done have a cash effect, and some things do. But you know, she's predicting your cash flow needs is also really essential that, you know, say you're involved in a project, you know, when you need to pay people, so you can plot to have the funds ready in good time. But equally, not necessarily setting the bank doing nothing if it's not needed for six months. So it can help in that sense, too. So let's deal and project evaluation, the first section I wanted to cover today. The next section is projected budgeting and cash flow. So this may or may not apply. So if you're just looking at biter's legs, generally speaking, you might not have a project to worry about. But a project as we spoke about on a previous episode, you know, it could be as simple as changing the carpets and painting the walls. Now, you might not necessarily need to go to a detail budgeting, you know, tool, or spreadsheet with multiple lines and tabs. But you know, it's sensible, you know, to have a schedule of works, and to be able to predict what each section might cost. And then to test that. So yes, it probably is worthwhile. So with projects, budgets, and cash flow, the idea here is that we have, you know, a budget versus an actual position. And this helps us to show what are called variances in real-time. So if you maintain this, it doesn't have to be too fancy. It's just two columns. So line item, you know, for example, painting and decorating budget cost, pardon? Oh, 2000 pounds to paint the house. Actual Oh, what do they charge me? Oh, they charged me two and a half 1000. So the variance is 500 pounds in that case. And of course, if you can imagine building up your budget with all of the different line items, putting in the budget line in all the budget figures in one column, and then putting in the actual as you go in the in another column rather, you can see a what the differences or the variance between the two figures. And then you can see, well, how is my project actually doing here compared to what I thought it might do, but also to help you going forward. So if you maintain this for all of your projects, you're then going to build up knowledge that you can utilize on subsequent projects. And then hopefully, you won't be falling into the same trap, oh, we thought it'd be 2000 pounds to decorate a property. But the last three projects we've done is actually average two and a half 1000 pounds. So actually, that will help us to be more realistic on the next project that we undertake. So it's useful for managing the project as you go. And you know, and seeing the changes between what you're predicting and what is the actual, but also useful to look back and refer to make better decisions on your next acquisition or your next project.
Ideally, with a project, you should show a timeline. So and I'll explain and then I'll tell you what I do. So have a timeline, which shows potential sensitivities or shortfalls in cash in particular, well in advance so that you've got time to react. So I'll give you an example. I have a 12-month rolling cash flow forecast, which looks at all my developments. So each development has a tab and then I've got a consolidated tab, which summarizes the overall position. And what I do is every single month is I go in and I just reevaluate my projection or my prediction of my cash needs per project for the next 12 months. Obviously, I don't necessarily need to spend money on every single project every single month for a 12 month period. But I've got all my incomings all my outgoings all plotted. And then by project, I can see where the sensitive areas are, from a cash point of view. And also, overall, I can see where my sensitive sensitivities are. So that's telling me when I'm going to need money. And then when I look at my summary tab, and I've got my 12-month rolling cash flow forecast open, you know, sometimes it's a bit of a red zone, as I call it, you know, a few months ahead and thinking, Oh, okay, I need to find some money roundabout, you know, where are we now we're in. We're in late August at the time of recording. So I'll run about December, I can see a red zone. Oh, no, I mean, it's below the line bill underwater, or in other words, it won't have enough cash to meet my requirements. So what am I going to do about that? And the good thing about you know, a 12-month rolling cash flow Because I can see the future before it happens, of course, then you know, every month I update that, and now I can see whether it's changed. And that enables me to actually take action. If I can see that I need extra cash in December, but we're in August, I've got three or four months to fix the problem in advance of the problem. So it's very, very useful as a prediction tool, and a decision making tool and a planning tool, essentially, on our project. So you've got your individual project budget versus actual, so you can track your performance, you can look back on all your projects to see what your actual position was, to make better judgments and decisions on future for projects. And you can use it as a prediction tool, especially from a cash point of view, to see how you're doing, and, and make adjustments to your needs as you go. And what I would say is, you know, use this as a tool to either course correct. So if you see things going off the rails a little bit with a project, you've got a couple of things to do, you can either watch it go off the rails and crash, or you can actually course correct and change, you know the direction of the project. So you could perhaps value engineer, which means reduce, you know, change the specification are certain things that are lower spec to try and snatch back some costs, you can change the out. Obviously, during a project, this is a lot more difficult. The further in you go, you could change the layout, for example, to get you to know, better use of the footprint, you can change the use of the property from maybe a long term rental to a short term rental if you saw that the rental performance wasn't so good or even vice versa. So you know, course correct and change direction. And, of course, a contingency plan is a bit like what I said with the cash flow. So if you see a red zone out, well, okay, I might need a bit more cash then. So I better start working on how am I gonna find that extra cash. And what I suggest you do is to maybe use, you know, red amber green dashboard system. That's always very useful, you know, you can color code things red, Amber green, obviously, red is not going so well. Green is smack on target. And there's something to watch out for. And that will allow you to look at each individual line and go, Well, actually, how is that doing? What And why is that? And is there anything I can do about it? Or is anything, anything at least I can learn for next time. So there are the principles when it comes to projects that I wanted to share.
The next section is really so the first sections are? Well, one is before we do anything, the second one was about dealing with projects in particular, this third category is really about if we've got long term, rental property, or rental properties, which would then can constitute a portfolio and looking at, you know, some of the areas of budgeting and cash flow for long term, buy and hold properties. So it's post-acquisition and post-project, evaluation of the long-term rental performance of your property or properties. So we take it out of Project poziom, which is looking at the rental side of things. There's a slight distinction, this is going to be on an ongoing basis over a long period of time. So what are some of the principles that we need to take account of here? Well, probably one of the first things to note, and which often gets people caught out, particularly when it comes to doing your tax return is the difference between what I call capex and OPEX? What's not what I call is what people in the accounting world called capex and OPEX, or capital expenditure, an operating expenditure. So in what you find when you do your tax returns, is and you're doing your income tax return. That's all it's related to op x. So it's operating your rental property, what income and what expenses are allowable, as far as the taxman is concerned, as an offset against your income or your corporation tax, and that's the operating tax, sorry, operating expense category, whereas capital expenditure are things that are not allowable as deductions or income on your income tax return. So that might be a capital expense, which subject to capital gains tax is still corporation tax, if you own for a company, or indeed, it's a cost which would be classed as a capital cost, and then is not allowed as a deduction from your income tax, or your annual corporation tax is only recognizable if you sell that property and realize that gain. So capital expense and operating expense is a big deal, actually. And you know, you can get caught up in the minutiae of this as well. There's a number of resources that you could use to help you if you really wanted to get to understand it. So I subscribe to a service called tax Insider. You could buy a couple of books.
It's called tax Cafe is really useful as a couple of property, finance Sorry, property tax books, property finance, that's my book. There's probably tax books out there you can get as well which outline this. But the thing is this, the rules are changing all the time. And you know, the government and the taxman are tweaking the rules, so tell you what you can and can't do and they change. So the best thing piece of advice is actually to get yourself in accounts and rely on them because it's their job to stay up to date. That's what I do. But at the same time, I do try and stay up to date with the knowledge as well. So capex versus OPEX. first principle. The second one is there's a difference between profit and cash. Yeah, so not all of what you go, it goes through your bank account lens in your profit and loss account. And sometimes what goes in your profit and loss account doesn't go through your bank account. So there is a difference between profit and cash. So just don't get caught up with those things. So give you an example. You know, you will just one very, very small, simple example to illustrate my point. If you run your own property portfolio, and you submit your tax return, your accountant should tell, you know, ask you a question along the lines of Oh, did you? Did you use your home to help operate this business? Well, yeah, I mean, I've got an office or I've got a bedroom that I use, you know, when I do my books and stuff, great. Well, you give us an allowance, it's called use your home as an office. It's a few 100 quid a year, and we can allow that as an offset against your tax bill. Oh, really, that's great. Yeah, so you can reduce your tax bill by having this allowance, but it hasn't touched your bank account. Okay, no one's giving you the money. They're just allowing it as an allowance. So that's an example of a non-cash allowable deduction, as they call it. And there'll be other examples in the opposite direction, too. So I don't want to go too far into the accounting treatment, because you'll either be that way inclined, or you won't, but just be a little bit careful. And either, as I mentioned, get yourself clued up with some of the resources I mentioned. Or maybe get yourself an accountant who you can talk to about these things. As similarly, there's the principle of provisions accruals. And contingencies. We're gonna talk about a little bit when I talked about project accounting, that we're putting in things into the forecast and into our budgets, which may or may not happen, but think they are likely to happen, that provisions and accruals they should happen as a provision and an accrual is something that should happen, we actually know has happened. And we may need to make an allowance for it in our figures. So let me give you an example. It's really interesting, or very simple. One is if you're doing your profit and loss account, at the end of the tax year, you give, you know, you give you books, sometimes it's January, right, for the submission by the end of January. So you give all your books and your papers relating to the previous tax year, which would have been the sixth of a fifth of April, and the prior fifth of April, right? You give everything to your accountant in January. So there you go. That's what I did. Up until the fifth of April, some people cut off at the 31st of March just to make things simple. And you go that's me done. And then the counselor says, okay, that's absolutely fine. Well, my bill for that is 1000 pounds, or whatever it is, right? Oh, but I didn't give you 1000 pounds before the end of fifth of April just gone. And I'm probably not going to give it to you now we're going to give it to you, when you give me the money, give me the accounts back. So I might give you the money late January when I pay for your service. But yeah, what you would do in your accounts is make a provision for that future expense, which is paying your accountant round about January following your year-end is the provision that it happened or related to the period of counting that you're recording. So you knew that was going to happen, because the accounts that's going to charge you just because it had you know, you actually incur spent the money rather, this is different. So in cash flow and profit sometimes. So you spend the money sometime after the year-end, but you make a provision in your urine for it happening. And so that's an example. Another example is you make provisions for you know what, whenever I do portfolio reviews, people often just show their actual position, and then they work out their profit and is like really nice, big juicy number. And you know, sometimes you go well, what about voids? And what about maintenance? They're the two big ones that people often either undercook or a metal together? Oh, well, I've had the same tenant for three years. So there's no voice. Okay, there hasn't been so that's your actual reality. But in terms of budgeting and predicting the future, then you should make a provision or an allowance for some voice tap and because they will eventually happen. If you're going to hold a property for decades, it's unlikely you're going to have the same tenant in the property for several decades. So you make a provision for a void which is basically the gap between one tenant leaving and a new one coming in. Now you weren't may well be lucky. And therefore you say to me, Richard, this makes sense. Didn't happen, I've got tenants who stay forever, blah, blah, blah, but no, just do it, do it, and put it in your numbers where are budgeting points of view. And the same with repairs and maintenance. So repairs and maintenance kind of boil down into a number of categories. So you've got your kind of general record general repairs and maintenance, little things that happen here and there. Okay, you might need to tighten up a toilet seat and send your handyman in to do that, there's kind of a little thing that happens here. And there, you might get knocks and scrapes and bumps from the tenants, you know, I came into a rental property recently, and I saw there was a bit of wear and tear on the property, there's some marks on the wall, there's some statue there's a bird on the carpet was a really mad about. And because that is right in the middle of the carpet. And that means the whole carpet needs to be replaced, but don't need to replace all of the carpets in the whole house. But I might need to replace that bit of carpet there. You know, if I want to maintain this property to the highest standard, so there's those sort of things, then you get sort of regular upkeep and preventive maintenance. So you do not need to do servicing of your boiler and that sort of thing, you might want to just do a general refresh of the paintwork every year or two, just to keep it fresh and attractive, those sort of things, then then you've got more longer-term refurbishment and upgrade type of needs. So you might have just fitted a new kitchen, but maybe in you know, somewhere between five and 10 years, maybe not five, but you know, seven to 10 years time, you might need to replace that kitchen with a new one. And you know, you should really make a provision for that happening. And then it could be even more significant structural issues like a new roof that needs to get one for example. And over decades of ownership, all of these things will happen. And so you should really allow a provision for repairs and maintenance and upgrades and refurbishment and put it into your numbers. Otherwise how even afford it. Because you see, ideally what you do is you put it into your numbers, you see if it's still profitable, and then you carve it out into a separate account. And then you can use those funds when the cost comes allow around. So that's another principle to have. So
have a have, you know, an eye on provisions across you contingencies, contingencies, and things that might happen? but not necessarily. So, you know, the damage would be an example. You know, sometimes, unfortunately, tenants will damage something and scarper and you're picking up the car. So you think, ah, I wasn't expecting that. But make a contingency and have it in your numbers. The other area, perhaps to consider is, you know, around debt and refinancing. So most people be taking out buy to let mortgages or equivalent. And you know, you might say, well, Richard, I've just done that. And also don't need to worry about that again. Well, actually, from a budgeting and cash flow point of views, a few things to consider there. So the first thing is what will the interest rate be when it comes to renew your fixed rate. So people tend to go to three, five years fixed rate, sometimes longer. But at the end of that term, you've got a couple of decisions to make and options. You hopefully say, Well, I just renew it, but what will the interest rate be in 235 710 years time. So it's ideal that you kind of make some sort of provision for that. And then there's usually a cost associated with the refinancing. So there's a broker fee, there's a refinancing fee from the lender, sometimes additional legal fees, that taking come into play. If you need to break the mortgage sooner, because maybe you're selling the property, then there could be early repayment fees. So have all that, you know, in mind, and put it into your fingers when it comes to your debt and refinancing.
Another thing is, it's okay to sort of set up a budget, and then even to it. But the next thing is you need to put in the actual numbers. So don't just set up a budget, I think it's going to be okay, well, there's cash in the bank. So it's all good. No, plot your actual numbers, and then work out what the difference is. And equally reconcile, especially when it comes to things like rent, reconcile your rent, making sure you get paid on time. So that also points to another principle, which is to do things in a timely manner. And I kind of do say, Do as I say, not as I do here sometimes, because I don't always do diligently go through my entire portfolio, and keep all my management accounts up to date, you know, every single week, let's just say that. But it's good idea to have a discipline to you know, get it done on a timely basis, say monthly, and not just wait till you hattons your tax return and do it all in that go. So those are principles. And then the other thing that kind of really comes into play here especially so probably in the first two sections, I've talked about spreadsheets quite a lot. And spreadsheets are really fantastic tool. One of the best inventions I think that you can have in very, very flexible, quite easy to use, easy to navigate, etc. But there's other software and technology that we can use to help And it particularly plays a part once we've got a long term, you know, buy and hold property or a portfolio. So spreadsheets are still good. I still use spreadsheets a lot, you know, for my business doesn't always need a fancy pants sort of accounting system, or property management system, which are the other two areas that you could potentially look at. So you could have a property management system, some examples would be Arthur, landlord, Padma, there's others available. But you know, if I mentioned those three, you'll kind of know what I'm talking about. And that helps you to track your property management. And this touches on the budgeting, cash flow, but it isn't just budgeting and cash flow, it feeds into your budgeting and cash flow. So it's a tool that will help you but it doesn't actually manage and control and track your budgeting and cash flow. So it's, it's a kind of a middle ground, it just helps you to have everything in one place, rather than have all your receipts in a shoe box. And the accounting systems is specifically related to your budgeting and the cash flow. So you've got zero, you've got QuickBooks, you've got free agent, and there will be others, you know, accounting systems that you can have. Now, the best accounting systems are ones that integrate, particularly with your bank account. So just lightens the load a little bit. And usually, you have to pay a subscription to have this kind of accounting package. And a lot of us will just resent paying that money. And think, Well, I'm not going to pay, you know, 20 quid a month or something when accounting package, I'll just use a spreadsheet, and I'll go in and get my bank statements. And I'll just drop everything into it every month, that's absolutely fine as well, by the way, use a spreadsheet, draw down your bank statements, upload it into your spreadsheet, cross-check it against what you're expecting, say rent paid versus rent received, to do reconciliation, as it's called, and an off you go. But I think as you get more complex, or if you don't really feel comfortable, you know, doing using a spreadsheet, and you know, just trawling through your bank statements, say once a month, then having technology like an accounting system, and or a property management system can really be useful. But of course, it comes at a cost. So if you want one bite or less, and it's running on minimal profit, that say, you know, 150 250 pounds, pounds a month profit, and you're shelling out, say, I don't know, 20 quid for zero, can't remember the exact cost 20 quid zero, I think landlord is free, Arthur comes at a cost, can't remember what it was exactly, maybe it's 15 quid. So it's 35 quid a month, then the old one, by the way, we're going to we were going to give it to a bookkeeper to do for us. And maybe that'll cost us 600 pounds a year or 50 pounds a month. So we're up to about 85 pounds a month to measure what money we've got coming in. So if we're making at, you know, 150 pounds to 250 pounds a month, on a profit on a rental property, and we're paying out say 85 pounds a month, just to count the beans, so to speak, that probably doesn't represent good value is quite a massive carve out from our costs. So that would then point you into, okay, do it yourself, use a spreadsheet, check out your bank statements once a month, and off you go. And that's what most people do. So they don't spend the money, because it isn't really worthwhile. And then they kind of have some kind of, you know, self serve solution like that. But there will become a tipping point where the activity becomes too complex. Let's say you've got multiple properties in your portfolio, for example, and in which case, there's a tipping point where you go, Well, you know what, I think I need something a bit beefier. And that might make you look at something like an accounting system, or management system and potentially an outsourced bookkeeper to assist you as you grow. So it's one that you can scale as your needs scale as well. The other principle here in this area is to do what I call milestone reviews. So you know, you might do a family, some people do it more frequently, yes, but you might do a monthly rent, written reconciliation, for example. That's a really good discipline to have. Some people might do that more frequently. Because if the tenant is missed their rent payment, and you only identify it, like let's say they're due to pay on the first of the month, then you do your rent reconciliation at the end of the month. So the 31st, for argument's sake, that's obviously 30 days after maybe tenants missed their rent payment. So really, you could do with an alert system before that. Because if you start chasing someone who's missed a rent payment, at least 30 days late, and by the way, the next day, they're due to make their next rent payment. So it could be two months down by the time you've perhaps made the phone call or sent them an email or something like that. Of course, this is if you're self-managing, then that's too late. So you definitely need a faster system. If you're self-managing your rent your letting agent should be doing this for you. If you use a letting agent that's one of the roles but definitely do a rent reconciliation, make sure you're getting what you think you are getting. And then that will allow you to make decisions and to jump on it much more quickly. So Some things you need to do quicker than others. I always do an annual milestone review. So when I'm just counting my beans, and ready to submit it to my accountant at the end of the tax year really to, you know, process my accounts and pay my tax, etc, I also do a portfolio review and look at how my portfolio is performed. And I track it at that point in time as a matter of course, across a course right across the portfolio. And I'm looking for properties that are performing well properties and are performing so well. And that enables me then to ask good questions. The principle of this is to ask good questions. And the good question might be, is this property still performing as expected? Can I do something else with it? Is there equity in the property that I can utilize elsewhere? So I'm asking good questions like that. So enables me to do it. So that's my annual review. But I also have a review around what I call significant events. So a significant event was probably something related to an individual property, rather than their portfolio as a whole. And here's a couple of examples. So let's say, there's 10 properties talented, and then the tenant serves notice, and then you think you need to change the tenants in attendance over. Now, it might well be that you just carry on as normal. And you know, just get either get the letting agent or you go and find the tenant and you know, off you go. But I think it's a trigger point to reevaluate what you're doing with the property. And every time there's a tenant changeover or a remortgage, or as a refurb. Jew, I use that as a significant event trigger to go and have a look at that property's performance. And it might actually change my mind about what I'm going to do next. So rather than just blindly carry on, you know, doing the same thing, I look at the situation and go, actually, this is the best thing for me, right now. I had it recently, I had a property, it was in a semi-rural location down in Cornwall, I'd done a refurb on this project years ago, it was doing pretty well from a rental point of view, but it always, you know, seem to to have a tenant changeover either in August or December, which are notoriously slow months. And so I had kind of extended void periods, beyond average, if you like. So it always sort of dragged down the rental performance a little bit, because I'd have a void period of maybe up to six weeks, which is about twice the national average according to the RNA. So it's like, so Okay, when it's tempted, but it just takes forever to get it tenanted. And of course, it could have done different things it could have said, right, let's try and have a tendency that doesn't end in August or December, for example, but doesn't always work if the tenant moves on to statutory periodic. But there we go. That's something I could have done. But what I always do, or did around the tenant change over a period of time was I looked at the market. So I looked at the rental market. And I said well, what am I likely to get for re tenant, but I also looked at the sale market. And I try and figure out well, what what's the property worth now what equity I've got, if I got tied up into it, that's exactly what happened with my Cornwall property. And you know, things were sort of running along with what I call a normal level for a while. And then over a period of a year or two prices just shot up. And I looked at the situation, I thought, well, I've got a lot of capital that's grown now in this property, and my rental performance is okay. But I do have these long void periods. So I decided to sell the property, rather than to return into it and release the equity and reinvested it elsewhere in a property that will, you know, perform at least as well, but we wouldn't have so many voids. So that's why I decided to do and of course, then I need to look at things like capital gains tax, but I had a very low capital gains tax position on that particular property. So it was fine. So there we go, you have master reviews, regularly annually, and perhaps at significant events, as I mentioned. And again, as I mentioned before, maybe having some sort of reporting dashboard system sounds fancy, but you know, red, Amber, green color coding, or you know, just look at, you know, budget versus actual and the variance, but have a mechanism that actually, you know, allows you to see the performance of your portfolio or your individual property over time is a good thing to review. And the final topic really is about support and assistance. So I've talked a little bit about what we can do. I've talked about I've touched on a little bit about how we can get support. So the main areas of support and assistance are using software tools and apps. So I've talked about the property management systems are talked about accounting systems, in particular, we could, and that comes at a cost. So there's a trade-off here. So we might want to be organized, but it comes at a cost and that will eat into our bottom line. But it might make our life easier. And it might make us more have more control by having that kind of software in place and as some of its free as well, by the way, so you don't necessarily have to go for paid subscriptions, but there's drawbacks and limitations of the paid versus the unpaid solutions. Then, of course, we can Have a bookkeeper or something of that description. Now I call a bookkeeper, someone who does the regular sort of accounting and record-keeping and budgeting and cash flow. For us. Someone who's like enjoys it, someone who's good at it, and someone who has time to do it. But of course, that also comes at a cost. But you know, if you're, for example, on a husband and wife team, for example, it might well be that one of you is better than the other one at bookkeeping, and one of you is better than the other one. It's sort of, you know, re-evaluating the numbers or actually working on the property or dealing with tenants. So you could perhaps carve out the rule, the discipline between you, but equally, you could hire somebody in to do your bookkeeping for you. And the final area is really an accountant. Have some people do their year in tax returns themselves, and final those themselves, and that's fine. But equally, usually, an accountant will save you money. So it's worth engaging accounts. And it costs probably upwards of 600 to about 1500 pounds a year typically, to have an accountant to submit your year and figures. But really, they should be advising you to make sure you stay on track, you don't get investigated by the taxman, they should really be able to tell you ways in which you could save money attainted at one earlier, using your home as an office would be an example. But of course, you can find that out for yourself. But the accounts and stay up to date with all the rules and make sure you just stay out stay straight, they should really be saving you their feet. That's my sort of gold, a golden rule. You know, how are you helping me save your fee this year, Mr. accountant, some years, I'll save you a lot, some years, I won't save you so much. But these things that support this assistance, you know, can help you software bookkeeper or accountant can also save you money, he can keep your ear on the right side of the rules and regulations and the laws free up your time so that you can focus your time and attention on other areas. So don't necessarily you know, scrimp and save too much in this area. Because you know, I have a principal, if I've got more time available, I can make more money, which will enable me to pay for these people. So it's kind of a trade-off or an opportunity cost if you like. So there we go. That's what I really wanted to cover today. Set the scene. For the panel discussion, which we're coming up next week, I've got a few people who talk about what they do with their particular portfolio. Hopefully, that's been useful to you To recap some of those principles. And I guess just in drawing some conclusions, the show notes are going to be over at the website, thepropertyvoice.net if you like to talk to me about anything from today's show, or this series or property more generally, you know, you can reach me podcast to thepropertyvoice.net by email, and I get those emails personally. Sometimes a bit slow to respond these days, but I do get them so do email me. And I'll do my best to try and respond to you. And but I guess all that remains to say is thanks once again for listening to the podcast this week. And until next time on the property boys podcast is champion.
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Transcribed by https://otter.ai