In the world of property investment, there's a longstanding debate that seems to pit the traditional against the innovative: Cash Flow versus Rental Yield. It's a battle of financial priorities, and today, we're diving into this topic, in a direct, insightful, and with just the right amount of wit (hopefully) to keep you engaged.

The Essence of Cash Flow

Let's cut to the chase. Investors, particularly landlords, are increasingly keen to understand one fundamental aspect of their investments: Does the deal cash flow? In simpler terms, after all the bills are settled at the end of the month, is there more money jingling in their pockets or less?

Here's a straightforward definition to remember:

Asset = Money into your pocket each month.
Liability = Money out of your pocket each month.

Your rental income is the asset that fills your pocket, while expenses like mortgage payments, management costs, and monthly operating expenses (MOE) are the liabilities that deplete it. The latter covers potential issues and is best kept in a separate account for rainy days.

Understanding the Numbers

A cash flow calculation is more than an exercise; it's a revelation. It involves subtracting your expenses (mortgage, management costs, and MOE) from your income (rent). This simple yet powerful computation unveils whether your investment is a true asset or a hidden liability.

Interestingly, while most conversations about property investment gravitate towards yield, the real question is about its impact on cash flow. Does a 6% yield matter if you're bleeding money every month? The answer is a resounding no.

Beyond Yield: The True Indicators of Success

Yield, often revered in property investment circles, is not the be-all and end-all. It's a metric that fails to account for the reality that many investors aim for an infinite return on investment. The true indicators of a successful investment are its cash flow and cash on cash return—measures that yield alone cannot fully encapsulate.

Stress Testing: A Reality Check

As part of our commitment to landlords understanding the returns, we propose stress testing your investment properties against interest rates of 6%, 7%, and 8%. These rates may sound high but it is better to see your position in different scenarios so you can make decisions based on these numbers. You should also include MOE at 10% and a letting management charge of 10%. This exercise is not just about numbers; it's about peace of mind. It helps in understanding how your investment stands against fluctuations and ensures your cash flow remains positive.

Mortgage Calculation Simplified

For those dizzy from the numbers, here's a simple way to calculate your mortgage interest:

Mortgage Balance × Rate = Annual Interest

Annual Interest/12= Monthly Payments

Remember, this formula only works it's wonders for interest-only mortgages, making it easier to gauge your monthly obligations.When you add in your MOE and Management costs

Now you have your monthly liabilities then take this away from the rent to see what position you are left in.

The Main Takeaway

Knowing your numbers is not just good practice; it's the bedrock of successful investment. Cash flow is king, and capital growth, while important, should not eclipse the fundamental need for a positive monthly income.

Offering services like stress testing and having open conversations about financial health are not just value-added services—they're essential strategies for winning business and ensuring long-term success.

So, to all landlords out there, it's time to shift the focus. Move beyond yield, dive deep into your cash flow, and remember, if the numbers don't work, we're here to help. Whether it's reshaping strategies or making tough decisions, the goal is clear: To secure investments that aren't just profitable on paper, but in reality, every single month.

Remember, in the dynamic world of property investment, being well-informed is not just an advantage—it's a necessity.

One Final Thing

We produce these reports for landlords who would like to understand the numbers more but don’t have the time to. We do a deep dive into your property which includes uplift in equity, rent review, financial review, cashflow and our recommendations based on the topics just mentioned.

If you would like to get your report click here to start the process.