This group has been designated for adults age 18 or older. Please sign in and confirm your date of birth in your profile so we can verify your eligibility. You may opt to make your date of birth private.
Kindle Notes & Highlights
Read between
January 4 - January 12, 2021
The owners have introduced capital of £70,000 into the business which the business owes back to them. In addition, the cumulative sum of the profits and losses made by the business in all financial years prior to the current year was £5,488. The business also owes these accumulated profits back to the owners.
If we’ve calculated our balance sheet and our P&L correctly, then the capital at the end of the year will be equal to the net assets of the business. Hence, the balance sheet – well, balances. In this way, the balance sheet and P&L are always linked.
Q1. When I set up a limited company, how do I account for my initial injection of monies to the business? If you’ve set up your own small limited company in the UK, then you’ve likely also appointed yourself and/or your partner as Directors of the company. Whilst you could theoretically set up the initial injection of funds as share capital – that is, the capital of a company that comes from the issue of new shares, it is much simpler for you to loan the money to the company. If you go down the loan route, the loan will be classified as a director’s loan to the business. Because it’s money
...more
for larger capital expenses, e.g. spending on fixtures and fittings like furniture, the cash will be paid out on day one, but the cost of these items will be spread out over time as depreciation.
Xero or Quickbooks, these programs will provide a cash flow statement for you.
The accounting for property investors engaged in activities like flips, trading or property development is a whole different ball game. For a business that engages in flips, the revenue line is instead the sale of the refurbished properties and the cost of sales line is the cost of buying and refurbishing the property. It is therefore a different kind of business from property rentals.
If you’ve set up a limited company, then you’ll almost certainly want to appoint a bookkeeper and/or a property accountant. Limited companies need to file their financial statements and tax returns with Companies House each year. These accounts need to be prepared in accordance with the relevant accounting standards (e.g. UK GAAP) and with the requirements set out under UK legislation (e.g. the Companies Act 2006).
I think that Xero is the best tool for the average UK property investor.
use. It turns tasks like reconciling bank transactions into a fun job I look forward to. It’s a shame I only get to do it once a month.
metrics
Revenue
Profit per month
Increase in value of the property
For Green Leaf Properties, we calculate the capitalisation rate for Property A to be 4.3% (calculated as £5,522 ÷ £127,000) and we calculate the capitalisation rate for Property B to be 4.8% (calculated as £8,358 ÷ £173,000). From these metrics, we can see that Property B had a higher gross yield and a higher capitalisation rate this financial year than Property A. The capitalisation rate is the better yield metric here, as it takes into account property expenses too, not just revenue. It shows us the yield we would have generated if we owned the property outright with no mortgage financing.
the total return achieved by a property over the year is simply the sum of the return on investment (or ROI) and the return achieved via capital growth (or CG).
How do we calculate the average return achieved?
known in the investment industry as the time weighted rate of return (or TWRR).
What gets measured, gets managed. –Peter Drucker,
To estimate the market rental income, we need to conduct a market survey. This is a simple process and you should do this at least annually, preferably more frequently. You can do a search on Rightmove or your favourite portal to see what similar properties are being marketed for right now. The closer the comparables, the better the estimate. You can also “shop” your properties by calling some local letting agents to ask them what the property could let for in the current market. Call as both a landlord and a tenant and see if the answers differ. To avoid overly optimistic estimates, ask the
...more
Using loss to lease as a KPI We can turn loss to lease into a KPI by expressing the loss to lease as a percentage of the market rental income.
For Green Leaf Properties, the loss to voids % is calculated as £800 ÷ £9,900 which equals 8.1%. So, we’ve lost 8.1% of our market rental income from the one-month void period. Every investor will have their own tolerance level. Generally, I aim to keep the loss to voids below 5% when averaged over several years. In practice, this means that I need to keep voids to less than two weeks if my tenant changes every year.
How to improve loss to voids
A competitively priced rent will help with this, as will taking care of existing tenants and responding to their requests promptly.
The second strategy is to do everything you can to turn the property around quickly. The single biggest thing you can do here is get your agent to start marketing the property a month or two before the existing tenancy ends and to line up some viewings in advance. You should also make sure you attend to any cleaning required or repairs needed as soon as possible after the tenant leaves. Finally, you could even consider offering some kind of incentive or reward to encourage the tenant to stay for longer. I’ve heard of landlords and investors providing a move-in hamper and sending their tenant
...more
I try to invest in strong city centre locations and choose professional tenants,
Make sure you screen tenants carefully through your reference checks and absolutely do not give someone the benefit of the doubt. If they have bad credit history, you should insist on a guarantor or better still look for another tenant. Where I can, I try to stick to tenants with a strong employment history. By this, I mean that I look for both long service with a single employer and some level of professional qualifications in an industry that is going to be in demand for some time.
(d) Other income It is possible for you to make extra income from your investments in addition to rental income.
For Green Leaf Properties, we’ve generated £200 of other income over the year by offering a monthly cleaning service. To express this as a KPI, we simply divide this amount through by the market rental income. That is, £200 ÷ £9,900 equals 2.0%. This tells us how much other income we’ve managed to generate, expressed as a percentage of market rent.
Here’s a quick list of ideas
Parking – Depending on supply and demand in the local area, you could charge anywhere from £50 to £150 per month for parking.
Monthly pet rent
£25 to £50 a month,
Cleaning service
If the fee you charge the tenant is greater than the cost of hiring a cleaner to provide this service, then you’re in the money.
Laundry service – You could offer a laundry service for a fee, perhaps a pick up and return dry cleaning service. Again, you could charge a fee, then cut a deal with a local dry cleaner.
Moving in and out – There might be opportunities for renting out storage space or supporting tenants in the move.
Buy-out fees – You could perhaps, subject to the tenant fees ban, charge one month’s rent for lease breaks.
charging for furniture hire and adding additional rent to cover the cost of utilities. I’ve even heard of someone running a bike rental service as part of their business.
running costs are much more controllable than income. For this reason, controlling expenses is the single most important thing you can do to improve the profitability of your portfolio.
make sure these are on-track. If they go off-track, you should look into why this has happened.
rent guarantee insurance.
I don’t typically take out this type of policy. In my view, it’s better to manage this risk through proper screening of tenants. Also, as your portfolio grows in size, the risks around non-payment reduce as a result of diversification. That is, with a large portfolio, the likelihood of all tenants defaulting on their rent at the same time is low, absent some big economic shock.
cost of services provided is £218. This cost breaks down as £100 for one month’s council tax and £18 for electricity costs in the void period. In addition, the cost of hiring a cleaner to provide the monthly cleaning service was £100.
We can turn this expense category into a KPI by expressing the total repairs and maintenance cost as a percentage of the actual rental income from the property:
Actions you can take to reduce these costs include shopping around for tradespeople if you’re managing the property yourself. Also, you should make sure you act on any repair and maintenance requests promptly to prevent further damage. As the old saying goes, a stitch in time saves nine. If you are using a letting agent, then make sure they are managing tradespeople well and responding quickly to any repair requests.
At the end of each fixed-rate period, speak to your mortgage broker to see whether there are better mortgage deals on the market.
Tenant satisfaction Tenant satisfaction – You could design a tenant satisfaction survey, e.g. using SurveyMonkey, and monitor these tenant satisfaction scores over time. Time to complete repairs – One of the biggest frustrations for tenants is landlords who don’t respond quickly. Why not set yourself a KPI around the number of days taken to respond to requests and complete repairs. Suggestions box – Write out to your tenants and ask for their suggestions and about any niggles or frustrations they have.
Legal and regulatory
New tenancy set up
Safety testing
