Thursday, 18 March 2010

Property - Investment or Business?

If you are buying a property to earn income then you probably think of yourself as a Property Investor and you’d be forgiven for thinking that as everyday we are bombarded with this term in the media. Even the Tax Office want us to slip in neatly to this description and treats Property Investment differently than other businesses.

I don't really like to use the word Investment for what I do and I believe it's why some of us make money from property whatever the market is doing.

These are some of the things I do to keep my business alive & kicking:-

• Five year rolling strategic plan
• Five year cash flow forecast made up of 3 interlinked versions - one each for high, medium & low interest rates. I constantly tweak these to check I've got sufficient funds for at least 2 years even with high interest rates.
• Full feasibility studies for each project I consider, linking it in to cash flow to test it's strengths/weaknesses
• Keep flexible to new opportunities and the changing property cycles
• Never forget my tenants are my customers who need to be given reasons to stay with me
• Keep up with latest regulations, economic news & forecasts
• Tax planning with a Tax Consultant
• Keep up to date accounting records & separate bank account for business
• Carry out annual portfolio valuation and appraisal, taking action as necessary
• Rolling 5 year Maintenance Schedule which also links in to cash flow forecast
• Protect my rents with Rental Insurance
• Review rent annually
• Have varied portfolio (not put all eggs into one basket)
• Network - learn & share

Those are not necessarily in the order of importance but if I were to put one at the top it would be the Cash flow Forecast with at least 2 years' cash taking a pessimistic view on the next 2 years.


RealEstateInvestor said...

I love the list. If more people in the residential real estate sector thought of themselves as running a business there would be a lot landlords with choice.

RealEstateInvestor said...

Jo - When you look at three interest rates, what sort of spread do you use between the best and worst case?

Jo King said...

I use 3% between best & worst.

At the moment for my best case I have rates increasing in Feb 10 to 1% then gradually increasing throughout the year to 3% by year end. That is now looking unlikely but I'm not brave enough to reduce it down in case I'm wrong so my worse case shows 6% at year end.

One of my main reasons for selling some of my portfolio is to get the Yields up in preparation for increased rates.

Jo King said...

Sorry, above should have said Feb 11 not Feb 10! And I'm referring to BOE Base Rate, I then add my mortgage margins accordingly.