Posted by Simon Misiewicz on 13th May 2014
Do you have your fingers on your financial pulse?
Can you diagnose your ROI problems?
Property investors like you and me are very good at reviewing the financials of our property investments through our due diligence process. We take our time to ensure that the property is in the right location, that it brings in the right level of income and that costs are low enough for us to make money.
We plan effectively. We ensure that we diagnose any problems and prescribe the right solutions so that the numbers are healthy for us to invest in the property.
But what do we do after the property has been purchased?
Do we all monitor the cash heartbeat of our property investments on a monthly basis? Do we look for the next property? (which for most people is a lot more exciting to do).
Often enough what we love doing is chasing the deal, getting the next project under way. I am here to put a dampener on all of that. What if you could make more money from six properties that perform very well compared to ten properties that perform OK.
If I am honest I am not sure that “most” people would stop at six properties and would still prefer to go for the thrill of owning more. Is that the right approach? I am not so sure.
Owning more properties means that there are more:
• Tenants to think about
• More boilers to worry about
• More mortgage applications to make
• More letting agents to deal with
• More of everything in fact
The issue we face by chasing deals is that we do not monitor the financial performance of our properties. If we do not monitor the financials closely we are at risk of the following:
• Voids are higher than expected and income falls
• Maintenance costs increase because we do not monitor the quality of kitchens, bathrooms and take pro active action to replace on-going issues with more robust equipment / furniture
• Rental incomes are not reviewed against market conditions and therefore income falls.
• Utility bills are excessive (HMOs in particular) due to over usage or poor insulation.
• Mortgage interest rates costs are higher than they need to be when mortgage reviews are not undertaken. This is especially the case when you have a period of low interest rates, which are then increased at the end of the term.
This comes about when people put their receipts in a drawer and put them into a shoebox or bin liner so that the accountant can sort it out.
Can you measure ROI if you keep receipts locked away without entering them into a financial system? The simple answer is no.
Would you constantly get in your car to get to a destination without knowing how you are getting there? Again the answer is no.
If it is so simple and easy to do then why do we not keep track of our financials? I believe as Jim Rohn says. It is easy to do and it is easy not to do.
I believe that your income can be increased and your costs decreased if they are tracked and measured in a financial system. If you keep track of income and costs on a monthly basis then you will see that there are issues 1 month after they occur, rather than 12 months later when the accountants has gone through the bin liner of receipts.
If you are able to see the financials, you would see a problem such as profit on a property dropping from £800 per month to £700 a month after the third month etc. You would investigate why this was happening.
Once you have identified the root cause of the problem then you can put a solution to it and bring the profits back from £700 to £800, if not more.
If you stopped losing £100 per month then you would make £1,200 more than if you left the receipts in a bin liner.
Is this worth doing? I would say so especially of you have five properties doing the same thing. In this instance you would make £6,000 more per year (5 X £1,200).
Applying the treatment
You can use a spreadsheet to input your rental income and costs and track them month on month. If you feel really adventurous then you can use an online accounting system like Xero or Kashflow to enter your financial results.
It will be difficult at first but the benefits and results will be worth it. Do it yourself for a period of time so that you truly understand the financial performance of your properties.
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