Property Investing Part 4 – Income for Life



Welcome to Part 4 of our series on property investing with Graeme, focussing on the “income for life” part of the property investor’s mantra:

This is the second half of an article explaining how serious property investors make money from property without using their own money, and how you can too.

You’ll remember from the previous post that our aim is to buy a property below market value (BMV), refurbish the property to a good standard, pull our money out using a mortgage, end up with equity in the property and each month benefit from rental income……and then repeat the process thus building a successful portfolio that generates passive income. With this strategy it’s crucial to buy BMV. The money in, money out mantra works if you buy at the right price and then add value with refurbishments.

In the previous article we learned how to pull money out of a property so in this article we will move on to the final part of the mantra – how to generate income for life. What we mean by income for life is making sure each property will give us monthly rental income. This is also known as positive cashflow.

Cashflow is the single most important word for most investors.

Cashflow is the life blood of a property investment. If there is one word to remember from today’s post it is cashflow

Focus on cashflow

Cashflow is either a positive number or a negative number. Investors aim for positive cashflow because it means money is flowing into our bank account. The cashflow equation is simple but crucial.

Income – expenses = Cashflow

Income is the monthly rent our tenant pays and, on the other side of the equation, monthly expenses include our mortgage payments and property management fees. So to be more specific the calculation is:

Monthly rent – monthly expenses = monthly cashflow

If, for example, the rent is 500 and expenses are 300 then we have a positive cashflow of 200. Conversely if we have rent of 650 but monthly expenses of 750 then we suffer from a negative cashflow of minus 100.

Before buying a property the most important thing to do is research. In order to find property that yields positive cashflow we must accurately find our projected income and expenses, then we will know if the property will generate positive cashflow and this decides if we buy the property. Fortunately, in the internet age, our research can be done mostly online and with a few phone calls.

So how can we accurately calculate our income and expenses?

What exactly is my monthly income?

As stated, our monthly income is the rent paid by our tenant. When researching rent we should receive for our target property it’s important to use established property websites. In the UK two well-known sites are Zoopla and Rightmove. Simply go to the website’s rental page and insert into the search engine properties that are as similar as possible to your target property. Insert the relevant postcode and property type e.g. 2 bedroom or 3 bedroom, and find property currently being advertised to rent. Examine the photos of the advertised properties to make sure they are a similar standard to the property you plan to buy, refurbish and let. Find 3 such properties and take the lowest rent as the assumed rent. Of course we want to get higher rent but to protect ourselves while calculating the property’s cashflow let’s take the lowest number.

In the UK another method to find the base rent of an area is to use Local Housing Allowance (LHA) rents. LHA is rent money given to tenants claiming government benefits because they are unemployed or too sick/disabled to work. LHA rent is usually the lowest rent in an area and therefore can be the gauge for the base rent we can expect. Calculating cashflow based on LHA rates doesn’t mean our tenant will be unemployed (although that is one strategy) it simply means we know the guaranteed rent we can get in a certain street/area. This information is online. Simply type into google the name of the town and LHA rates. Then you will see there are 5 different rent levels given based on the number of bedrooms in a property. The rates are: shared housing rate, 1bedroom (br), 2br, 3br and 4br.

I am for example currently looking to buy a 2 br property in my investment area of Liverpool. I simply go online and find the 2br LHA rate for Liverpool is 454 and I use this figure as my monthly income in the cashflow calculation.

Liverpool Bedroom Rate RATE PER MONTH
Shared £250.34
1 Bedroom £393.90
2 Bedroom £454.52
3 Bedroom £523.55
4 Bedroom £673.13

A third option for finding rent in an area is to call three local lettings agents and tell them the street of your target property and number of bedrooms. Ask the standard rent for such a property in good condition and once again take the lowest rental figure as the assumed monthly rent.

Finding our projected rental income can be done in 30 minutes. Even so there are plenty of amateur investors who do not do the research or use unrealistic, sky-high rents to calculate overblown cashflow. Do not get carried away by a lettings agent who says you will get sky-high rent. Usually they do this because they want your business and you will end up with an empty property because you got too greedy demanding rent that no one wants to pay. If you do get higher rent than expected that is great, but for now stay focused and assume a lower rent in your cashflow calculation because this will let us know if the property is really worth buying.

Now we know how to accurately find our monthly income, next we need to accurately calculate the property’s monthly expenses.

What exactly are my monthly expenses?

There are 3 main monthly expenses an investor covers.

  1. Monthly mortgage payment
  2. Management fee,
  3. Monthly Operating Expenses (MOE)

The most important monthly expense to pay is the mortgage. You absolutely must pay the monthly mortgage, however you pay without using your money. Who pays for it? The tenant pays your mortgage with their monthly rental payment.

For people who hate the debt of paying a mortgage you can use your own money to buy houses but you will soon run out. Even if you are wealthy, buying houses quickly leaves a large dent in the bank account. The art of property investing is the art of managing debt to sustainably make money. So our first monthly expense to pay is the mortgage and the point is someone else pays this mortgage – our tenant.

In the UK interest only mortgage rates currently stand around 2.5%.

Again property websites provide a calculator to calculate how much we must pay per month, simply insert the relevant figures (purchase price, deposit, interest rate). The mortgage market however is broad and constantly changing so I strongly recommend you use a mortgage broker who can quickly find the best deal for you based on your situation. It is a small cost to use a broker but they perform an important task finding the best mortgage deal and could save you thousands of pounds over the years and decades to come. The broker’s fee is also tax deductible.

If you want to calculate the mortgage cost yourself the formula is quite simple. There are a few key numbers you will need:

  1. The property’s Done up Value (DUV). As explained in the last article this means the value of the property after your refurbishments
  2. The loan to value (usually 75% in UK)
  3. The mortgage interest rate e.g. 2.5%
  4. And the number 12 because there are 12 months in the year (therefore 12 mortgage payments to make in a year)

 The monthly mortgage payment calculation is:

DUV x 75% x mortgage interest rate /12 = monthly mortgage payment

(If you didn’t understand these terms please see the previous post).

So using our example of a 100K property from the last post, and knowing from our mortgage broker that the best mortgage rate is 2.5%, the calculation looks like this.

100K x 75% x 2.5% / 12 = 156.25

Therefore the monthly mortgage payment is 156.25 which we can round off to 156 pounds.

As we are in an historically low interest rate environment (which means monthly mortgage payments are low) amateur investors get very excited and want to go out and buy anything on the market.

Before rushing out and trying to buy everything, professionals do the exact same calculation as above but they also do it a second time with a higher mortgage interest rate of 5%.

So if we do the exact same calculation again at 5% we get a higher monthly mortgage payment:

100 x 75% x 2.5% / 12 = 312

This calculation confirms the property is worth buying.

Why do professionals do this second calculation? Because we want to stress test the mortgage. When interest rates increase (at some point they will) we want to make sure the property at least breaks even with mortgage payments and we do not fall into negative cashflow.

So in order to protect ourselves the calculation is done twice – first, work with the real life mortgage rate and then check again at 5% as a stress test.

Now some people will say “Don’t worry about stress tests, just buy the house and get some income”, but do you remember the professional’s mantra?

Money in money out, asset for free, income for life.

Income for life…….not income for 15 months until I suffer negative cashflow from rate hikes and have to sell the property at a loss.

And when this happens and you have to sell the property at a loss because the bank repossessed it, guess who will be buying the property at a bargain price? – Some irritating professional who wants income for life and has done their homework properly. I therefore want you to be protected too so please do both calculations and then you will have a much safer and stronger property portfolio which will stand the test of time.

The second monthly expense we need to consider is management fees. Professional lettings agents will provide long-term management for your property for a fee. Management fees vary between 8-12% of monthly rent – the agents I work with all charge a flat 10% of rent. For example if the rent is 500 pounds the agent’s monthly fee is 50 pounds. This fee covers finding suitable tenants, credit checking the tenant, organizing repairs, taking rent, and dealing with arrears.

Property investors use other people’s money (OPM) to buy property and they use other people’s time (OPT) for the long-term management of their portfolio. Long distance investors will definitely need an agent to manage the property, however local, amateur investors who live in their investing area sometimes want to save the management fees and manage the property themselves. Think carefully about this because if my agent is doing a good job I am happy to pay the agent’s fees, which are tax deductible. Getting a good agent frees an investor to carry on building the portfolio or doing their day job or whatever they want to do. The point is if you have a good agent pay them well, remember to deduct their costs from your taxable income and benefit from the extra free-time!

The final expense is Monthly Operating Expenses (MOE).

MOE includes the required annual gas check, annual building insurance (the only legally required insurance) and savings for wear and tear. It could also include void money and ground rent if the property is a leasehold. If you have a good property in a desirable area then some of these MOE costs should be minimal e.g. voids and wear and tear, at least for the first 5 years. MOE is generally calculated at 10% of monthly rent although some investors prefer a slightly higher figure.

I personally have a separate bank account as my MOE pot of money. The pot starts with 3000 pounds and over time empties as I pay MOE expenses, but every month I transfer 10% of the portfolio’s rent into this account to top it back up. Professionals have a system in place so savings for operating expenses are automatically taken care of.

Et Voila! Here we have the information and methods to accurately assess our cashflow.

Income – Expenses = Cashflow

Rent         Mortgage

Management (10% of rent)

MOE (10% of rent)

The property feeds you

This post is all about achieving positive cashflow and another cashflow principle is that you only buy a property if you can achieve a positive cashflow of at least 100 pounds per month. Be very careful about buying a property below 100 pounds cashflow because if you have a sudden significant cost e.g. boiler breaks, storm damages the roof or damp issue, your cashflow is wiped out and you have to dip into life savings to pay for the house. Remember – you shouldn’t feed the property, the property should feed you.

Now 100 pounds per month doesn’t sound like a lot of money but considering you have a property for free and equity, you’re literally getting 100 pounds every month, for life, for free. Furthermore the cumulative effect of building a portfolio and buying 2 or 3 or 4 times, year on year, will make a fundamental financial difference to most people’s lives.

So can you get the cashflow calculations right?

Before going out and buying property I recommend you run the cashflow calcs at least 50 times on different properties. To get started have a look at the 3 example properties below and run the cashflow calcs and decide which one would you buy?

Liverpool 2br

Rent 454

Mortgage 280

Management 10% rent

MOE 10% rent

Cashflow =


Grimsby 2br

Rent 475

Mortgage =127

Management 10%

MOE 10%

Cashflow =


Hull 3Br

Rent 465

Mortgage 275

Management 10% rent

MOE 10% rent

Cashflow =


Always protect the downside

Richard Branson stands out as probably the most famous British entrepreneur ever. One of his key teachings is:

“Always protect the downside”.

As you read how professional investors operate you will notice there are multiple checks to protect the downside, for example checking the area’s base rent, buying BMV, calculating 100 pounds plus cashflow and stress testing the mortgage. You can make a lot of money from property, but oh boy, you can also lose a lot of money too. Protecting the downside is just common sense – when it is raining you open an umbrella, when you get in a car you use the seatbelt and property investing is no different. Another protection we use is checking we always have 2 exits. This means if our first strategy (buy, refurbish, rent) doesn’t work then we have a second plan. The standard two property strategies are:

  1. Buy, Refurbish, Rent and
  2. Buy, Refurbish, Sell.

So if we really can’t find a tenant for the property for whatever reason we need to know we can find a buyer for the property – the buyer might be a young family or first time buyer or another investor or somebody else.

If you’re strategy is Buy Refurbish Rent, then check your second exit also works i.e. you can sell the property.

Once again view reputable online property websites for sold comparables in the area. What price did similar properties sell for and was the sold house in similar condition to your property? How long were they on the market for? Have any properties sold in the area in the last 6-8 months and how much for? If you can’t find any comparables it means one of two things:

  1. It’s difficult to sell because the area is a war zone.
  2. Residents love the area and don’t want to leave.

It is easy to see if the area is a war zone – just visit the area and look for dilapidated houses, graffiti, loitering youths and litter on the streets. Are the cars in good condition or not? Are the registration plates new or old? A great tool is google street view. If you’re doing this research online drive the street and nearby streets using google street view and check for signs of trouble.

You will quickly figure out which type of neighbourhood it is.

If it is a war zone think long and hard if you want the hassle of being a landlord in a troubled neighbourhood. You can make positive changes to a property but will find it much, much harder to influence an entire neighbourhood.

These two connected articles have illustrated the core principle which skillful property investors use to build passive income. When we follow the same steps i.e. buy cashflowing property and take our money out of deal, the great thing is then we can go shopping again! Amateurs think they have to use their own money and therefore soon run out of funds and stop investing, but property investment is a low capital investment……….if you know how.

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