Understanding the exact position of your property portfolio and making the right decisions is crucial to growing your property business.
The best way to do this is by using the right information.
So, as a landlord, which important metrics should you be tracking?
ROI
The most important metric of any investment is the Return On Investment (ROI). This is the annual profit (income minus costs) generated by your portfolio, divided by the cash you have put in.
Yield
It’s important to stay on top of the gross yield of your portfolio. This is simply the rate of return you can expect to achieve on your properties. It helps to visualise how quickly you will make a return on your investment and you only need to know two figures to do the calculation – the expected annual rental income and the price you paid for the properties. If you know these two figures, the formula to calculate yield is easy:
(Annual Rental Income ÷ Purchase Price) x 100 = Yield %
For example, if you purchase a property for £180,000 and you expect to receive £9,000 a year from it in rental income, your calculation would look like this (£9,000 ÷ £180,000) x 100 = 5% Yield.
A decent yield is anything above 5% - gross yields across Gloucestershire and Worcestershire are slightly above average, at around 6%.
Rental Cover Ratio
You should also stress test each property and the entire portfolio with your current interest rate and mortgage monthly cost - in case your tenants stop paying their rent or are only able to make payments based on Local Housing Authority rates or Universal Credit. This metric will help you understand the overall risk level on your entire portfolio level and how much margin you have if your tenants can’t pay.
New Cash Flow
Your actual cash flow is based on the actual rental income minus the actual monthly expenses. Net cash flow is often different to gross cash flow, which is rental income minus fixed costs.
LTV (Loan To Value)
Use up-to-date information on the LTV of your rental properties to have a better idea of your current position and your options to re-finance. Some lenders have restrictions on the overall LTV of a portfolio and criteria can change quickly.
Portfolio Total Equity
How much equity do you have in your portfolio? Knowing the current estimated property value minus the current balance of mortgages and other loans, will give you a clearer idea of the choices you have, particularly if you are thinking of re-financing to expand your portfolio.
Portfolio Interest Cover Ratio
The Interest Cover Ratio (ICR) of your portfolio, based on your outgoing interest payments and incoming rental income, is used by lenders to determine the resilience of your portfolio to increases in interest rates and it can be a key determining factor in your ability to secure a new mortgage. Understanding the position of your portfolio will help you to understand your options.
Tracking all these metrics on an ongoing basis is important for any landlord, especially as making well-informed decisions quickly can prove the difference between making a successful profit on your investment or not.
If you’re looking for help managing your investments, register as a Landlord with us to find out more about the packages that we offer.
