| As a landlord/lady, it is always a good idea to | | | | getting overlooked (and potentially save some |
| regularly review the performance of your | | | | money). For example, are you spending too much |
| property portfolio considering a range of different | | | | on maintenance, repairs, insurance etc.? Could you |
| situations that could occur. Stress testing has | | | | keep some of the cash-flow by managing the |
| more commonly been used in the banking sector | | | | properties yourself? Could you potentially turn any |
| - for example to examine how robust a financial | | | | of your properties into a HMO (and benefit from |
| instrument or model can be in range of | | | | an improved yield)? Would acquiring more |
| circumstances (and using specific algorithms to | | | | property make sense (to balance out the |
| deduce what the return would be within such | | | | negative cash flow you may be achieving)? |
| scenarios). | | | | 4) Releasing Money from Your Portfolio: for those |
| In the buy to let sector, similar principles can be | | | | who had bought property before (and during) the |
| applied using the accounts that you would already | | | | onset of the credit crunch, keep an eye on the |
| be maintaining as well as tools available on the | | | | various house price indices and reports (such as |
| web. This is something that even the healthiest of | | | | 'Hometrack') to see how the value of your |
| portfolios needs to go through every now and | | | | property is moving. Look at a number of different |
| then. | | | | growth scenarios to determine when and how the |
| 5 Stages of Stress Testing Your Property | | | | equity level in your property will increase in order |
| Portfolio: | | | | to see, approximately, when you will able to |
| 1) Data Collection: mortgage payments; rental | | | | release cash (either by selling or re-mortgaging). |
| receipts; voids; maintenance / repair costs; | | | | Note that some areas (such as London) are often |
| tradesmen / labour costs; insurance; bank | | | | less affected than others and can go up in value |
| charges; gas inspection costs; transport / fuel | | | | quicker - often due to a short supply. Start with a |
| costs; EPC charges; interest payments on other | | | | hypothetically pessimistic view of negative growth |
| loans related to your property business; legal | | | | to see how you will be able to handle every |
| costs; book-keeping and other auxiliary charges | | | | situation (good and bad). You should also bear in |
| (you may want to also add your property buying | | | | mind the fact that lenders, particularly during a |
| costs, if any). You should ensure that the | | | | downturn, tend to take a particularly stringent |
| information you use is accurate and up-to-date so | | | | view with regards to valuations – it is |
| that you are getting a clear picture; | | | | therefore better to take a conservative approach |
| 2) Net Operating Income: this is essentially | | | | (for example using sales and not asking prices); |
| deducting the total amount of money you spend | | | | 5) Major Costs: lastly, and often forgotten about, |
| on your portfolio from the rent you receive. | | | | is to test worse case ‘real life' situations |
| 3) Future Cash Flow Testing: whilst Bank of | | | | against the performance of your portfolio |
| England interest rates stood at historically low | | | | (refurbishments / large scale repairs, boiler |
| levels at the end of the first decade of the | | | | replacements, bad tenants etc.). These costs do |
| 2000s, most people are aware that they can | | | | build up, particularly after you have owned your |
| change at a very quick pace - particularly if | | | | portfolio for some time. With points 3-5 above, |
| inflationary pressures mount. For this reason, it is | | | | the best form of stress testing is to ensure that |
| important to examine the cash flow from your | | | | you will be able to sustain the portfolio if both |
| properties through various rate increase | | | | interest rates increased; the value of your |
| increments remembering that long term averages | | | | properties continued to decrease and you take |
| are between 5-6% (look at historic interest rate | | | | into account a number of refurbishments etc. |
| figures using the link we have provided below). It | | | | (whilst always looking at your net operating |
| is through this analysis that you can often weed | | | | income). |
| out any issues with your properties that may be | | | | |