Real Estate Investor Magazine South Africa October 2013 | Page 26

FINANCE

BY KOOS DU TOIT

Managing Your Cash Flow
The right action plan gets results
property may at times be vacant and even the
best tenant may on occasion pay the rental late
or not at all.
For this reason, smart property investors factor
in a vacancy rate of 5% into their cash f low
calculations, even if the current vacancy rate for
the area is lower. Similarly, professional property
investors take out rental insurance to ensure
that the rental is received on time every month,
regardless of whether or not the
tenant pays on time, or at all.

O

ne of the most common pitfalls
propert y investors step into is
neglecting to project carefully and
then to manage tightly the cash f low of an
investment property on an ongoing basis.

Cash flow management
Cash f low management is little more than
ensuring there is enough cash available, at the
right time, to cover the expenses that must
be met.
This, however, seems deceptively simple,
because good cash f low management is more
than a simple calculation to check whether
the expected income exceeds the expected
expenses. In reality, cash flow management is a
forward-planning strategy, requiring a thorough
understanding of the expected income and
expected expenses, as well as careful provision
for the unexpected events that might impact
on the investor’s ability to meet comfortably the
expected expenses given the expected income.

The income
The starting point should be to calculate the
expected income realistically - establishing a
realistic rental income and annual increase,
while factoring in possible scenarios that could
affect the collection of this income, such as a
vacancy or non-payment of rental. Even the best
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October 2013 SA Real Estate Investor

and jeopardising the long-term success of their
property portfolios.
The expected expenses should be covered
comfortably by the expected income and
the contribution the investor can make,
comfortably, from his/her own pocket.

In the same way, smart
property investors ensure
they can comfortably afford
any shortfall between the rental
income and the monthly expenses from their
personal cash flow. “Comfortably” means that in
covering the shortfall from his/her own pocket,
the investor’s personal monthly cash flow does not
become tenuous. In fact, it implies that even when
covering the shortfall each month, the investor’s
personal cash flow will still provide for a buffer
to absorb minor out-of-the-ordinary expenses,
whether in respect of personal financial needs or
the property investment.

The unexpected

However, prudent cash f low management
further includes building a financial “buffer”
or “war chest” of sufficient funds to cover the
unforeseen and unexpected events that have
so often derailed even the best investment
strategies. These “unexpected” events include,
for example, a prolonged vacancy, a non-paying
tenant that refuses to vacate the premises,
damage to the property, unexpected extensive
repairs or maintenance, or a special levy.
The best way to build up such a “war chest”
is to budget more than the minimum monthly
bond repayment in the cash flow calculations
and to pay this higher amount into an access
bond, where access to it will be retained, while
this money is reducing the interest payable on
the bond as well as the term of the loan.

The expenses

Plan ahead

When considering the expected expenses, it is
important to make provision for all expenses,
including rates and taxes or levies, utilities,
insurance, rental management fees and routine
maintenance, taking into account that these
expenses will increase each year and the
increase will be at least the rate of inf lation,
although many expenses, notably rates and
taxes and utility costs, are rising well above
inflation.

P3 Investment Group’s investors rely on easyto-use and intuitive Property Wealth Manager
software, which prompts them to factor in all
these variables. This ensures investors make
informed investment decisions before acquiring
a property and then manage tightly the cash
flow of the property acquired.

The cash f low should make provision for
inevitable interest rate increases, which may
raise the monthly bond repayments beyond
the “comfortable” level. Whatever the current
interest rate, smart investors calculate their
cash flow projections on a 12% interest rate (the
long-term average) before buying a property.
This allows them to build a buffer against
interest hikes without impacting their cash flow

With the right software that provides an
historical, current and future view of the cash
flow position of a property, making provision for
numerous variables and “unexpected” events,
and with an action plan to build up a solid
“war chest” of funds to cover the unforeseen,
property investors can not only successfully
avoid the property investment pitfall of careless
cash flow management, but transform it into a
competitive advantage.

RESOURCES

P3 Investment Group

www.reimag.co.za