When it comes to property investment, understanding the financials behind your mortgage is essential to ensuring long-term profitability. Let’s delve into the specifics of refinancing a property, particularly focusing on how much you can borrow, what that borrowing will cost you, and what your true net cash flow looks like after all expenses are considered.

#### Step 1: Refinancing Your Property

So, you’ve purchased a property below market value, invested in renovations, and now it’s time to refinance. Imagine your property is now valued at £100,000. The key question is: how much will the bank lend you against this newly appraised value?

In most cases, banks will lend up to 75% of the property’s value. This percentage is known as the loan-to-value (LTV) ratio. For a property valued at £100,000, the bank would offer you a mortgage of £75,000 (calculated as £100,000 x 0.75). This is the amount you can leverage to either recoup your initial investment or reinvest in other opportunities.

#### Step 2: Calculating the Mortgage Cost

Next, you need to consider the cost of borrowing this money. Mortgage interest rates fluctuate, but let’s work with a conservative estimate of 6%, which represents a worst-case scenario in the current market. To calculate your monthly mortgage payment, you’ll apply the following steps:

**Determine Annual Interest**: Multiply the mortgage amount by the interest rate.£75,000×0.06=£4,500 per year£75,000 \times 0.06 = £4,500 \text{ per year}£75,000×0.06=£4,500 per year**Convert to Monthly Payment**: Divide the annual interest by 12 to get the monthly cost.£4,500/12=£375 per month£4,500 / 12 = £375 \text{ per month}£4,500/12=£375 per month

So, your mortgage payment to the bank is £375 per month. This figure represents the cost of borrowing the £75,000.

#### Step 3: Understanding Rental Income and Expenses

Now that we’ve established the cost of the mortgage, let’s compare it to the income generated by renting out the property. Suppose you can rent the property for £750 per calendar month (PCM). This rental income is the first step in calculating your net cash flow, but it’s important to remember that it isn’t the entire picture.

**Deducting Management and Maintenance Costs**

Managing a rental property comes with additional costs, primarily letting and management fees and a reserve for maintenance expenses:

**Letting and Management Fees**: Typically, you’ll pay your letting agent around 10% of the rental income for their services. In this case, that’s £75 per month.**Maintenance Reserve**: It’s wise to set aside another 10% of the rental income (£75 per month) for ongoing maintenance and unexpected repairs. This reserve ensures you’re covered for minor issues like broken door handles or more significant repairs.

#### Step 4: Calculating True Net Cash Flow

To determine your true net cash flow, you subtract all these expenses from your rental income:

**Total Expenses**: Add the mortgage payment, letting and management fees, and the maintenance reserve:£375+£75+£75=£525 per month£375 + £75 + £75 = £525 \text{ per month}£375+£75+£75=£525 per month**Net Cash Flow**: Subtract the total expenses from the rental income:£750−£525=£225 per month£750 – £525 = £225 \text{ per month}£750−£525=£225 per month

This £225 is your true net cash flow, representing the money that remains in your pocket after all costs are accounted for.

#### Step 5: The Importance of Understanding Net Cash Flow

Understanding your true net cash flow is crucial because it gives you a realistic view of the profitability of your investment. It’s easy to overlook costs like management fees and maintenance, but failing to account for them can lead to overestimating your profits.

In this example, while the gross rental income is £750, the true profit, after accounting for all expenses, is £225 per month. This figure assumes your tenant pays rent consistently each month without any issues.

#### Final Thoughts

The process of refinancing a property and calculating the associated costs and benefits can seem complex, but it’s essential for any property investor to master. By understanding how much you can borrow against your property’s value, the cost of that borrowing, and your true net cash flow after all expenses, you can make informed decisions about your investments.

Remember, while the allure of a high rental income might be tempting, it’s the net cash flow that ultimately determines the success of your property investment. Always factor in all possible expenses, including management fees and maintenance reserves, to get an accurate picture of your investment’s profitability. This careful calculation is the key to sustainable and profitable property management.