Don’t be caught by the council tax exemption that doesn’t exist
So far in this series of articles about buy-to-let cash flow, I’ve discussed how to calculate cash flow and the disastrous effect that forgetting about service charges and reserve funds will have on your investment returns. We’ve seen how Jane’s property crashed from an estimated £1,000 + profit every year to a loss of around £5,000 in the first year.
Here, you’ll learn about how council tax is treated during void periods – another cash flow consideration that many buy-to-let investors forget to include in their calculations.
Councils squeezing the pips out of landlords
There was a time when, if your investment property was empty or between tenancies, you were entitled to council tax exemption. Providing the property was empty and unfurnished, you didn’t have to pay council tax for as long as six months. That’s all changed, and councils can now decide to give a full exemption, part exemption, or no exemption. No prizes for guessing what the majority do.
Jane’s costly buy-to-let cash flow errors mount up again
Jane wrongly assumed that the council tax exemption still existed.
She’d had several issues affect her cash flow and profitability, and when her tenant’s first-year tenancy was nearing an end, she decided that it was time to increase the rent. She didn’t like to do so – her tenants had been as good as gold; but needs must, as they say. She’d been told that the service charge was being increased by £100, and she needed to get her buy-to-let cash flow in order and to look something like her forecasts when she first bought the property.
She sent her tenants a letter to explain that she was increasing the rent by £50 per month. A month later they moved out, just a couple of days before the end of their tenancy agreement. Jane was devastated but convinced she would find new tenants quickly.
Those new tenants took two months to find, and then only after Jane had dropped the revised rent by £25 per month. She was happy that she had found new tenants. And happy that she had managed to increase the rent by £25 from the amount her previous tenants had been paying. What was far less satisfying was what it had done to her cash flow projections for her second year of buy-to-let ownership:
| Expense/Income Item | Per Month (£) | Per Annum (£) |
| Rent | £925 | £11,100 |
| Mortgage | £530 | £6,360 |
| Void Period | £154 | £1,850 |
| Void Period | £154 | £1,850 |
| Maintenance | £90 | £1,080 |
| Landlord Insurance | £20 | £240 |
| Property Management | £93 | £1,110 |
| Service Charge | £77 | £925 |
| Total Expenses | £962 | £11,565 |
| Cash Flow | -£39 | -£465 |
Before she had invested, Jane had thought she’d calculated her cash flow correctly. Now she found herself owning an investment property which, instead of providing a monthly net income of around £100, was costing her £37 a month to keep in the black. Worse was to come.
A couple of weeks after her new tenants moved in, Jane received a council tax bill for £210. She phoned the council and said that there was obviously some mistake. The property had been empty. And she wanted to know why she was being asked to pay council tax for the two months between tenancies. It was explained to her that this was council policy and that there were no longer any council tax exemptions.
Jane was upset. She was also angry at herself for not knowing the law. Now, for the second year running Jane’s property would make a substantial loss. Not quite the £5,000 loss she’d accumulated in her first year, but a loss of £675 was still hurtful. She had projected her net income in the first two years of buy-to-let ownership would be almost £2,500. Instead, she had racked up a loss of nearly £6,000.
How can you avoid the same mistake?
The moral of Jane’s story is to make sure you are thorough with your cash flow calculations. Go over them time and time again, and check and double-check items like service charges and council taxes. Speak to other landlords, lettings agents, and property managers.
If you need to increase the rent you charge, make sure you do so with a strategy that maximises income by raising rents and doesn’t give you an unwanted, unnecessary, and expensive void period.
Contact me or one of the Ezytrac team today on+44 1522 503 717. We’ll be happy to work through your cash flow with you and make sure that the numbers do stack up. We’ll consider contract clauses that allow you to raise rents at regular intervals. And you may also get a surprise when you discover just how competitively priced full-service property management can be.
In the final part of this blog series about buy-to-let cash flow. You’ll learn about other expenses that have to be paid between tenancies. And I’ll also give you a checklist of expenses that you can print off to use when you do your cash flow calculations.
Yours in effortless property management,
Brett Alegre-Wood