We are making some changes to the procedures of rental distribution and operation of property contingency funds. We want to make clear these procedures to increase transparency on the Assetz Exchange platform so that investors have full disclosure of the financial situation of each property. This new approach also mirrors how a traditional buy-to-let investment operates, which should make it simpler and more familiar for investors.
Each property has an associated contingency (cash balance) that has up until now been used to pay for unforeseen costs such as repairs, lettings fees and void periods etc. Historically, each month an amount was deducted from the gross rental income of each property to contribute towards its contingency fund prior to distribution to investors.
This meant that a large unexpected cost could deplete the contingency significantly or conversely, if there were no charges for a period of time, the contingency balance would simply continue to increase regardless of whether it was needed. The contingency budgets were decided at the time on a best estimate basis for the cash flow volatility of each property over the term of the loan. However, now we have 18 months’ worth of financial information we are adjusting contingency levels to better reflect reality, and in parallel putting in place the necessary protocols and processes to ensure that the contingencies are dispassionately kept at the necessary levels.
Going forward we will be implementing a target contingency balance, specific to each property. This contingency balance acts as a buffer to aid cash flow management over the course of the year and ensures all expenses can be paid when due. Each month, after expenses have been deducted from the gross rent received, any amount in excess of this contingency balance target is the amount that will be distributed to investors as net rental income. If there is a continued shortfall of the contingency balance below its target, then deductions will be made from future months’ gross rent until the target level is met. We will cease to make a fixed deduction from gross rental income to contribute to a contingency fund as a matter of policy, but instead follow the procedure outlined above. This approach ensures a more objective and process-driven method, improving consistency and predictability.
If a property’s current contingency balance is in excess of the new target, this amount will be distributed to investors alongside rental payments. If the current balance is below the new target, the shortfall will be made up from future deductions in the gross rent prior to distribution to investors.
A new deduction will be taken from the gross rent to account for accounting fees (£10 per month) and banking charges (£5 per month). For properties on the platform with more than one unit, there will only be one deduction. Previously, for properties with Assured Shorthold Tenancies (AST), deductions were made from the gross rent to account for potential void periods. As part of the new procedures, these deductions will no longer be taken.
We are categorising expenses and costs into three categories:
Known monthly costs of a fixed nature, including management fees, ground rent, loan monitoring fee, etc. These will be deducted each month from the gross rental income before distribution to investors.
Known costs of a variable nature, including service charge, property insurance, corporation tax etc. An estimation of these costs will be accrued for and deducted each month from the gross rental income before distribution to investors. When a bill is paid, any under/over accrual will be deducted/added.
One-off, unforeseen costs, including letting fees, maintenance costs, council tax and utility bills, sundry expenses, capital expenditure, etc. As these costs are unpredictable they will be deducted from the gross rental income prior to distribution to investors in the month they are incurred, lowering the net return to investors for that particular month, as is normal with a traditional buy-to-let property.
Net yield forecasts
The net yield forecast for a property will be based on the current gross rent being achieved, less category 1 and category 2 costs and accruals. If a property is vacant, no rental distribution will be paid to investors, just like a traditional buy-to-let property. In the event that a property is vacant, the net yield forecast will be based on the market rent expected once the property is tenanted.
Income, costs, accruals and contingency breakdown
We will soon be displaying the full breakdown of all income and expenses by month for each property. This will give investors complete transparency on the current and historical performance of a property. The new target contingency balances will be released alongside these breakdowns.
We believe these new policies better align the investment experience on our platform with that of traditional buy-to-let. One of the goals of Assetz Exchange is to enable investors to be buy-to-let landlords, with all of the essential information and performance breakdown readily available, but without the usual hassle of owning a property outright.
If you have any questions about the new procedures, please don’t hesitate to email us at firstname.lastname@example.org.
Click here to read more blogs...