NOI tells you how the building performs. Before-Tax Cash Flow tells you how you perform. It is NOI minus your annual mortgage payments.
If your NOI is £7,850 and your mortgage payments are £6,000 a year, your BTCF is £1,850. That is the cash you actually have to spend, reinvest, or save for tax.
BTCF determines whether your property is self-sustaining. If BTCF is positive, the property covers its own costs and mortgage. If negative, you are subsidising it from your own pocket every month.
Here is where the South Coast pinch hurts. With prices high relative to rents, many BTL properties in Portsmouth have BTCF close to zero or negative when bought with standard deposits. A £250,000 property renting for £1,100 a month might have a mortgage of £900 at 5%, leaving £200 for all costs. After management and maintenance, BTCF is often negative.
This does not mean it is a bad investment. Negative BTCF can be justified by capital growth. But you need to know the number.
Stress-test your BTCF at 1% and 2% above your current rate. If it goes negative, make sure you can cover the shortfall from savings or other income.
The formula
BTCF = NOI - Annual Mortgage Debt Service
Why this matters
BTCF is the reality check. If your property cannot cover its own costs and mortgage, you need a good reason to hold. Know the number before you make that call.
Property maths is not optional. If you want someone to run the numbers with you, Xelox Properties can help. We cover Portsmouth, Hampshire, and the South Coast.