One of the most important aspects of buy to let is deciding what the correct rent level for your buy to let property is. You need to know the correct rent level not only when offering your property for rent, but before you even purchase it – so you can assess your likely yield accurately. Here’s some practical advice on how to set the correct rent level for your buy to let property.
First of all, here’s why it is important to charge the correct amount of rent:
* Charging too little rent affects your bottom line profitability. Plus, raising the rent to a more realistic level in future may involve the expense of finding a new tenant and/or the risk of voids.
* Charging too much rent, which although initially might seem like a good mistake to make, means you may need to re-tenant the property frequently, also involving the risk of enhanced voids. There is also the risk of incurring arrears.
Next, let’s look at what your rent isn’t decided by:
* Your rent isn’t decided by the value of your property. While it’s true that areas that are more expensive to buy in are also more expensive to rent in there’s no conclusive link. Plus, properties worth the same amount in the same area could have totally different rental values.
* Your rent definitely isn’t decided by your costs and overheads. For example the fact that your mortgage repayments are £500 per month doesn’t mean that you can rent your property for £500 plus a margin.
The fact is, the rent you can charge is decided by market forces. The amount people are able and willing to pay to rent your property. And that, in turn, will depend on how many of those people want to rent in that location, how many other suitable properties there are in that area (ie. supply and demand) and what rents are being asked for those properties.
So how do you decide what the most appropriate rent for your property should be?
* Ask letting agents in the area concerned. They almost always have a very good grasp of market rents in their area. (Bear in mind they don’t get it right all of the time and charging the correct rent is ultimately your responsibility.)
* Consult one of the various rental level indices. Again bear in mind these are only a guide.
When consulting a rental level index also look at whether rents are currently rising, falling or static. You can use this information to judge whether your rent should be more, less or the same as other current rents.
However, the most effective way to decide the correct rent is to compare your property with similar properties nearly:
* Search to find all the similar properties for rent in the immediate local areas.
Check with letting agencies, both online and offline. Check with letting portals like Zoopla, Rightmove and OnTheMarket. Check with local small ads., such as on Gumtree, in the local press and even local notice boards.
Compare these properties with your own and note what their asking rents are.
* Other sources of rental data you can consult: University accommodation offices often have information on student rents, if you are letting a student property. Housing associations make their current rent information freely available. This information may be of use if you are letting budget property. Also check the levels of Local Housing Allowance if you intend letting to Housing Benefit tenants.
Important. Bear in mind that the asking rent may not be the market rent, which may not be the actual rent being paid by the tenants of similar property. The asking rent may be more than the actual rent, the same, or it may in some cases be less. As a guide, consider calling and asking agents and landlords etc. whether they will accept less than the asking rent/are expecting more than the asking rent.
At the end of the day remember that calculating the correct level of rent in buy to let isn’t an exact science. Other factors may come into play, such as the quality of finish, how much your tenant wants/need accommodation, the time of year and even just whim. However, at the end of the day the correct rent for your property will generally always be dictated by the market forces of supply and demand.
You may also find these Insider reports useful when setting the correct rent in buy to let: Making Money In Buy To Let. It’s Really All About …. Demand