Why setting the right rent is so important
Having discussed the job of rental income and a couple of the pitfalls to avoid when setting the rent on your investment property in my last buy-to-let landlords blog, in this second part of four I want to explore further why it’s so important to set the right rent from the outset. You’ll also learn property-specific factors that affect the amount of rent you can charge.
Set the right rent, and you’ll get the right tenant
One of the primary reasons for your buy-to-let property standing empty is that you’ve set the rent at the wrong level. Now, when I say this, I’m assuming that you’ve done all your research into the local property market and established that there is a demand for rented homes before you invested. You know that there is demand in the local area. You might even witness tenants moving into an apartment on the floor above yours, or into the house next door.
When setting the rental price, you have to consider what amenities and facilities your property offers to prospective tenants. If your investment property remains empty despite properties around you are rented easily. Then it could be that you’ve set your rent too high, or even too low.
A high rental price suggests that these are plentiful. If they aren’t, then prospective tenants won’t give your buy-to-let investment property the first look, never mind a second glance.
On the other hand, if you’ve invested in a property that benefits from being in a great location, setting the rental price too low could put off prospective tenants. They’ll naturally assume that there is something wrong with the property – otherwise, why would you be prepared to accept a rental income so far below the average?
Set the right rent, and you’ll reduce void periods
Have you ever walked through a market and wondered why two vegetable stalls are super busy while at a third the market trader is twiddling his thumbs? Okay, so there might be some reasons for this. The produce might be lower quality. The trader might have earned himself a bad name over an extended period of time. Most likely, though, it’s because his produce is priced wrong.
There’s a reason that most goods and services have the same price around the same level in a particular area. That’s the price that the market is willing to pay. You see it as competitive, and it’s a price that gives the seller a reasonable profit.
Being competitive in your rental pricing is a key to keeping void periods to a minimum. There’s a lot of work involved in becoming and remaining rent competitive. Understanding that rental pricing is a local issue and is important. What is perceived as the right price in London will be hopelessly uncompetitive in the north of England.
You’ll need to keep an eye on the local press, be in touch with local lettings agents, and even check out other places for rent that are similar to yours. Establish pricing in the surrounding area, and you’ll know the price at which to set the rent on your investment property. (I’ll look at how to set rents in the next blog in this series.)
Set the right rent, and you will make a profit on your rental income
The goals that you want to achieve from property investment won’t be the same as the next investor. However, whatever your goals, and unless you’ve invested in a negative cash flow strategy, the rental income should at least cover all those costs and expenses that I mentioned in the first article in this series (mortgage, insurances, maintenance, etc., etc.). You’ll be looking to pocket around 3% to 10% of your gross rental income every month.
There’s one caveat here: those first few years are the hardest. It is when your property investment is bedding in, and the property’s value is starting to creep up. As the value of your property rises, you should seek to increase your rent (providing, of course, the rental increase keeps it competitive).
Many property investors buy a property knowing that it won’t make a profit in the first two or three years. The pay-off is the increasing rental income that pulls them into cash flow positive after a couple of years, and, of course, the profits they make on the rising value of the investment property.
If your investment property isn’t giving you some benefit every month or quarter. Be it by rental income profits, a rising value, paying down the mortgage, or allowing you to benefit from the tax advantages of property investment. Then you might have overpaid for the investment property, or you’ve set the rent at the wrong level.
What affects the rent you can charge?
The correct rental price for your buy-to-let property depends on some factors. These range from the big overriding influences (such as the economy) down to property-specific factors (such as the make of appliances in the home for rent).
Wherever you invest, you’ll want to invest in a location that benefits from a good local economy that supports your investment. However, paradoxically, when the wider economy is weak rental prices could improve – people can’t afford to buy, and so they turn to rental properties.
Wherever your buy-to-let investment property is located, there is one economic rule that dictates the rent you can charge: the rule of supply and demand. If the demand for rental properties is higher, then you can set higher rent.
Property-specific factors that affect rental potential
In the course of your local area research, you’ll be looking to establish a competitive rental price for your property. If your buy-to-let is a two-bedroom apartment, then you’ll want to compare to other two-bedroom apartments in the close vicinity. However, what rent you can charge will depend on the desirability of your investment property. It is where property-specific factors affect the rental price. For example:
- Does the property benefit from outside space or beautiful views?
- Is the kitchen fitted with the latest appliances?
- Are the floors easily cleaned?
- Does the layout suit the current-day fashion of open-plan homes, or is it an older-style property with separate rooms serving different functions?
- If it’s an apartment, is it on a top floor or at ground level? And if it’s a top floor apartment, is it served by a lift?
- In the home itself, is there plenty of storage space?
- Will you rent it furnished or unfurnished?
- Are there any amenities, such as broadband or television, included with the property?
What difference does setting the right rent make?
I once had two clients who had almost identical apartments in the same development. One of the properties let quickly, while the other hung around for a few weeks. The problem was that the owner of the latter apartment wouldn’t accept that his property had a lower rental value than the other property.
One apartment was on the seventh floor, while the other was on the ground floor. The apartment on the higher floor had fitted wardrobes in the bedrooms and a dishwasher in the kitchen. The ground floor apartment didn’t have those things. The apartment on the seventh floor looked over green fields; the other looked onto the carpark.
At the same rental price. The apartment on the higher floor offered better value to tenants and so rented at the asking price quickly. Eventually, the owner of the ground floor apartment took my advice. Lowered his rental expectations (by just £50 per month), and the property was rented within a few days. In the meantime, those few weeks of overpricing produced a void period that blew his expected first-year profit.
How Ezytrac helps buy-to-let investors with rent setting
Ezytrac is a national property management company with a local focus. We regularly measure and compare rents in the localities where our clients hold properties. You’ll get the benefit of this research, both as a new client and as a client with a tenancy coming up to its rent review period. Why not contact one of the teams at Ezytrac on +44 1522 503 717 to discover how you can take advantage of our local market knowledge when setting rents for profitable investment?
In the next part of the blog post series, I’ll examine how to determine and set the right rent as well as a few tips about how to maximise rental potential.
Yours in effortless property management,
Brett Alegre-Wood MARLA MNAEA