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As rents rise, how should landlords decide what to charge on their buy-to-let?

Rents on private properties are up by 1.8% over the past year

As rents rise, how should landlords decide what to charge on their buy-to-let?

Rents are on the rise in England and Wales, with a third of lettings agents reporting increases in June this year. But as a private landlord, how do you decide on the right price to charge your tenants?

Around 31% of lettings agents have reported increases in rents on properties under their management in June, data from lettings group ARLA Propertymark shows. And data from the ONS suggests that rents on private properties across the UK have risen by 1.8% in the past year, and by 14.8% since 2011.

But raising the rent can be risky – Which? has worked out that the average landlord could spend as much as £1,382 to replace a tenant, providing a strong incentive for getting the balance right. So, how do you go about setting the best rent for your long-term let?


How to determine the ‘market rent’

Setting rent as a private landlord can be a tricky business – too low, and you may struggle to secure a return, but too high and you may lose a good tenant.

One starting point is evaluating the rental market in your local area. If you use a lettings agent, they will usually give you a rental assessment, estimating how much you should charge.

But it can be worthwhile conducting your own research on the local market. Find online listings for properties in your area with similar features to your own – including number of bedrooms, size, position and any extras, like a garden or off-street parking.

Check how long these properties have been on the market and whether the advertised rent has been discounted. You could also ask your lettings agent how many tenants are currently making enquiries about properties in your area and how many have been recently let out.

This analysis can indicate how much tenants are willing to pay for similar properties, getting you to the ‘market rate’.

Find out more: Using a letting agent – how to get the most out of your agent

Is your rental yield high enough?

Aside from the market rate, another factor in your decision will be your own costs – you need to make sure the property pays off as an investment.

Landlords often look to boost their rental yield, which calculates your return on investment. You can find this percentage by dividing your annual rental income by the cost of your property.

  • Rental yield = Annual rental income / purchase price of property x 100

So, if you bought a property for £200,000 which brings in rental income of £10,000 per year, your yield will be 5% – the higher your rent, the higher your yield.

However, you also need to take into account expenses, which will include mortgage costs, interest payments, management fees, safety certifications and repairs and maintenance costs.

If you’re a higher-rate taxpayer, you may also end up with a bigger tax bill on your mortgage interest in coming years. Between now and 2020, the government is paring back the tax relief available on mortgage interest. Landlords should carefully consider how higher tax may eat into their profits.

Find out more: Mortgage tax relief changes explained 

How does your rent affect your remortgage?

If you plan to remortgage in the near future, you may need to consider whether the rent you charge will meet your lender’s affordability criteria.

Since 1 January, new rules from the Bank of England have required banks to stress-test buy-to-let investors at a higher level. Landlords applying for a new mortgage or a remortgage will now need to show that their rent could cover 145% of their mortgage costs, even if their interest rate rose to 5.5%.

In practice, if your mortgage costs are normally £8,400 per year at 2% interest, the lender would assume your payments would be up to £12,000 a year on 5.5% interest – and your rent would need to cover over £17,400 per year. Your rent would therefore need to be at least £1,450 per month.

Some landlords may find their current rent levels are not high enough to clear this bar, and be tempted to increase them. But it’s not always this easy – lenders will make their calculation on the basis of a ‘realistic market rate’, so you need to stay on par with the rest of the market.

Find out more: Becoming a landlord – Which? explains the ins and outs of letting

Can you afford to lose your tenant?

If your tenant is already moving out, or you’re letting out an empty property, the market rate will be the best indicator of how much your rent should be. But if you have an existing tenant who wants to renew, raising the rent may be a little more difficult.

Most tenants renting from private landlords are likely to expect a rent rise at some point. But if you set the rent higher than the tenant can comfortably pay, they may decide to move out. Unless your property was severely under-priced, losing a tenant over a rent hike can often end up hurting you financially.

A report from Homelet puts the average monthly rent across England and Wales in June 2017 at £814. Say you decide to raise the rent by around 10%, or £20 per week, to £894 a month.

If your tenant decides to move out, ARLA put the average vacancy period at three weeks – meaning you’d lose £563 in income while the property is empty. Although you may subsequently be earning £20 more per week when a new tenant moves in, it could take more than seven months to recoup this loss.

Find out more: Landlord rights – discover your rights and responsibilities

If you use a lettings agent, you’ll usually also have to pay a ‘finders fee’ for placing a new tenant, which generally costs around 8% to 10% of your annual rental income. Taking the lower end at 8%, you’d pay another £858 to the lettings agent – which would take a further 11 months to recoup through increased profits.

Overall, your costs would be £1,394 to find a new tenant, which could take you up to 18 months to pay off from your newly-won profit.

In addition, you need to consider the value of a tenant who looks after your property and pays their rent on time. Whatever profit you make may end up being eaten up in repair costs – or rent arrears – if your new tenant does not live up to the same standards as your previous one. It pays, therefore, to factor in what your tenant can afford, and whether you’re likely to sour the relationship by raising the rent.

Checklist for setting your rent

Before implementing a rent hike, make sure you have:

  • Evaluated the local market by comparing similar properties, days on market and discounts
  • Asked your lettings agent for a rental assessment
  • Calculated the impact on your rental yield and profit
  • Checked whether your rental income would pass a lender’s affordability tests
  • Assessed your tenants’ ability to pay and likelihood of renewing the lease
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