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Property Investment

The Rent You Should Be Charging for Your Buy-to-Let

You want to make a good income from your investment property but how do you know what level to set the rent at? If you set it too high, you risk narrowing your market too much – especially if there are lots of properties available to rent in your area, and this could leave you with an empty property and a mortgage to pay with no income to cover it. On the flip side, setting your rent too low could mean you risk not making a return on your investment, or, even worse, it could even see you making a loss.

It is therefore essential to set a rent level that not only attracts and retains tenants but also provides you with a good return on your investment as well.

Covering your mortgage costs

Buy-to-let mortgages generally require that the rental value of the property at least covers the mortgage repayments. For example, the rental income for a property that cost £250,000 property bought using a 25% deposit would currently have to be at least £937 per month, according to the buy to let rent calculator on mortgage advisor Alexander Hall’s website.

However, industry experts recommend setting the rent for your buy-to-let property at 125% of the monthly mortgage repayment, and this is probably a good policy to stick to.

Some lenders may also require a buffer amount to protect against mortgage rates rising to 5 or even 5.5%. So, based on the same £250K buy-to-let mortgage, the minimum rent requirement could rise to in excess of £1,300 if these ‘stress test’ figures are applied. Check out the mortgage calculator on Charcol’s website, which includes this buffer amount.

We should point out that these calculators only provide a very general guide to what you can borrow. As with everything in the mortgage market, your individual circumstances will dictate whether you qualify for a buy-to-let mortgage and what rates you will qualify for.

 

Calculating your rental yield

Property investors and landlords habitually use rental yields to help identify suitable properties to add to their property portfolios.

Rental yield is the return you are likely to achieve on your property through rent. It is a percentage figure calculated by taking the expected annual rental income of your property and dividing it by the property value or purchase price.

This ‘gross rental yield’ (described above) does not take into account any mortgage, maintenance or running costs. It is also wise to factor in the initial costs of buying your property, such as survey fees, solicitor’s fees and stamp duty etc.

There will also be ongoing maintenance costs to keep your investment in tip-top condition and you should also factor in emergency maintenance/repair costs to your calculations, so you have contingency funds at the ready if required.

If you choose to use a letting agent, you should also include these costs in your budgeting figures.

Your Move has a handy Rental Yields Calculator on their website that can work out both gross and net rental yields, so is a useful tool.

 

Regional factors

As well as ensuring good rental yields, new figures released this week show that average UK rents are, once again, on the rise, (average rents across the UK rose by 2.7% year-on-year to £953 in October 2019). Regular month-on-month, year-on-year figures such as these can provide some pretty useful guidance on how much you should charge to rent out your buy-to-let property, or, indeed, how much to raise the rent by each year.

Of course, average rents across the country, and in London, vary dramatically and therefore need to be taken into account when deciding your property’s rental charges, as demonstrated by these other headlines figures from tenant referencing firm HomeLet’s Rental Index.

  • Rents in London increased by 2.8% in October 2019 than in the same month of 2018; the average rent in the capital now stands at £1,665 a month – 74% higher than the UK average of £953
  • When London is excluded, the average UK rental value was £788 in October 2019, this is up 2.8% on last year.
  • The latest data also shows that rents in the North East are growing faster than any other region in the UK

The table below from HomeLet provides a regional breakdown of the latest average rental values in the UK. 

Region Oct-2019 Sep-2019 Oct-2018 Annual

Variation

South West £840 £846 £811 3.6%
Scotland £674 £676 £647 4.2%
Wales £623 £634 £614 1.5%
Greater London £1,665 £1,694 £1,619 2.8%
Northern Ireland £672 £673 £653 2.9%
East Midlands £642 £653 £628 2.2%
North West £727 £739 £697 4.3%
East of England £924 £927 £908 1.8%
West Midlands £706 £718 £693 1.9%
South East £1,020 £1,045 £1,010 1.0%
Yorkshire & Humberside £653 £657 £631 3.5%
North East £538 £535 £515 4.5%
UK Average £953 £967 £928 2.7%
UK

(excluding Greater

London)

£788 £797 £768 2.6%

Source: HomeLet

Furthermore, HomeLet’s interactive map provides even more refined area breakdowns and lists London borough statistics individually, so is worth a visit.

Additionally, looking at local rents for homes similar to your buy-to-let property, and getting valuations from local letting agents, is likely to provide the most accurate idea of pricing.

So, as you can see, rental yields and where you live can very much affect how much you charge for rent.

 

What factors are most important to you when setting your rental charges?

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Alex Wright, Editor