When you are letting a new rental property or are looking to let to a new tenant, a key skill for the successful private landlord is being able to work out how much rent to charge. If you charge too much you might put off potential tenants and end up with a long void period, but if you charge too little you will be losing income unnecessarily.
Another factor to consider is that rent levels are not static – they go up and occasionally, though less often, come down with market forces. So you need to monitor market rents to make sure you keep yours as close as possible over time to the local market level.
Average rent figures produced nationally can be misleading because they are skewed by the much higher rents achievable in expensive areas like London and the south east. Regional figures are published by some sources but even they can differ from going rents in specific locations.
There are a number of ‘How much rent should I charge?’ calculators available for the UK, such as this one provided by OpenRent. These will give you a guide to the rental price of properties in the UK, but should be used with some caution when you are deciding precisely how much rent to charge your tenants.
Some landlords make an annual increase based on inflation and what’s going on locally. This is usually just a small percentage annual increase and most tenants understand that since other prices are rising, why not their rent? So long as it’s a reasonable amount they will usually accept the increase without question and get used to the annual rise. Other landlords take the view that they should reward long standing tenants by leaving the rent level unchanged over time. They reason that a small hit on the rent is more than compensated for by the costs involved in a void period if they lose a good tenant. Finding a new tenant and re-letting, with all that goes with it, is a real hassle.
What you don’t want to do is allow the rent to get so far ahead of local market rates that tenants start to look around for alternative accommodation. But the danger of leaving the rent level the same is that over time it gets so far behind the market rent that it’s just too much of a jump for the tenant to swallow if you try to put it up to the market level all in one go.
For example, a tenant paying £6,000 per year in rent and staying ten years, with say a three percentage point annual increase in the market rent year on year, would be underpaying by around £2,000 by year ten – a discount of 25 per cent at the year 10 level of £8,000. Getting the price spot on, or at a slight discount on the market level, will not only quickly attract tenants to your rental, avoiding long void periods, it will also maximise the return from your investment – you want to be fair, but at the same time you don’t want to be a mug!
Unfortunately, there’s no formula – it’s not an exact science. There are a lot of factors to take into account when deciding how much rent to charge:
You can’t hope to set a fair but competitive rent without getting a real feel for the local market. Letting agents have this because they are dealing in the market constantly. They know instinctively what a rental should bring because they have up-to-date market knowledge and comparables at their fingertips.
As a landlord you’re not in this privileged position because you’re not doing this all the time as an agent would. But you can keep an eye on what’s going on. You can also find ways of getting accurate information about the market. That means conducting regular research, walking the streets, seeing what other rentals look like and what they are going for. Be observant when you are out and about. Look at the health of the rental market in your location. Are homes being snapped up by renters very quickly or do they tend to linger on the market for weeks or even longer before tenants are found?
If you’re in an area where demand outstrips supply, you can afford to be more ambitious when setting your rent. In contrast, if the balance of supply and demand tips the other way, you’ll need to lower your expectations in order to attract tenants. Remember also, having a good tenant in the property paying a lower rent is far preferable to having a vacancy for six months – that loss of income can never be recovered.
It’s an oft quoted cliché, but where your property is located has a big impact on the rent you can charge. For example, the exact same one-bedroom flat in the West End of London will bring in more rent than a four-bedroom family home in many other parts of the country would.
The national averages are only a rough guide and can be useful to gauge high level trends for rental values. But when it comes to calculating specific rental values, focus on the typical values in your own area instead.
Having a clear idea of the type of tenant you are targeting will help you decide on the type of facilities to provide and therefore the level of rent to charge which is sustainable. For example, a tenant looking for an unfurnished house will not see any great benefit in a higher cost rental property just because it is lavishly or comprehensively finished.
Generally, the location along with the type of accommodation will determine the sort of tenant you are looking for. Is your property a flat or apartment for example, or a family home? What do existing residents look for? Local employment, transport links and lots of local amenities? Quiet leafy streets with older residents, or within the catchment of quality schools? These are all factors to be taken into consideration when considering how much rent to charge.
Are you including full furnishings and appliances or providing a part-furnished or unfurnished property?
In theory and beyond providing the basics, the more furniture and fittings you include in your rental, the higher the rent level you can charge. But this is not always true. A lot depends on what the type of tenants you’re attracting are looking for. What’s more, everyone’s situation is slightly different, so be flexible and willing to remove or supply furnishings and appliances as required. It might just be enough to put you ahead of the competition.
The size, condition and these days the energy efficiency rating of your rental property, will have a bearing on its appeal and therefore how much rent you can charge for it. Since the COVID pandemic, many tenants have been looking for more space, both inside and out, especially if they work from home.
Obviously, the larger the home and the more rooms or garden space you have, the more you can ask for in rent.
A well-presented and maintained property, that is pleasantly decorated in neutral shades, will generally help it appeal to a wider range of tenants, and should let more quickly. Depending on the prospective tenant’s circumstances, other features such as a garage, parking space and a garden will also help. A fast internet connection is now one of the first things people look for when searching for a property, especially students or people wanting to work from home. This is a must have item for most people today and although it may not necessarily justify an increase in the rent, a slow internet connection could be a deal breaker for lots of tenants.
The type of people you’re trying to attract as tenants is a big factor when it comes to rental value. Very often the location and type of property will determine the type of tenant you are aiming for and who you are most likely to get. If you are near a large hospital or university then doctors, nurses, students and lecturing staff are obvious targets.
On the other hand, commuters and families will have different requirements. Transport links, shops, restaurants, parks, play areas and schools being obvious examples.
If you are willing to take pets, which usually means cats and dogs, and take the appropriate precautions with additional insurance etc, then a pet friendly property can be a real attraction for some tenants who will be willing to pay a premium for this.
Perhaps the easiest and quickest way to research the competition these days is online. Almost without exception, people start their property search online using one of the leading property portals such as Rightmove, Zoopla or OnTheMarket. You can do the same using these sources to get a feel for the local market and identify rent levels for similar properties. You can also monitor how hot the market is by seeing how fast these advertised properties let and identifying agreed lets.
Keeping an eye on the property section of your local newspapers is also a good source of information, and you may consider sounding out local agents. If you have bought and sold properties through your local agents or even used them for the odd letting, your relationship may be such that they are happy to share information with you on pricing. Otherwise, keep an eye on their websites and window displays to clock the asking prices for their local rental properties. By taking the time and effort to do your research in this way you will begin to get a real feel for the local market and you will become almost as well informed as the local letting agents when it comes to understanding how much rent to charge for your property.
You won’t find an exact or easy formula for arriving at how much rent to charge, as the above testifies – there are just too many variables involved. But if you follow the advice given here you should be in a position to understand your market well and arrive at a sensible answer to the question – how much rent should I charge?
Rental yield is an important measure of the return you get from your investment and to some extent gives a guide as to the question, have I got the rent level correct? Just as you would judge the return on your cash investment in terms of the interest you receive from a bank or building society, so too is this the case with your buy to let.
For example, annual interest of £20 on a building society investment of say £5,000 would give you a yield of 0.4 percent – 20/5,000×100. Likewise, a buy to let investment of say £250,000 and a net rental income (after all expenses, though not counting your time) of £12,000 would give you a net income yield of 4.8 percent – 12,000/250,000×100.
That’s really the sort of yield or higher you need to be aiming at, otherwise it’s hardly worth taking the risk over a no risk building society account, or putting in the hard work of running your buy to let.
Of course, this calculation does not take into account the capital appreciation of your property investment, so your total return (income plus growth) will hopefully be a lot higher, unlike the building society where you are actually losing money in real terms as inflation is currently far higher than your interest received.
‘How much rent should I charge calculators’ are very useful to use as a guide, and will give you some confidence to know you have got your rent charge at or near the correct level for your type of letting and its location, but should not be relied upon in isolation.
If you have hit the right spot when it comes to pitching the rent level, perhaps going a couple of percentage points below what other similar lets are asking locally, providing a good advertising description and marketing campaign should also help to create a bit of an early buzz around your offer.
If you can get an early rush in demand from several prospects, with lots of early viewings, then that not only encourages early commitment, but it also puts you in an ideal position to select suitable tenants based on their past history and your best judgement.
Taking the effort to do thorough research and some calculations will help you work out how much rent to charge for your property, which will pay big dividends by having your property let quickly. This will enhance your profits and help you identify your correct target market, making sure your property offer meets the needs of your potential tenants.
