Rental Yields: What you should be charging your tenant

Landlord Expert
By Landlord Expert June 1, 2011 08:32

Potential landlords entering the buy-to-let market will have a variety of reasons for doing so, but ultimately they will all want to achieve the same thing – a high rental yield.

Whether you are letting a property as a way of funding your retirement, to provide additional income to top-up your wages or with plans to eventually sell when the housing market hits a high, you can only benefit from getting the best yield possible in the meantime.

But there are a number of factors to consider when aiming for your ideal rental yield and reaching this pinnacle might involve you taking a brand new perspective on the rental business.

Here's everything the first-time landlord needs to know about rental yield.

What is rental yield?

In a nutshell, it's the amount of money you pocket after deductions from your tenants – the rental income - divided by the value of your property. This figure is expressed as a percentage.

Say for example you bought a flat worth £100,000 and rented it for £500 a month, your rental income would be £6,000. The yield would be 0.06 or six per cent.

However, before calculating how much rental income you will receive you need to take into consideration the costs of owning a property. These will then be deducted from the rental income.

Matt Hutchinson, director of room rental website, Spareroom.co.uk, said: "The biggest and most significant cost is likely to be your mortgage, with other costs including maintenance, insurance premiums, agency fees and ground rent to name but a few."

He also said you will need to take into consideration void periods, which are the times when the property might be empty – for example, the time between one tenant moving out and another moving in.

Property website, Rightmove.co.uk, suggests you budget for having at least one month's void period per year.

For insurance premiums Rightmove suggests putting aside two to three per cent of the rent for an unfurnished property and up to four per cent for a furnished home. However, this can vary according to location, type and size of properties.

Ten per cent of the rent should be earmarked for replacing fixtures and fittings, said Rightmove.

When should I start thinking about rental yields?

Once you make the decision to enter the buy-to-let market, you should start thinking about rental yields straight away.

Matt Hutchinson said: "If you are buying a property with the intention of letting it out, you should take rental yields into consideration before you commit.

"Do some research to make sure you're not investing a lot of money, and committing yourself to a lot of work, for very little reward."

There are two ways of making money as a landlord. The first is by the value of your property rising over time – this is known as capital growth. The second is by earning a rental income.

Whether you have bought a property for the sole purpose of letting it or are renting out rooms in your own house, you would hope that over time the price of your property will rise and you will also be able to increase the rent and therefore the yield will improve.

But there is also the chance that your property could fall in value, which is why it's important to do plenty of research to ensure you are buying in an area where prices are most likely to go up and where there's a demand for rented properties.

Mr Hutchinson added: "You can't just rely on the value of the property rising any more. Today a solid rental business incorporates good rental returns and capital growth.

"If you intend to be a live-in landlord your own priorities should come first."

How can I increase my rental yield?

Most of the work involved in getting the highest yield is done before you buy a property. Choosing a good location with plenty of scope for house price rises is essential.

Having a decent deposit to put down on a mortgage will also help you achieve a better mortgage interest rate.

Buy-to-let mortgages tend to have higher interest rates than mainstream mortgages.

As a result you may find your yield is lower than the interest you are paying on the mortgage. This shortfall is not the end of the world if you have made a good choice of property and bought somewhere with potential to grow in value.

If this is the case you'll find as the value rises and your rental income rises you should start to reap rewards.

You can also increase your yield by letting by the room, as opposed to the whole property, according to Spareroom.co.uk's Matt Hutchinson.

For example, many landlords choose to take a risk on the wear and tear of their property and let their house to students as they can convert a sitting room into a bedroom in a three-bed house and therefore move in four rent-paying tenants.

"Properties let by the room," said Mr Hutchinson, "often command higher rents. In addition, void periods are usually easier to cope with as it's generally only one room at a time that's empty."

However, there are a few things to look out for.

Mr Hutchinson added: "You will need to consider House in Multiple Occupation (HMO) regulations if renting by the room, also admin is more intensive, which is why full-time pro landlords are often more likely to rent by the room than buy to let investors with one or two small properties."

What rental yield can I expect to get in today's market?

It is a good time to be letting properties at the moment. With so few people being able to get onto the property ladder, as well as other social and demographic factors, there is a strong demand for rented accommodation.

Buy-to-let mortgage specialist, Paragon, reported at the end of April that 49 per cent of landlords were enjoying growing levels of demand from tenants in the first three months of 2011.

This was up from 40 per cent at the end of 2010.

Meanwhile the Council of Mortgage Lenders' (CML) latest figures revealed buy-to-let lending in the first three months of 2011 was down on figures at the end of 2010 but higher than in the first quarter of 2010.

And going forward the CML was optimistic. Michael Coogan, CML director general, said: "Demand for rental property remains strong, and as more funding becomes available we would expect to see buy-to-let lending increasing."

According to Matt Hutchison the latest figures on rental yields in the UK show they can currently be as high as 7.7 per cent and as low as 3.6 per cent.

He added: "At the moment, yields are increasing. However, research has shown that tenant arrears are also on the up as people struggle for money to meet living costs, which is bad news for landlords."

 

Landlord Expert
By Landlord Expert June 1, 2011 08:32

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