How to maximise your rental income

Tips to increase rents and keep your tenant on board

In our last article, we discussed rental income and how to measure its real value against other assets. We also talked about the impact of leveraging, and how this boosts your real yield from buy-to-let rental income. In this article, we discuss how to maximise your rental income to ensure your investment capital is working as hard as possible.

Rental income has a lot of work to do

Rental income must work hard, especially in the first few years of ownership. You will use it to cover costs that include:

• The mortgage
• Buy-to-let landlord insurance
• Maintenance and repairs
• Tenant search and tenant vetting
• Gas safety certificates and electrical testing

You should also put some of your rent to one side, in a reserve fund. This will provide a buffer against unforeseen costs, such as void periods.

The cost of void periods

According to recent research, the average void period (the time between lettings) is 21 days. So, if your tenant leaves, you are likely to be without rental income for three weeks. During this time, you must still pay the mortgage interest and other costs.

You can reduce void periods by:

• Charging the right rent
• Starting the tenant search process early when you know a tenant is due to leave your investment property
• Being a good landlord
• Always attracting great tenants

At Ezytrac, we have strong local connections and a vibrant tenant list. We start the process of finding a new tenant as early as possible, helping our landlord clients to keep any void periods to a minimum. Often, this means the void period duration is no more than a few days – just enough time to do a deep clean and complete the necessary inventory checks.

Set the right rent, and you’ll get the right tenant

A major cause of long void periods is setting the rent at the wrong level. Too high, and your competition is ahead of you, and your property will stay empty for longer – perhaps forever. Too low, and prospective tenants will ask what is wrong with the property for the rent to be so much lower than other properties in the area. Quality tenants will avoid your property because the rent is too low – and you may end up with a tenant you really don’t want.

Set the right rent, and you’ll reduce void periods

When setting the rental price, you must consider what amenities and facilities your property offers to prospective tenants. And you must set a competitive rent. This doesn’t mean low rent.

Rental pricing is always a local issue. What is considered the right rental price in London would be hopelessly uncompetitive in the North of England.

To set the right rent, you’ll need to work locally. Keep an eye on the local press. Be in touch with local letting agents. Check other properties that are like yours, to learn what rent they are achieving. Establish pricing in the surrounding area, and you’ll know the price at which to set the rent on your investment property.

Set the right rent, and you will make a profit on your rental income

Unless you have a negative cash flow strategy, the rental income should at least cover your costs. The caveat is that the first two or three years are the hardest. Your property is bedding in, and you haven’t yet benefitted from rental increases.

After this initial period, increasing rental income pulls you into positive cash flow (and it’s likely that your property will have increased in value, too).

If you aren’t benefitting from your property every month (either by rental income profits, a rising value, or paying down the mortgage), then you’ve either overpaid for the investment property or you’ve set the rent at the wrong level.

What affects the rent you can charge?

Wherever you invest, several factors affect the rent you can charge to tenants. These range from factors outside of your control (e.g. the local economy) to property-specific factors (such as the make of appliances in the home for rent).

Invest in an area that is close to local amenities (shops, schools, restaurants, bars, leisure facilities, transport links, etc.) and has a strong local economy.

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. Where the demand for rental properties is higher, the rent you can set will be higher.

Property-specific factors that affect the rental potential

The rent you can charge will depend on how desirable your property is. Property-specific factors affect the rental price.

For example:

• Does the property benefit from outside space or attractive 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?

Rent setting tips

The importance of setting the right rent

Before you commit to buying an investment property, you’ll want to know the rental income you can expect to receive. It’s an integral part of cash flow planning. You must set the right rent to get the right tenant, keep them, and minimise void periods.

How do you know what the right rent is?

There’s only one way to know what the right rent is for your investment property, and that is by knowing the rents for similar properties in the same area. You must learn what tenants are paying for rental properties of the same size and standard, and with the same access to amenities and facilities. Here are the crucial factors used to compare rental values:

• The local area
• Property type and size
• Location on the development
• Amenities on the development (e.g. car parks, gardens, swimming pools, etc.)

Discovering the right rent

Now the hard work begins. You must learn local rental values. Search on the internet. Examine the local press. Keep an eye on letting agents’ windows. Phone letting agents, as both a prospective tenant and a landlord. They’ll usually suggest two prices (depending on their potential client): a lower one for tenants and a higher one for landlords. The real rental price is between the two.

How to increase the rental value of your buy-to-let investment

Tenants pay for value. The more value your property offers, the higher the rent it will achieve. There are three ways to increase the rental value of your investment property:

1. Provide furnishings. This usually adds value, though not always. It depends on your target tenant, and whether they are likely to have their own furnishings.
2. Up-to-date white goods are a big selling point. Fridges, freezers, washing machines, etc. are all necessary items in the kitchen. A package of matching appliances could cost less than £1,000 and pay for itself within a year.
3. Including utilities and other bills in the rental price might be risky, but could increase the rental value. Be clear in the tenancy agreement which bills are included.

Use a tenant’s emotions to increase your rental income profit

Now it’s time to tug on the heartstrings of prospective tenants. If the property feels right as their new home, it will be easier to sell a higher rental price. Here are some tips to do this effectively:

• Market the property with professional photos and fantastically written descriptions.
• Be a good landlord. It’s surprising how tenants are prepared to pay a few extra quid to rent from a landlord with a good name.
• Be accessible. Make it easy for the tenant to contact you when they need to discuss problems or report repairs.
• Create a sense of urgency. Schedule viewings that roll on one after the other to add an element of competition and fear of losing the property.

How to raise rents

Setting the rent at the right price is not a one-time exercise. You should review the rental price regularly, and raise the rent to remain in line with the market. Many landlords find this difficult to do, especially if they have a good tenant. They fear that the tenant will go elsewhere. This is a false fear if your rent is in line with the market.

Reasons to raise the rent

Make it easier to raise rents by ensuring you can explain why. Here are the seven most common reasons to increase rents and maintain or increase rental income profit:

1.     Inflation

If you raise rents to keep pace with inflation, the chances are that your tenant will expect you to increase the rent.

2.     Taxes

A little more difficult to explain, but perhaps helped by headline warnings of landlords going out of business because of higher taxes. Your tenant doesn’t want you to go out of business. If you do, they will lose their home.

3.     Rising mortgage rates

The rent pays the mortgage. If interest rates rise and you can’t cover the mortgage, where would that leave your tenant?

4.     Major maintenance or making improvements

It’s not unreasonable to request a higher rent for improvements that enhance their home (and your buy-to-let property).

5.     New infrastructure

New schools, shopping centres, or upgraded roads and rail will probably have a positive impact on the local property market. That means rental values rise.

6.     Maintaining rental prices in line with the local market

If rents are rising all around you, then you’ll need to increase your rent to stay in line with your competition.

7.     Personal reasons

This may be the hardest sell of all, but sometimes you simply need to raise the rent.

7 strategies to sell a rent increase

If you explain a rent rise logically, it’s more likely to be accepted as a normal part of the rental life. Here are seven strategies to make increasing rent easier.

1.     Care about your tenants

Tenants will be more receptive if you’re seen as a caring landlord.

2.     Know what your competition is doing

It’s easier to propose a rent increase if you know that you’re remaining competitive or simply coming back into line with general market rates.

3.     Be prepared with the numbers

Be prepared to back up your rental increase with solid numbers. If inflation is running at 5%, then a 5% rise in rent simply accounts for your increased costs.

4.     Plan your rent increase

Don’t catch the tenant off-guard. Put a rent review clause in the tenancy agreement. Tell them in advance that a rent review is on its way.

5.     Be human

Show your human side. Increased costs are putting pressure on your finances. You fear that you may need to sell. Empathise with the tenant – and do it face-to-face.

6.     Be reasonable

If your tenants are long term, pay their rent on time every month, and don’t make ridiculous requests, then you won’t want to lose them. Listen to what they have to say, and be willing to reduce your rent increase to help them, or perhaps to stage the increase in two or more steps.

7.     Give the tenant extra options or guarantees

There may be some sweeteners that you can offer your tenant. For example, a period during which you guarantee no further rent increase. This will help to ease the pain of an increase.

Don’t confuse maximising rental income with maximising rental income profit

As a buy-to-let landlord and property investor, you’ll want to maximise your rental income profit. But this doesn’t mean maximising your rent. There’s more to maximising rental income profit than simply increasing your rent. For example:

• Find great tenants that pay rent on time
• Take advantage of the best mortgage offers
• Be a good landlord
• Put in place a solid tenancy agreement
• Benefit from professional property management

Do these five things, and you’ll be most of the way to maximising your rental income profits. Your tenants will look after the property as if it were their own, and you’ll find it easier to increase the rent when you wish to.

To learn more about profiting from buy-to-let investment, contact Gladfish today at +44 207 923 6100.

Cheers,

Manny Esezobor