September of last year saw rental prices in key city centre locations plummet, with some parts of the nation’s capital experiencing falls as great 20%. Thanks to a wave of renters seeking more tranquil surroundings after banking on the longevity of the working from home lifestyle, alongside stagnancy in the amount of available rental opportunities, left landlords cutting hundreds from their monthly rental fees in efforts to keep their properties occupied.
With government figures revealing that almost half of the nation’s landlords is exclusively dependent on the rental income from a single property, is telling of the lengths landlords were willing to go to in efforts to minimise the impact of the COVID pandemic.
The pandemic also saw some property investors’ turn to providing social housing, with rental yields as high as 12% being realised. This granted rental property owners secure, long term tenancies that have been known to offer above market rental returns, with dependable rental payments being made, all at a time where the pandemic has left thousands of households with an unpredictable income and mounting rent arrears.
However, recent weeks are showing that this trend of escaping in search of greener pastures is being bucked, with renters returning to the convenience of the city. Hamptons of London has stated that in the first half of the year property investors and landlords holding rental opportunities within the city were seeing an average gross yield of 5.3%; a 0.6% rise from 2020 suggesting that the rental yields are ready to return from the lows of last year.
This change is even more pronounced across other areas of the UK, with prices for rental property reaching its highest point in five years in London; seeing some landlords report that their earnings have doubled in the depression seen over the nation’s lockdown. With the current influx of renters returning to the capital and property prices dropping, rental yields as high as 4.6% are being witnessed by fortunate landlords.
Hamptons further reported that although the price of a rental property within London is roughly 16.5% lower than the prices seen across the same period in 2020, the amounts landlords are requesting their tenants pay each month in rent has seen a sharp rise, quelling the annual decline in rental prices for the third consecutive month. Perhaps in thanks to the mass exodus of those looking to rent their next home in London seen across the lockdown periods, May 2021 saw a 16% increase in the amount of renters search for opportunities within the city, an incredible 45% higher than the same month in 2019.
With this rapid return to city centre renting in mind, the regions of London closer to the outskirts have been experiencing this trend for a far greater period of time, recovering from the pandemic far sooner. Rental charges in such regions have consistently increased for the last 11months with the annual rental growth for June being the strongest at the time of the report’s publication, set at 9.4%, alongside a 10% increase when compared to the prices rental property owners were requesting from prospective tenants in March of last year.
Outside of the capital the report stated that partly in thanks to there being a widespread shortage of rental opportunities, with 46% less accommodation being available to rent than in 2019, the fastest growth in rental price has been seen since 2014 on the back of a 10.9% increase.
As can be expected, when considering a buy to let investment, the rental yield that could be gained from the letting opportunity is a significant consideration to say the least. Knowing the potential return a landlord can see on their investment is a critical in making an informed decision on how much you should charge your tenants.
It is essential to consider that there is a finite window available to landlords to establish a correct amount of rent. Of course, negotiating with aspiring tenants can have many benefits, making the rental opportunity more appealing to a greater number of residents, keeping the property occupied and helping landlords steer clear of extended void periods. Calculating the return on investment correctly will allow the landlord to see how much they could potentially earn of the fixed term of the tenancy, or each year in relation to the sum they paid for the buy to let property.
Thankfully determining the return on investment for a property is somewhat simple; achievable through dividing the amount of rent a tenant can expect to pay each year in rent by the value for the rental property, then multiplying this figure by 100. Despite its simplicity this ROI will not be a fully accurate representation of their income as it will not account for the many potential costs they will incur when managing a rental property.
With this in mind, it is in the best interests of rental property owners to work out the net rental yield the opportunities they provide could offer. This would account for the costs a landlord is likely to incur whilst letting out their rental property such as numerous marketing fees, charges for the tenant referencing process, landlord insurance, consistence maintenance and replacing furnishings, alongside their commitment to paying interest on their buy to let mortgage. To calculate this more transparent representation of how much a landlord is able to earn from a buy to let property, simply deduct the accumulated costs of the previously mentioned business expenses from the annual rental charge.
When considering the numerous costs a tenant must account for before moving into a rental property, with holding deposits, tenancy deposits, insurance and in a growing number of cases paying as much as six months’ worth of rent in advance, landlords need to stay competitive op ensure their rental opportunity maintains its appeal with aspiring renters. A timeless piece of advice for landlords that are struggling to establish a figure for how much they should charge their tenants each month is to assess the area for similar and competing rental opportunities. Not only will this give rental property owners an invaluable insight into what competing rentals in the surrounding area have to offer tenants, but the demand for such properties and the most prominent demographics to rent to. If a rental property is able to discern which demographic their opportunity is likely to appeal most to, providing that the demand for rental accommodation in the area is healthy, the landlord can enjoy greater flexibility in their favour regarding the amount they charge in rent each month.
There are many considerations that can help inform landlord when setting their rental charge for a property. As can be expected the location at which the rental is found will perhaps be the largest influence on this figure. As mentioned above, when rental demand is in your favour the amount a landlord is able to request from their tenants each month can surge dramatically, setting annual earnings far beyond the expected. But this is not something to be done on the whim of expected interest. Students and young professionals have been known to commonly value city locations that provide a favourable commute and work life balance; whereas families favour locations that have ample amenities on the outskirts of town. Not only that but depending on the demographic a landlord wishes to rent to the rental property in question may be let out in a furnished, or unfurnished state, each bringing with them vastly different demands when hosting the rental on the market. As can be expected a rental opportunity that saves aspiring tenants the hassle of moving a hosts of furnishings, or allowing them to avoiding the expenses of purchasing new contents for the interior of the property can command a higher rental price for this convenience.
To the relief of tenants landlords are unable to increase the amount of rent the residents of their rental property are expected to pay at any time in the tenancy. In the overwhelming majority of instances, renters will have formed an agreement to enter into an assured shorthold tenancy, meaning that the landlord is prevented from increasing the rental charge during the fixed term of the rental period. However, once this period is brought to a close the landlord and tenant will automatically enter into a rolling, or periodic tenancy permitting the owner of the rental property to increase the amount they charge for the property no more than once each year.
With this being said, the landlord is able to increase the amount the tenant is expected to pay each month in rent during the fixed term, however this will require both parties to sign a new rental agreement; something that the tenant is under no legal obligation to do. In such situation the landlord is usually justified in asking for the increase and will typically present their reasoning, negotiating with the occupants to reach a fair and mutually convenient price.
Further to this, providing that the landlords have included a rent review clause within the original tenancy agreement, they may also be empowered to increase the rental charge during the fixed term of the tenancy. Such a clause will make it clear to the tenant not only when the increase will be enacted but the amount by with the rental will rise; however this increase will still have to fall in line with appropriate rent increase demonstrated across the market.
It is important for tenants to note that if the amount they are required to pay in rent each month is increased despite their best efforts to negotiate to the contrary they must not stop paying rent to the landlord. Upon the singing of the tenancy agreement the occupants of the rental property were granted numerous protectionary rights on the condition that they respected and adhere to the responsibilities they are expected to fulfil, including their obligation to pay the agreed upon amount of rent. With this in mind if the residents of the rental property begin to withhold the expected rental payments they will be considered to be in breach of the terms of their tenancy agreement, therefore allowing he landlords to begin efforts to regain possession of the property through eviction proceedings.
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