Rental income and the pitfalls of buy to let landlords basing profit strategies on it
Buy-to-let landlords want to maximise rental income profits and capital growth from their property investment.
A common mistake of inexperienced landlords is to think the way to do this is to increase the rent to as high a level as possible. Do this, and you risk being out of line with the market, and that could encourage a great tenant to move on. You’ll be left with a property that could remain empty for weeks or even months. That type of void period will destroy your profit, not maximise it.
In this series of four blog posts, you’ll learn everything you need to know about maximising rental income profit. I’ll start with explaining the job that rental income does for the buy-to-let landlord, and the pitfalls of concentrating on rental income as a way to maximise profit.
Why do buy-to-let landlords charge rent?
Your tenants won’t know half of the costs of being a buy-to-let landlord. In my experience, the majority of tenants think you simply charge them rent, pay your mortgage, and pocket the rest. The reality couldn’t be further from the truth.
In the last blog in this series (“How to raise rents and retain great tenants”) I’ll discuss the part that educating your tenant in landlord realities plays when increasing rents. For now, though, it’s important that you understand exactly what job your rental income does first and foremost.
For many property investors, the real profit comes from the capital gain made between the purchase price and sale price. For buy-to-let landlords that hold their property investment for a considerable time, while the capital gain grows the profit from rental income increases, too. As you raise rent over time, the impact of your costs reduces. That’s one reason why buy-to-let property investment could be a better retirement income option than annuities.
Rental income has a lot of work to do
Before you reach retirement and benefit from what could be real lifestyle rental income, your rent will need to work hard to pay its way. It is especially so in the first few years. The rent that your tenant pays will be used to cover costs and expenses that include:
- The mortgage
- Buy-to-let landlords insurance
- Maintenance and repairs
- Tenant search and tenant vetting
- Gas safety certificates and electrical testing
You’ll also have other legal obligations to contend with and pay for (for example, buy-to-let landlord tests and checks for Legionnaires’ disease). Perhaps most importantly of all – and something that so many new landlords in particular neglect – some of your rental income profit will need to be put to one side in a contingency fund. It will provide a property investment buffer: funds for emergency repairs, or to cushion the blow of a rise in interest rates and higher mortgage costs.
What stops your rental income from working hard?
There are some pitfalls that you might fall into. The worst of these is being the cause of void periods. Void periods themselves are usually caused by other pitfalls, such as charging the wrong rent or trying to raise the rent too high, too fast.
The cost of void periods
It’s impossible for me to tell you exactly how much a void period will cost you. It depends on your rental income, costs and expenses, and how long the void period is. However, if your property is vacant for, say, 20 days (that’s the average void period in London), then you’ll lose out on 20 days’ rent.
So, let’s say that your gross rental income is £1,000 per month, then a 20-day void period will cost you:
((1,000 x 12)/365) x 20 = £658
Now, £658 is a pretty big hit to your rental income profits, but don’t forget that while your property is vacant, you’ll still have other costs to pay out. The bank won’t say “Hey, don’t worry about the mortgage this month,” will it?
(For more info, see our article “How much will tenancy void periods cost the buy-to-let landlord?”)
You can reduce void periods by:
- Making sure you’re charging the right rent
- Starting the tenant search process early when you know a tenant is due to leave your investment property
- Making sure you’re a good landlord
- Making sure you always attract great tenants
You’ll find the Ezytrac property management team has strong local connections and a vibrant tenant list. It improves your chances of getting great tenants and offering them a good landlord/tenant relationship. As soon as we know your tenant plans to move on, we’ll be working hard to find you a new tenant to minimise any void period. It’s not unusual for our buy-to-let landlord clients to have no more than a couple of days between one tenant moving out and a new one moving in – just enough time to do a deep clean and complete the necessary inventory checks.
Renting at the wrong time
Demand for rental property in the UK is at an all-time high and growing. Currently, there are around 5 million households in the UK that are renting in the private sector. This number is expected to increase to more than 7 million by 2031. So, you might think that there’s no such thing as a bad time to rent.
However, people hate moving in the winter. Families, too, don’t like moving and disrupting their children’s schooling. So, early summer is the best time to rent – there will be more people looking for homes. It means you’ll have better competition for your investment property from tenants who want to move. And this means you’ll have a better chance of competitive pressure prompting tenants to pay top dollar.
Now, this doesn’t mean you won’t rent in the winter or achieve a good rental amount; but if you try to extend a tenancy agreement to expire in the summer instead of the winter, you’ll get on the summer cycle for rentals. It could help you when it comes to finding great tenants and raising rents.
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:
- 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 (especially if your tenancy agreement includes rental review clauses).
In the next part of the blog post series, I’ll examine why setting the right rental rate is so important.
In the meantime, if there are any questions or queries you have about any aspect of property management, or how to maximise your rental income profits, feel free to contact one of the Ezytrac team or me on +44 1522 503 717.
Yours in effortless property management,
Brett Alegre-Wood MARLA MNAEA