Whether you’re a landlord, planning to become a landlord, or an agent setting the right rent is an important part of letting a property successfully. Here we’ll look at how to set the right rent for a rental property.
Why is it important to get the rent right?
It’s very important to try and set the right rent for a rental property when you advertise it. If the asking rent is too high you might not find a tenant for it. Plus, new properties always attract most attention when they are first listed. So if you have to reduce the rent later there may be less or no interest in it.
If your asking rent is too low you could get far too many applications, creating a lot of admin. work. It can be more difficult to make a correction to the rent later, once a tenancy is underway. Worst of all you could lose money if the rent you ask is too low.
How not to decide the right rent
Firstly let’s look at what setting the right rent is NOT related to. That is the value (neither the purchase price nor the current value) of the property.
It is often the case that areas with higher property prices have higher rents and vice versa. That’s probably because higher purchase prices push more people into the rental market and create higher demand. But it’s not a good idea to assume that a more expensive property will rent for more.
So what does the correct rent depend on?
In simple terms supply and demand dictates the correct rent for a property.
More specifically what is the current market rent essentially depends on the levels of both supply of that type of accommodation and demand for it in that particular area. If there is a lot of demand and not much supply rents will be pushed up.
An identical property in a similar sort of area may rent for much less if there is lots of supply and not much demand.
How to calculate the right rent
To help decide what the current market rent of a property might be there are a number of different sources you can use:
Look at current asking rents. Go to either Rightmove or Zoopla (or both) and see what rents are being asked for similar types and sizes of properties in the same area.
Just bear in mind that asking rents are not necessarily the same as the local market rent – that is what a property is actually worth – or actual rents agreed. Also, if a property has been advertised to let at a certain rent for several weeks it could indicate that the rent being asked for it is too high.
Check with rental data sites. There are a number of sites which present data on asking or actual rents for different areas. Some of these are for professionals but others are open to the general public. For example, with Home.co.uk you can enter any area of the country and it will show you rents for different property sizes.
Be aware that most of these data sites calculate an average or median rent only so can only serve as a guide.
Use a rent calculator site. With rent calculator sites you can enter an address and give a few property details and an algorithm will calculate a rental value for you using a variety of data sources. For example, Openrent has a rent calculator. Again these calculators are only a guide.
Make some adjustments. Whenever using sources like these you can make an adjustment, ie. up or down, depending on the individual property, local amenities, how much demand there is for it and also how quickly you want to let it.
For example, if the property is new or newly renovated or overlooks a park rather than a busy road you might be able to adjust the rent up.
Experiment to find the right rent. Once you have a particular rent in mind you could advertise your property to see what the response is. If you attract few enquiries it might suggest the rent you’re asking is too high. If you attract many enquiries it could suggest your asking rent is too low. Bear in mind the disadvantages of this however.
Just by advertising a property at a certain rent you are under no obligation to rent it out at that level of rent.
When might it make sense to charge less than the maximum rent?
Although it is generally a good principle to set your rent at the highest level you can get it isn’t an absolute rule. There can sometimes be an argument for advertising a property at less than the local market rent, eg., 2-5% less. This will hopefully generally a strong level of applications. You will be able to choose whoever you feel is the best and most reliable tenant even at slightly under market rent.
How to handle rent rises
As part of setting the right rent it’s also a good idea to consider the question of rent rises.
All landlords (and agents) ought to have a policy for considering raising the rent. This would normally be at the end of a tenancy contract if the tenant wishes to renew or once annually in the case of a periodic tenancy.
After all your overheads rise pretty much every year so it is not unfair that the rent does too. In fact, tenants will see their other living costs rise every year so, even though they may hope it doesn’t rise, won’t see an annual rent rise as unreasonable.
It’s usually better to have a small annual rent rise rather than leaving it unchanged for several years and then finding that, perhaps due to rising costs, you have to make a large rise. That could cause a good tenant to think about moving.
When considering if you should make a rent rise check what local asking rents and market rents are using the methods above to guide your decision.