The name of the game in any investment market is to maximise returns with some investors having a short-term investment horizon while others look more long-term. When renting out property to tenants there is a temptation to squeeze that extra few pounds per month which all goes towards paying off finance costs. Is this wrong?
PLAY THE LONG-TERM GAME
There are many reasons why you should look towards the long-term when renting out property and price your rental demands accordingly. Placing yourself at the top end of the rental value market in your area could put you in a very difficult position if rents start to soften. Initially, if you are priced towards the higher end then you will need to reduce your rental demands to a greater extent than those who were perhaps more competitive before the market softened.
COST OF REPLACING A TENANT
If you have the chance of a 5% rental yield over a 7% rental yield then surely it is a no-brainer? However, what happens if your turnover of tenants increases dramatically on the higher less competitive rental yield and you have periods of vacancy? There are a number of factors to take into consideration when experiencing relatively high turnover of tenants which include:
PERIODS OF VACANCY
Every day that your property is vacant is costing you money, you will still be paying the bills, you will still be paying your mortgage but your income will reduce immediately. If you are looking to apply for finance to increase your property portfolio in the future, then periods of vacancy do not look good on your cash flow projections.
ADVERTISING FOR NEW TENANTS
Many people seem to overlook the cost of advertising for new tenants which can soon mount up if you have a relatively high turnover of tenants. Even just a couple of hundred pounds three or four times a year can soon start to eat into your rental income and that is before we even consider the periods of vacancy covered above.
REDECORATING YOUR PROPERTY
In the vast majority of cases, when a new tenant moves into a property the landlord will “spruce it up a little” to make it look as attractive as possible. There is a cost to redecorating, perhaps replacing worn out furniture and carpets and this comes out of your rental income. The less frequently you are forced to redecorate your property the greater the cost savings and better your return.
KNOW YOUR TENANT
We live in an age where the likes of AirBNB encourage short-term letting arrangements at relatively high rents. You don’t know your tenant, there is no relationship and as such no long-term commitment on either side. If you have a family or a couple living in your property they will likely look to make roots in the short to medium term giving you some longevity on your investment. While some people suggest it is wrong to get to know your tenants this does help to avoid misunderstandings, solve problems as quickly as possible and in many cases offer assistance in times of short-term cash flow problems.
Those who look to maximise their rental income in the short term may do very well, they may have relatively high occupancy rates but the vast majority of landlords with this type of outlook tend to struggle with periods of vacancy. As we all know, a vacant property is not earning any income and is effectively a dead property when it comes to investment returns. Ensure your rental rates are competitive, build up a rapport with your tenants from a distance and you will be able to plan well into the future with a constant rental income.