cars on the road between apartment buildings

Understanding rental values costs and budgeting

Understanding how much to charge for rent, what expenses to expect, and how to budget can be challenging for new landlords.

In this article, I have tried to simplify these for you. This will assist you in planning and being prepared for the more common costs. It is also important to understand the rental values in your area so that you can price your property competitively. Keep in mind that setting high prices may not always be the best strategy, as I will explain further.

Your first step is to determine the actual rental value of your property in the current market. This will be your total income, not taking into account any deductions. If you are used to being a salaried employee, think of this as your salary before taxes and other deductions.

How to work out what the rental value of your property is?

Ask a few local agents for a market appraisal.  You’ll be given a selection of price comparisons to consider (hopefully not too wildly different). Equally importantly, you will gain an insight into how the market for a specific property type is performing right now.

Look on-line.  The best places to look are social media, Zoopla and On The Market.  You won’t find many rental properties on Rightmove. This is because they are too expensive for most independent agencies to advertise with. 

However, don’t fall into the trap of thinking that the prices you see on-line are the actual rental prices agreed.  Keep an eye on these properties for a couple of months. Identify which ones get snapped up quickly and which ones are hanging around. 

If a property is advertised for more than a month in the current, high demand/low supply market, this should be a red flag. You may need to dig a little bit deeper to underestand why. It might not be overpriced but there will be a reason its not been let thus far.  Also bear in mind that some high turnover properties are let before even making it to the advertising portals. So what you see on the portals are often at the higher end of a property type.  

Who sets rental prices?

Contrary to popular belief, Agents and landlords do not set the rental prices. Market forces drive rental prices. As in any market, the number one market force for prices is supply and demand. The shortage of housing stock in general is an on-going thorn in the side of everyone affected by it. 

This problem will continue until we have a government that creates a sensible plan for housing and invests heavily in social housing. The government should also stop creating conflicts between landlords and tenants. Their strategy of dividing and conquering has successfully diverted attention from the real issues for many years.

But anyway, mini rant over and back to what else affects rental house prices!

Local wages are another key factor because these affect affordability.  Its also one which a lot of landlords overlook.  As an example, a property at a rental value of £1500 pcm would mean that a tenant would need to be earning £45k p.a. to pass the affordability checks.  In Cornwall the average wage is £33k p.a. This means that you will have a smaller pool of people able to afford your property. A property priced at £1,000 is bang on the affordability of the average Cornish family.  I’m not saying don’t price higher but you need to be aware of the local average prices for your type of property and your target tenant’s affordability.

You should never value your property based on what you personally think its worth. A feature wall, or designer kitchen, will have little to no influence over the rental value of your property.

How to budget for costs?

This is often tricky, because how can you budget for what you don’t know is going to happen? 

The general guide for landlords is to make sure you have as a minimum 1 month of your property’s rental value put aside for costs.  You’ll rarely need all of this every year but its wise to get into the discipline of putting this amount aside. Doing so means that you won’t go into a blind panic if the boiler breaks or the roof leaks.  If no major costs have come in over a few years, you’ll have the budget to decorate and replace carpets.

If you can’t afford to budget in this way and would struggle with the property being empty for more than 4 weeks a year, then you’ve not given yourself enough margin. My suggestion if this is the case, is that you have another look at your budget calculations.

What are the main costs to consider

General Maintenance/wear and tear

Things wear out but if you’ve budgeted as I mentioned above this will remove most of the worry.

Keeping on top of the maintenance of your property will also be key to keeping your tenants happy.  Happy tenants also look after properties better. They have pride in their home and tend to stay for a longer time. So a win win.

We have one very experienced landlord who we manage his portfolio for and who we feel has the perfect strategy.  He always checks with us what the market value of his properties are, then goes lower.  He also replaces carpets and decorates every 7-10 years. This is regardless of whether there’s a new or long-standing tenant in his property.  His tenants look after his properties and only leave for personal changes in circumstances, never because they don’t like the property.

Taking the opposite stance and trying to squeeze as much rental income from a property as you think you possible can, has the opposite effect.  Your turnover of tenants will be higher, there will often be longer void periods (time between tenants) and there will be far more complaints/issues because tenants will expect everything to be perfect all the time.

Other Costs you can’t avoid

Safety certificates.  If there is gas in your property, you must have a gas certificate every year.  Likewise, since 2020, its been a legal requirement to have an electrical safety certificate issued every 5 years. The tests themselves are not expensive but they may highlight areas that need replacing/repairing.  If you have a fireplace, then your will also have to cost for an annual chimney sweep and safety certificate.

Alarms. Smoke and where required CO alarms must be working and in date.  So there will be costs of replacing them. They normally last around 10 years.

Insurance. All landlords must take out liability insurance.  There are other insurances you can consider such as rent guarantee insurance but all the others are optional.

Taxes and damn taxes! If your rental income is on top of your salary, you will almost certainly be taxed on your income.   However, there are a good number of costs which can be offset against your tax. So it would be wise to speak with an accountant specialising in rental income.  

There are lots of other potential costs and considerations but hopefully the points above will at least help you gain a better understanding of what your annual net income is more likely to be.  This should also put you in a better postion to protect yourself from being exposed, should any unforeseen costs arise.

I hope this helps.

Please contact John or Deborah at CAM Lettings if you’d like to discuss anything related to West Cornwalls’ property rental market. We’re always happy to have an informal chat.

Leave a Reply

Your email address will not be published. Required fields are marked *