Is this a good buy-to-let investment?

Rental Income

At the simplest level the annual expected rental income is simply 12 times the monthly rent for similar properties. And a look at rental adverts for similar properties currently available will give an indication of the market rent. Unfortunately this is not really the case in practice and the problems are best demonstrated using an example.

Example

Estimating the monthly rent

You are interested in a property and when you look at adverts for comparable properties there are a few available and the monthly rent being asked averages £1,350 but ranges from £1,200 to £1,500 per month. So the market rate for rent is £1,350 right? Wrong!

Firstly, if there are comparable properties advertised for £1,200 then why would prospective tenants choose yours if you are asking a higher rent? You may have personal preferences why yours is better, but this view may not be shared by prospective tenants. Tenants tend to be prepared to pay less of a premium to rent a nice property than buyers are to purchase one.

Secondly note that these are advertised rents - if a property is advertised at too high a rent then it is likely to be advertised for many months before a tenant is found who is willing to pay too much. But for adverts at a fair rent then they won't need to be advertised for more than a week or two. This means that using advertised rents as an estimate of achievable rents is too optimistic.

Thirdly, in some areas it is common for prospective tenants to haggle over the rent and hence the rental will often go for less than the advertised rent.

Due to a combination of these reasons it is better to be realistic about the achievable rent. In this case perhaps assume just £1,200 per month.

Estimating the annual rent

Well that's easy isn't it? Just take the monthly rent and multiply by 12.

Unfortunately it's not that simple. There will be periods when no rent is received - either there will be no tenant in place between tenants (voids) or there will be problems with existing tenants and either no or reduced rent will be received from them. Some voids will be deliberate to allow work on the house which cannot be easily accomplished with a tenant in place such as kitchen or bathroom refubishments.

It is fairly typical to work on the assumption that 10% of the anticipated rent is lost to voids and other issues with unpaid rent. However this percentage varies according to area and property type. Not only that but it is also related to how optimistic you are with the anticipated rent - the higher the rent you try to achieve the longer it may take to find a tenant.

So first glance suggested an annual rent of 12 x £1,350 = £16,200. But this was then reduced by making the monthly rent more realistic and then allowing for the fact that 12 months rent will not be received each year. Assuming a more realistic monthly rent of £1,200 and that 10% of rent is lost to voids a better estimate of the annual rent would be £12,960.