To determine the rental value of a property it is important to understand the local market and local rental demand.
It is also crucial to keep in mind that the London lettings market experiences seasonal patterns. Generally, the peak rental market occurs around the spring and summer months, while December and January are both traditionally subdued periods in the market. This means, property prices and rental values are not always aligned, so more expensive properties do not always command the highest rent; as it is also dependent on the seasonal market. Many landlords will look for annual rental returns that exceed their expenses (i.e. their mortgage repayments, letting agent fees, insurance and maintenance), as this will deliver a profit.
In other cases, landlords may be satisfied with a rental income that does not deliver a profit if they are confident that the property’s value is increasing, meaning they will benefit from capital growth.
In general, a combination of rental income and capital growth is often possible, particularly in the long term where the trend for property value is generally an upwards one.
Length of tenancy
Short tenancies can generally be more lucrative, but with the increased churn comes an increase in administration and a greater risk of voids – periods when a property is vacant and no rent is collected.
Longer term tenancies reduce the risk of vacant periods and rent increases can be included in the tenancy agreement, otherwise rents can be increased for a new term, but this needs to be negotiated so the tenant can decide whether or not they want to extend the contract. Length of tenancy should therefore be considered when setting the rental value. Rental figures can be quoted weekly or monthly and are usually collected per calendar month, quarterly or six monthly.
Whether the property is furnished or not will not necessarily determine the rental yield of a property. A furnished property will be more appealing to certain types of tenants and not so appealing others. Whether to let a property furnished or not should be considered when deciding on the target tenant. As a landlord, if you can be flexible with the furnishing in your rental property and offer prospective tenants the option to rent unfurnished, fully furnished or part furnished, this will widen the audience and possibly result in finding a new tenant quickly. Your letting agent will be able to advise you on the type of property that will appeal to the right tenants and ultimately influence its rental potential.
Rental income is subject to income tax, so you will need to inform HMRC of your new revenue stream. It is recommended, for you to contact a qualified accountant or HMRC directly, for independent advice and to find out more information about your financial responsibilities as a landlord.
If you are going to be living outside the UK for more than six months in the year, your letting agent will need to deduct tax at the basic rate on behalf of HMRC. You can apply directly to HMRC for approval to receive rent without NRL (Non Residential Landlord) tax being deducted at source using the NRL form available on the HMRC website. HMRC's 'approved' must be addressed to the agent or person collecting the rent. An 'approval' is not transferrable.
For KFH properties, the agent number you will require for this application is: NA13760
As with any property, it is inevitable that repairs and maintenance will be required over time, and a landlord should make any necessary repairs which are their responsibility promptly. Putting aside some of the rent each month for contingencies will mean there is money available for when things go wrong.
A contingency fund may also help cover any mortgage repayments during periods when the property is vacant and no rent is being paid. Void periods need to be taken into account so landlords do not overstretch themselves with mortgage repayments.
Seek expert advice
Determining the rental yield of a property depends on many market factors. Looking at the advertised rent of other properties in the area will help, but to ensure that any return on investment is maximised, speaking to an expert with local knowledge is advised. At KFH, our experienced Lettings Managers can provide you with a free, no obligation rental valuation, comparing your property with similar properties in the area and considering current market factors including location, size, aspect and condition and time of year.