Buy to Let Investment: Setting and Collecting Rent
Buy to Let Investment
The first things to consider when deciding the level of rent to charge on a buy to let investment property are the costs involved with owning that property and any profit you stand to make. Buy-to-let investments should be seen as long-term investments, with the main return coming from capital growth and eventual resale. Letting the property will generate a rental income, but a take-home profit cannot always be made through this means. At the very least, the amount you charge in rent needs to be enough to cover all the costs associated with the ownership, maintenance and insurance of the property. In some cases, it is possible for landlords to pocket up to 6% of rental payments as profit. It is unlikely that you will be able to achieve a higher profit than this.
Be careful of setting the rent too high or too low; both will be equally effective in putting prospective tenants off viewing the property. A rent that is much higher than that of other similar properties in the same area will be viewed as unfair and greedy. Tenants will simply not be interested, as they can get an equally good property in the same location for a lower price. It may seem surprising, but prospective tenants will find rents that are too low equally off-putting. If you set the price at a much lower rate than other properties in the area, people will assume there is something wrong with the property and choose not to find out what. To get the most from your investment, you must calculate the perfect price.
The process of deciding this price is fairly simple. You must undertake market research in the form of monitoring the rents of similar properties. These can be found by checking local papers or using online resources. Keep track of which properties remain on these websites for several weeks, whether any put the rent price up or down and the effect this has, which properties go most quickly, and whether any extras such as inclusive bills are generally offered. Make sure that the properties you monitor are similar in size, location, and condition to your own. Set your rent at a price that falls in line with the rents charged on the properties that are let quickly.
Methods of collecting rent.
Cash: Accepting rent as a cash payment is ill-advised. One problem stems from the need to physically collect rent that is paid in cash. You will either need to set aside time to visit the property when rent is due, or trust the tenant to deliver the cash to you, either at home, at work or through the post. Collecting rent personally is time-consuming and it can often be difficult to find a time that is convenient for both you and the tenant. Having the cash delivered or left for you can lead to disputes over the amount paid. If the amount you receive in cash is less than expected or required, it is a matter of your word against the tenant’s. Such disputes can be very difficult to resolve.
Credit card: You will have a record of payment made if a credit card is used, so this will avoid disputes. However, there is often a charge applied to credit card payments and funds can be recalled by the tenant for several days after the payment is made. If a receipt has already been issued, the tenant could claim the payment was fraudulent and have the funds paid back onto their card.
Standing order / electronic transfer: Having tenants set up a standing order or pay via electronic transfer means there is a record of the payment, funds cannot be recalled and a charge is rarely applied. The downside of this method of payment is that you need to give your bank details to the tenant. This can be risky as the tenant could impersonate you and withdraw funds from your account.
Online services: There are specialised websites set up for rent collection online. Landlords can subscribe to these websites, and then simply give the tenant details of the online account. The tenant can pay the rent each month by logging on and arranging an electronic payment. There is no need for the landlord to provide their personal bank details when using this service.
Property management companies: If you choose to have a management company take care of your flat, they will collect the rent on your behalf, as well as dealing with any problems a tenant may have. The fees charged by management companies can be quite high though, reducing the chance of being able to make a profit from rental income.
When to collect rent.
You need to decide for your buy to let investment when rent will be collected. This can be on a weekly or monthly. If rent is set at a weekly amount, but paid monthly, tenants will typically pay an amount that is equivalent to four weeks’ rent every month. This means you may have to adjust rent that is paid weekly to bring it in line with the monthly payment, giving tenants a rent free week in five-week months.
The date each month or day each week that rent is due to be collected should be specified in the tenancy agreement. This should also set out whether you are willing to allow any grace period and what penalties will be applied if rent is late. A grace period is usually five days or less. If rent is not paid after this amount of time, it will be considered late and a reasonable charge may be applied as a penalty. If rent is not paid at all – tenants may be evicted after one or two months of non-payment.