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Cheap rents may show better return for landlords

15 January 2015

Stubborn landlords holding out for top price rents may be damaging their long-term profits by not accepting cheaper offers, according to property experts.

Savvy landlords understand the financial relationship between yields and void periods and tend to return better annual profits, argues property consultant Savills.

The basic financial fact is the longer the property stands empty, the less money a landlord earns in a year.

Taking the example of a £750 a month rent for a buy to let, a landlord would earn £9,000 if the property was let at full rent for 12 months.

However, if the property stands empty for three months while the landlord looks for a tenant willing to pay £750, the annual return drops to £6,750 – a loss of £2,250.

If the same landlord had accepted an offer of £720 rent for the home in the first void month, the gross rent for the year would have been £7,920 (£720 x 11), reducing the loss during the void period to £1,080.

“Although good buy to let homes are in short supply and plenty of tenants are chasing them, affordability issues mean the market is price sensitive as tenants grow more discerning,” said a spokesman for Savills.

“As a result, properties which are over-priced or not presented in the best possible way are likely to remain unlet – sometimes for a prolonged period of time.

“While there is always the temptation to try the market out to secure the highest possible price, the most savvy of landlords take into account the full picture, incorporating how much it costs for a property to remain empty.”

Void properties do not only mean a loss of rent for landlords.

Some buy to let insurance policies only offer cover if the property remains empty for a limited time, generally around 30 days.

In the winter, insurers will also want the water and heating drained down when a rental home is vacant to reduce the risk of water leaks in cold weather.

Landlords also have to consider other expenses, such as utilities and Council Tax during voids that further reduce their profits.