Setting the right rental prices in London is a critical part of a letting strategy. It influences the occupancy rate and income potential of your rental property. If you set it too high, it can lead to affordability issues with tenants and guests. It can compromise occupancy rates. If you set it too low, you won’t be able to maximise your investment returns.
As a landlord, it’s up to you to find the balance in your pricing strategy so you can set a competitive price and ensure the growth of your portfolio.
In this article, you’ll discover what it takes to set the right price for your rental properties. You’ll understand the concepts that you need to consider, the factors that influence the right rental price and tips to help you achieve maximum returns from your investment.
Understanding the Average Rental Prices in London
As of November 2023, Homelet’s Rental Index reveals that the average price in the rental market in London is £2,174. What started as £1,989 in January 2023 grew by £185 in just 11 months. When compared to the average rental price in the UK as a whole, London appears to be approximately £800 to £900 more expensive.
These figures will give you a ballpark figure of how much rent you can ask for your property in London. But it’s not as simple as copying the average rental price and using it for your own.
According to the Rent Act 1977, rental properties have a “fair rent” price that limits how much a landlord can charge a tenant or guest. This can only be adjusted after the property is reviewed again.
Regarding rental price adjustment, landlords can’t just decide to increase their rates. They have to strictly follow the once-a-year rental price increase limit. Not only that but landlords can’t change the rental price for fixed-term lease agreements - unless the tenant agrees to it.
Under this act, the tenant also has the right to challenge the rental price that landlords impose on them - especially if they think it’s too high.
Landlords and multi-property owners should consider this law when appraising the rental price for properties in London. Complying with the legalities of rental properties will protect you from possible legal disputes. It’ll also serve as your guide as you try to calculate the most competitive and profitable price for your properties.
Apart from the legal aspects, you should also monitor the factors affecting the value of the rental property. There’s a distinct relationship between the rental price to house value. For instance, property upgrades, new local neighbourhood amenities, increase in demand and public transportation improvements can boost the value and appeal of your property. These are good enough reasons for you to adjust your rental price to maximise rental returns - at least, if it doesn’t go against the restrictions and provisions of the Rent Act 1977.
2 Concepts to Consider During a Rental Price Computation
Apart from complying with legalities and observing the rental market conditions, there are 2 concepts that you need to consider as you calculate the new rental price for your property.
Rental Yield
This refers to the metric that gauges the profitability of your rental property. It follows a simple formula of dividing the yearly rental income by the value of the property. The result will be multiplied by 100 to get the percentage that represents the return on investment that the property generates.
For instance, a property has a value of £500,000. It has a rental income of £25,000. To calculate the rental yield, you’ll use the formula:
Rental Yield = (£25,000 / £500,000) x 100
Rental Yield = 5%
This means you generate a 5% return on the property’s value through rental income. The higher the rental yield, the more return you get on your investment. To maximise the rental yield, you’ll have to strike a balance between the rental price and the value of the property.
Capital Gains
Property usually appreciates over time. The growth of a property’s value is called capital gains. There are several factors affecting the capital growth of a property like market demand, property upgrades and other economic conditions. Simply put, if the value of a property is greater than the buying price, the difference is the capital gained from that investment.
So if a property was purchased at £500,000 and the current value is £550,000, the capital gain would be £50,000. This indicates a 10% capital growth from the time the property was bought.
Understanding how to calculate capital gains will help you determine the fair rental price that you can set for tenants. If you want to raise the bar of your “fair rent” you have to improve the property so you can increase its value.
Factors that Influence Rental Price Appraisals
If you want to optimise the rental income of your property, you need to start by identifying the factors that influence its appraisal. Evaluating each factor allows you to set a fair price that maximises your returns without compromising tenant affordability.
There are 5 key factors that you should focus on as you calculate a competitive rental price for your properties.
Location and neighbourhood
The location and the characteristics of the neighbourhood influence the appeal of a property for rent. The more appealing it is, the more landlords can demand a higher rental price.
Rentals in East London will differ from prices in Surrey or Cambridge. Apart from that, the reputation and characteristics of a neighbourhood also come into play. There are affluent neighbourhoods outside of London that are close to essential amenities - making them sought-after by tenants.
So if you’re calculating the rental price, ask yourself, what can the location and neighbourhood offer your tenants?
A young family would want to be close to schools and commercial hubs. An international student would want to be near the educational institution that they go to. If they can’t be near their preferred establishments, they would at least want to be near public transport that would help them get to their destination easily.
The closer a property is to the desired establishments of tenants, the higher the rental price that you can demand.
Property type, size and condition
This is all about the physical attributes of a property. The general rule is that the bigger the property and living space, the higher the rental price. The more bedrooms, bathrooms and square footage there are, the higher the price you can set. Not only that, apartments will charge differently than houses with a front or backyard.
The condition of the property is also an important consideration. A luxurious 1-bedroom flat may be more expensive than an average-looking 2-bedroom flat. A well-maintained studio unit will look more valuable than a dilapidated 2-bedroom apartment.
You should also pay attention to specific places like the kitchen, living room and bedroom. A new paint job, refurbished kitchen counters and new floors will give you the right to set a higher rental price.
Unique selling points
What is the unique selling point (USP) of your property? It could be a newly remodelled kitchen or a serene outdoor space with a sitting area surrounded by plants. It could also be a parking space, home office, gym access, etc. These can be used to justify the rental price that you’re asking from tenants and guests.
You can define the USP of your property by understanding what potential tenants are looking for. If you’re targeting business travellers, the USP could be a comfortable office space, strong Wi-Fi or an in-house gym that they can use to destress after work. For eco-conscious tenants, they’ll want energy-efficient appliances and well-ventilated flats with balconies. Allowing tenants to bring their pets can also make your property appealing to fur parents - making them amenable to paying more just to stay in your home.
Market demand and average rental price
Take a look at the market demand and rental price index in specific areas. You can use that data to benchmark the price that you’ll set for your properties. If you have properties in high-demand areas, that justifies setting a higher rental price.
Remember, you don’t always have to set lower rental prices in London to stay competitive. This only works if the market is oversaturated. You’ll have to lower your price to avoid longer vacancy periods. But if more tenants are trying to negotiate with the same property, that gives landlords the power to set higher prices.
Economic factors and tenant conditions
Understanding who your target tenants and guests are, specifically their economic status, will allow you to set a fair price for your rental property. Although your property is luxurious and in a high-demand area, you should still consider the high cost of living that your tenants are burdened with.
Setting a higher rental price will grow your wealth faster but it could give rise to affordability issues and longer void periods. If no one can afford your flat, you get nothing. Find the balance between higher rental yields and affordability. The tenant’s economic conditions will give you clues when it comes to how much they are willing to pay on rent.
Tips to Set the Right Rental Price
Setting the right rental price requires a strategic approach that combines a thorough market and economic analysis, financial considerations and compliance with local laws and regulations. To help landlords and multi-property owners with this task, consider these 7 tips to guide you while calculating the right price.
Conduct a comparative market analysis
A CMA or comparative market analysis is one of the first things that you should do if you want to determine the optimal price for your rental property. It involves looking at similar properties in the local vicinity and listing their current rental prices. Remember, tenants and guests will compare rental prices in the neighbourhood. It would do you well to position your property to have a competitive price advantage.
The CMA data will give you the market standard in terms of rental fees in the neighbourhood. When you get that list, don’t be too quick to set the lowest price to stay competitive. Compare the features of the properties first so you can see where you stand compared to them.
Is your property more luxurious? How is it furnished compared to others? These will play a role in setting a price that’ll stay competitive and reasonable.
Use technology to achieve data-driven decisions
Every decision you make as a landlord will fuel the success and growth of your portfolio. To ensure that you’re making the right decision every time, it’s best that you do your research properly. Fortunately, the digital age has made it easier to gather data efficiently and accurately.
There are platforms like Opago that offer data analytic features to help property owners gain insight into their properties. You’ll get a full overview of the property’s performance while tracking your return on investment - all at the click of a button.
With the data you get, you can confidently make informed decisions as to how much your property is worth in terms of rental fees. You can easily position your portfolio to achieve maximum growth and returns.
Calculate the ROI and list the property expenses and fees
One of the ways that you can set a rental price is by calculating your preferred ROI (return on investment). It requires you to assess the profitability of rental property while listing the expenses and fees incurred. These include mortgage payments, taxes, insurance, maintenance costs, etc. Deducting the expenses from the rental profits will provide an estimate of the ROI.
You can adjust the rental price to give you a positive return on investment. So if the annual expenses of the rental property amount to £18,000, you’ll need a monthly rental price that’s greater than £1,500. Setting a £2,500 rental price would give you an annual profit of £12,000.
Keep an eye on rental market trends
Monitoring the evolving trends in the rental market will also give landlords relevant clues when it comes to setting competitive and affordable rental prices in London. For instance, taking note of the cost of living, interest rates and even local infrastructure developments will help you determine how much your tenants can afford in terms of rental payments. You can adjust the pricing to align with the tenant's preferences and market demands.
You can also use information about the market to improve the physical features and structure of your property. You can add amenities that suit the need for flexible living. Or if London is experiencing an influx of international students, you can renovate your property to accommodate their needs.
Doing so will justify setting higher rental rates - thus increasing the property’s profitability and your portfolio’s returns.
Comply with rental pricing laws
As you monitor the rental market, you should also keep an eye on rental pricing laws - specifically for long-term letting (short-term rental in London is not covered by pricing laws).
Make sure your property and lease agreements comply with the rental laws. Consider the Rent Act 1977 for instance. It requires you to stay within the “fair rent” price of your property. If you wish to increase your rental price, you have to get your property reevaluated.
Staying compliant will help avoid legal issues in the future while maintaining a positive relationship with tenants.
Find the right tools for calculating rental prices
There are specialised tools designed to evaluate properties and calculate the right rental pricing for specific neighbourhoods. Online rent calculators will require you to enter the location, type and features of the property. It’ll generate the average rental rate in the area - giving you an idea of how much you can charge your tenants and guests.
There are also calculators focused on the rental value of a property. This data can also be used to calculate the right price for your rental property.
Using the right tools can simplify and expedite the process of calculating competitive prices for you. It can save you from manual calculations that may end up giving you the wrong data.
Consult with a property management company
If you’re not confident in your ability to set the right rental price for your property, you can always ask a professional for help. Get advice from a property management company so they can use their expertise. The nature of their business is to track the rental property market. You’ll benefit from their knowledge and experience when it comes to calculating a competitive price for your property.
These companies can give you more than just the right rental price. They can also streamline property operations for you. They can provide a range of services that include marketing the property, analysing market trends, screening tenants, maintaining properties, etc.
Be Strategic in Setting the Right Rental Price
Landlords and multi-property owners are encouraged to make informed decisions when it comes to calculating their rental prices in London. Don’t undermine its importance because this has a direct impact on the growth of your portfolio and return on investment.
By understanding the concepts and factors that influence rental prices, combining your knowledge of the rental market and legal compliance and using technological tools and expert advice, you can set up a competitive pricing strategy for your portfolio.
If you need guidance in setting the right rental price, consult with the experts. At Opago, we use data-driven strategies to help property owners make strategic rental price decisions. Consult with us to access our smart property platform.
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