HIGHER interest rates mean higher costs for buy-to-let landlords, many of whom will be considering raising rents to try to improve their yields. But setting the right rental rate is critical. Obtaining a higher return is desirable, but keeping periods when the property is empty to an absolute minimum should be the goal.

Amateur landlords should not make the mistake of believing that, just because their costs have gone up, the tenant will make up the difference. “You cannot pass on rising costs to tenants unless the demand is there,” says Richard Cotton, managing partner of the estate agent Cluttons. Fortunately for investors, demand is strong: one in four people in the UK lives in rented accommodation, with two thirds of tenants saying that they do so because they cannot afford to buy. There are more students and more singletons now than ever before, and both groups are more likely to rent. Meanwhile, net immigration into the UK, and particularly into the South East, has kept rental demand high.

Hence the prospects for landlords successfully to negotiate a rent rise look good, although finding the right level can be tricky. “Establishing the rental value is just another type of valuation, and all valuations are based on comparable evidence,” Cotton says. “If the three-bedroom flat next to your three-bedroom flat rents out for £500 a week, then there is good evidence that that is the market rate, provided that the condition and furnishings are of a similar standard. The problem for many private landlords without letting agents is that they simply don’t have access to the same amount of information.” He adds that it’s a good idea to let a third party do the talking: “It’s always easier to negotiate on behalf of someone else than for yourself.”

Some contracts provide the tenant with an option to renew for two or three years based on the level of inflation. However, agents say that these contracts often end up being a better deal for the tenant than the landlord. “Our advice to landlords would be not to commit to a three-year term with retail price index increases, as usually the rents will fall behind what the property could be achieving on the open market,” explains Virginia Skilbeck, of Douglas & Gordon.

The canny investor – or the investor with a good agent – will not simply rely on data. Cotton says: “The best agents will be able to look forward and say: ‘this type of flat has been renting out for £500 a month, but we see rents getting stronger, so you should put it on at £525’.”

However, resist the urge to push too far. Christian Thomas, lettings manager of Currell Residential, says: “Some landlords have served notice on tenants, to remarket at a higher price. This can be quite a risk, as a void period of just a couple of weeks would wipe out any potential profit from the higher rental value.”

RENTALINCOME

The latest buy-to-let index from Paragon Mortgages, the buy-to-let broker, shows that rental income rose for the sixth consecutive month in May, rising 1 per cent month-on-month and 3.6 per cent over the quarter to reach a national average of £10,702.

The average annual increase in rents is 5 per cent. In the South West rental income grew by more than 16 per cent, in the West Midlands by 12 per cent and in East Anglia by just over 12 per cent.

The Central London market is strong. “Rents in prime Central London have risen by 20 per cent in the past year,” says Dairin Garnier, head of lettings at Henry & James. The agent Douglas & Gordon says that rents for three-bed houses are rising fastest.

Landlord Mortgages, another broker, says that yields are eroding because rent increases have failed to keep pace with house-price rises. The average yield in England fell from 5.82 per cent to 5.42 per cent in the second quarter; yields in Scotland were down from 5.99 per cent to 5.85 per cent.

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