The buy-to-let (BTL) market is continuing to boom thanks to a number of factors contributing to steady tenant demand across the country. Figures from lender Paragon Mortgages last month revealed the average void period for the third quarter of 2015 fell below the record low of 2.6 weeks per annum. This is promising news for landlords and brokers alike, but as the risks from extended void periods diminish, we shouldn’t lose sight of their importance as part of any BTL investor’s business plan.
For landlords, a void period (the period of time between tenants) means a gap in rental income, and until a new tenant is secured, they must find a way to cover the property’s overheads. However, the prospect of a void period shouldn’t strike fear into the heart of landlords. Voids in tenancy are an expected and inevitable occurrence in every rental investment.
The good news for our landlord clients is that the market is currently seeing a trend of shrinking void periods. The most recent averages reflect levels unseen since 2002 and general feeling amongst landlords is that tenant demand is stable, with many predicting further growth.
The market is a very different place compared to the last time we saw void periods this brief, back when lending was based entirely on rental income. Following the market crash, the BTL industry suffered heavily as lenders exited the market. The majority of remaining lenders imposed a minimum outside income of £25k or more and disregarded applicants’ other cash sources such as assets, in order to minimise risks. Today, however, a good broker will judge an applicant’s affordability on their overall financial position, considering disposable income and other cash reserves to cover the risks of rental voids.
Despite current low levels, void periods are still a crucial consideration for every landlord’s budget, and as a rule of thumb I always recommend brokers ensure landlords are financially prepared to weather a void period of at least four weeks per year on each property. There are a number of precautions that investors can take to reduce the risk of lengthy void periods. For your experienced clients these may be a given, but for new landlords I would always advise they have considered the following:
Tenancy periods – different tenants look for different tenancy periods. If your client has budgeted for a year-long tenancy but then agrees to a short-term tenancy of 10 months, rental income will fall short
Happy tenants – it may seem obvious but a happy tenant is a paying tenant, so it’s important clients are able to maintain their investments and provide a good service for tenants
Unforeseen costs – it’s always worthwhile to ensure clients have budgeted for unforeseen costs, such as maintenance and repairs
Tenant acquisition – landlords may have planned for void periods, but they often forget to allow for the costs of acquiring new tenants. Depending on the method used and the amount of time it takes to find a new tenant, these can mount quickly
The rise in demand for rental accommodation has been exponential, and although recent figures may have been influenced by the start of the university year, it appears that the demand for rental accommodation will continue to increase for the foreseeable future. This being said, demand varies significantly by region, and void periods can be affected by a number of factors, outside the landlord’s control.
It is still as important as ever for brokers to ensure BTL borrowers are prepared for void periods and with effective preparation, budgeting and management we can ensure the mutual benefits from shorter void periods continues…
By Lucy Hodge, Director, Vantage Finance