Buying a property with tenant not paying rent
November 24th, 2022
I’ve been asked this question a couple of times over the last few months so thought I’d turn this into an email to share with you. In simple… yes! If you build it into your total investment/yield calculations.
A lot of landlords will make the mistake of using the purchase price or rental return to calculate their rental yield without taking into account every other cost and expense that happens along the way until they see a return on their investment. Your return on your investment only happens when you start getting income (in this case rent).
So let’s break it down and work out what is the total cost of that investment is. If you buy a property for £90,000 where the market rent is £500pcm but the tenant is not paying, you will need to factor in how much loss of rent (expenditure) there will be ongoing and how long it will take to evict that tenant.
If it takes you 8 months to evict this tenant then £500 x 8 is £4000 of lost rent.
Then let’s say it takes 2 months to refurbish and re-let the property (add an additional £1000 in loss of rent) together with £2000 of refurbishment costs and paying an agent £500 to re-let the property for you.
We’re now at £7500 on top of your £90,000 purchase price. This is before we factor in your solicitor fees, stamp duty, survey fees, possible court fees to evict the tenant. In addition to this, you may have a mortgage to pay and insurance etc…
Now, say the total cost to you before you start seeing a return is £105,000 – is this still a good investment?
In my opinion, yes!
Purchase price: £105,000 with a rental income of £500pcm meaning the gross yield of £5.71%.
When you first glance the figures, it looks like they are stacked against you. And if you are thinking short term, they are. But when talking investment, we must be far sited. The upfront loss is outweighed by the potential gross yield.
