The word “Void” fills Landlords’ hearts with dread. It makes their knees go weak. But Voids are, well…unavoidable (see what I did there?!). If you rent out property, at some point (many points), your property will be un-tenanted. Vacant. A VOID! Cue dramatic music.
Here’s the bad news. I can’t wave a magic wand to help you a-void the voids. But what I can do is teach you how to calculate the impact of a Void period.
Yes, voids will still cost you money. But the information in this blog will arm you a few tools you can use to reduce those costs. Sound good? Let’s go….
Let’s start with a definition:
“A void period when your property is unoccupied with no rental income”
I don’t think I need to simplify that further. Voids generally occur between tenancies, but can also occur when you first purchase an investment property, or prior to a sale. Some are short, maybe even just a few days, but some can last significantly longer.
So what does it actually cost Landlords? Well there’s two things you need to calculate. For both, let me use the actual numbers from a property of mine that is currently unlet (void).
1) Actual cash outflow
This is easy to work out. Since the day when your last tenant checked out for which you had received rent up until, what costs are you actually incurring? Calculate this on a monthly basis like I’ve done for my property below:
- Mortgage £290
- Council tax £97
- Electricity £45 (expected once bill received)
- Water: £25 (expected once bill received)
- Service charge: £190
- Ground rent: £25 (monthly pro-rated amount)
- Insurance: £13 (monthly pro-rated amount)
- Maintenance: £0 (cleaning and repairs covered by previous tenant’s deposit)
- Estate agent fees £0 (only pay these fees when property is let)
Total monthly cash outflow: £685
£685!! That’s a lot of money I’ve got to pay out. And that’s Every. Single. Month. That works out to be £23 a day and a whopping £8,220 a year.
So what can I do with this information? Well the key thing here for any Landlord is to check they have enough cash to cover their cash outgoings? In my example, I need to work out how many months can I pay out £685 before I run out of money. To do this, I’d take my total cash pot and divide by 685. I wont give you my exact number, but I’m fine for a while.
2) What is the Void Opportunity Cost
In property void terms, Opportunity Cost is a fancy way of saying “what money am I missing out on by not having a tenant paying rent”. Its similar to the monthly calculation we did in Point 1, with a few differences which I’ll explain:
- Lost rent £900 (this is the rent I wont receive each month the property remains unlet)
Mortgage £290(N/A for Opportunity Cost – pay this regardless of whether I have a tenant)- Council tax £97 (only pay this for void period, tenant pays when tenanted)
- Electricity £45 (only pay this for void period, tenant pays when tenanted)
- Water: £25 (only pay this for void period, tenant pays when tenanted)
Service charge: £190(N/A for Opportunity Cost – pay this regardless of whether I have a tenant)Ground rent: £25 (pro-rated)(N/A for Opportunity Cost – pay this regardless of whether I have a tenant)Insurance: £13 (pro-rated)(N/A for Opportunity Cost – pay this regardless of whether I have a tenant)- Maintenance: £0 (N/A as no additional repairs from property being void)
- Estate agent fees -£135 (when property is let I pay approx. 15%, or £135 to the agent, so I save on this cost when property is vacant)
Total monthly opportunity cost: £932
Remember, this is not what cash I’m actually paying out (that was Point 1). Instead, Point 2 is showing me what its effectively costing me on a monthly basis by not having a tenant. It’s a huge number. £31 a day. £11,184 a year. I need to find a tenant fast!
And here’s where it gets interesting. This information allows to me re-assess the rental price I’m currently marketing the flat at.
Its normal for Landlords to want to charge maximum rent for their property, and often, spurred on by valuations provided by estate agents, Landlords will hold out for higher rents.
But is this a good idea in the long-term? Take my property for example, lets say someone offered £850 a month. My gut tells me this is too low. I may even get a little annoyed: how dare they value my flat at such a low value.
Well actually, if I was to accept £850 rent a month and they moved in tomorrow, that would reduce my yearly profit by £510 vs if I waited and let property out at £900 (12 months x (£900 – £850) x 0.85% for agent fees). That is roughly half of the £932 I lose each month for the property being void.
So actually, unless I think I can let the property at £900 within 2 weeks’ time, its better to accept a lower rent of £850. Even shorter if we agreed a rental of £875 etc. Obviously you don’t know how long it will take to let a property at a given price, but this technique does put you in a much better position to assess your expected rental amount.
I’ll show off a little by saying you can actually calculate a formula that shows the optimal rent vs void period to maximise overall profit / cashflow –based on assumptions on how long it will take to let the property. That’s for another day (or message me and we can discuss) as it probably over complicates the main point.
Key message: Calculate how much a void actually costs you (cash outflow and opportunity cost). Use that information to better assess rental price the flat is marketed at, as well as offers received below your expected valuation – a lower rental amount may actually save you money.
Before I sign off, let me add one final point, and slight benefit of void periods. Not having a tenant in the property is the perfect opportunity to carry out any refurbishment work required as reduces disruption and is easier to coordinate – use the time wisely.
That’s all folks. Make your property, make YOU money!
Louis