With rents being at an all-time high, and expected to continue to increase even higher this year, many agents and landlords are looking at reviewing rental costs.
Currently, there is no industry standard with regards to landlords increasing the rent of their properties. Some landlords choose not to increase rent as they have a good tenant and do not wish to lose them, whereas others expect a 3.5% – 4% increase year on year.
So, you might be wondering what’s right. Well, there’s no easy answer and it all depends on the landlord’s individual situation. Legally, a residential review can only take place once a year, and at this review there are things that should be taken into consideration:
- Current market rent and projected rents for the next 12 months.
- Maintenance and large works completed in the property to improve it.
- Tenant affordability – based on the original references can the tenant afford it? Has their financial situation improved or is the increase pushing them out of the property or into arrears?
- If they vacate, what are the costs, what maintenance is required and what void time and loss of rent is there?
Ultimately, a lot of the time decisions regarding rent increasing come down to the financial figures. For example, if we look at a monthly rent of £1,000 and see that the market in this area has risen by 4%, then a 4% rent increase seems reasonable. The proposed increase is going to generate £40pcm or £480 per annum in addition to income. Now, whilst this might not sound significant if you have one or two of these properties, if a landlord has a portfolio of 20 units then that’s £9600 additional income per year, or an increase of £48,000 on a portfolio of 100 units.
On the other hand, if a tenant does not agree to the 4% increase, will not negotiate and you serve notice then there are likely to be financial repercussions. If the tenant vacates there will be fees to pay, such as:
- Check out, agent fees and move in fees.
- Maintenance to the property.
- Loss of rent between tenants.
- Council tax and utilities between tenants.
Looking at average figures regarding the above, this could cost over £1,000 per property. Attempting a £480 increase could result in a £1000 loss. Again, if you have a portfolio of 20 this lost will be £20,000 and a portfolio of 100 will make a £100,000 loss. However, it is important to note that if a landlord owns several properties in the same block of properties, which is not uncommon, then it is not good practice to ask for a rent increase on some, but not on others, and keep rents in line with each other.
Looking at the situation simplistically shows that rent increases are an essential part of proactive portfolio management, and something that agents should be discussing with landlords. However, it is extremely important to review the full situation, including the tenant’s situation and the likelihood of them accepting a rent increase.
Long standing tenants may be more likely to be open to a rent increase if the property is kept to a high standard and if they have a good relationship with the managing agent. Tenants may also be open to discussing rent increases at specific points in the tenancy which allows better financial planning for both parties.