Should you increase the rent?

Should you increase the rent?

Every business has its overheads. And whilst the cost of financing a rental property has, on average, decreased, other costs have shot up.

Take energy, for instance. Back in October, SSE became the first of the ‘big six’ energy providers to pre-empt the winter months with a hike in energy prices (by an average of 8.2%, no less). Now the remaining five have all fallen in line, and many landlords who include fuel bills in the rent – or whose properties are currently empty – face a jump in energy bills.

The two big thorns in the side of many tenants and homeowners, utility bills and living costs, aren’t necessarily as problematic for landlords (at least where their rental property is concerned). But the costs of goods and services – materials for repairs and refurbishments, marketing costs, professional fees, insurance premiums – are also likely to have risen more quickly than your tenant’s wages.

With the slow but steady rise in running costs, there will invariably be a time when you start to consider increasing the rent that you charge. The question is… should you?

When to raise the rent

You might think it a good idea to increase rent annually with inflation – which, in the UK, is measured by the Consumer Price Index (CPI) and the Rental Price Index (RPI).

For instance, let’s say you rented out a property in October 2012 for £750 per month. The CPI and RPI this October were 2.2% and 2.6% respectively (2.4% on average) – meaning that costs have risen on average by 2.4% in the last twelve months. If you were to use inflation as a guideline, you’d increase the rent by £18 per month to £768.

Inflation has increased by around 20% in the last five years. However, the ONS’s catchily-titled Index of Private Housing Rental Prices suggests that in the same period, private rents in the UK rose by only 4% – and therein lies the problem.

In some areas, such as London, rent has risen dramatically in recent years – whilst in others, it has remained static or even fallen. The local market is a far more powerful indicator of the rent you should be charging than the country-wide rise or fall of living costs. Anything, from a local housing development to a new trendy bar or two, can make an area more or less desirable or increase or reduce demand.

Then there are UK-wide factors. The latest Royal Institute of Chartered Surveyors (RICS) members’ survey reported a 10-year low in demand for rental properties in October, likely due to the early launch of the government’s Help to Buy mortgage guarantee scheme. Any landlord hoping to increase the rent during a dry spell could well deter new tenants or even force out an existing one.

Using the local market as a gauge

It’s reasonable to want to increase the rent yearly, as do local councils, but doing so in line with the local market is more sensible than using something as vague and unrepresentative as inflation. Instead, every time the tenancy anniversary rolls around, use an online property portal or check the local papers to see what nearby landlords are charging for comparable properties. This may mean that years pass without a single increase, or even that you have to lower the rent in order to re-let a property – but either option is better than losing business, and if you have invested well and kept your property up to scratch, both should be serviceable.

How to raise the rent

How you raise the rent will be a matter of personal and professional preference. Landlords with a number of properties may well go with the tried-and-tested Section 13 route – this is fine, though impersonal and potentially intimidating. You stand less risk of receiving notice from your tenant if you approach them in the first instance to discuss an increase (you might even arrange a face-to-face meeting, depending on how ‘hands-on’ you like to be in your management). This way, you can let your tenant know why you need to increase the rent and come to a mutual agreement on a new figure that is both tenable for you and affordable for them. You should then add a written addendum to your tenancy agreement which you have both signed.

The third option is to renew the tenancy and issue a new AST agreement. This prevents your tenant from disputing the rent increase with a rent assessment committee once the agreement has been signed, though it does mean that you will need to re-protect the deposit and reissue information about the deposit protection scheme, gas safety certificates and the like.

A few final points:

    • You can’t increase the rent more than once a year without your tenant’s agreement
    • You must give at least one month’s notice before increasing the rent, or six months if you have a yearly tenancy
    • It is sometimes worth keeping the rent as it is, even if average local rents have risen, in order to keep a good tenant
    • If your property is financed with a BTL mortgage, there will be a minimum amount of rent you can charge. This varies from lender to lender, but is typically about 1.2–1.3 times your monthly BTL mortgage interest.

By Ben Gosling

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Author: MattCommT

I live over at http://www.commercialtrust.co.uk, where I write articles on all things landlord, buy-to-let and property investment.

Website: https://www.commercialtrust.co.uk/

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