How To Approach Tenant Rent Increases
Tenant rent increases are often a contentious subject, so how should you determine the monthly rental price for a property and what’s the best way to enforce a rental increase without upsetting your tenants? We spoke to Michael Benjamin at Upad to find out more.
When you’re letting out a property, it’s critical that you allow the market to dictate your decision on the price of rent. Firstly, check property sites such as Rightmove and Zoopla to find out what prices are like in the local area – you can search for number of bedrooms, distance from the centre and other factors to help refine your results. Compare your property to similar ones that are advertised and use them as a guide to decide your monthly rent. You can also set up price alerts in your property area to keep track of changing rental price trends.
If you’re thinking of increasing the rent on your buy-to-let, speak to your tenants face-to-face first. It can come as a shock if a tenant receives a rent increase notice through the post without any prior warning. To avoid complaints or unhappy tenants, have an honest discussion with them first. Explain why you are increasing the rent (due to market prices increasing, increased taxation, maintenance costs, etc) so they have a better understanding of why you’re putting up the price. Follow this process and they will be more likely to agree.
There’s no steadfast rule on how often you should increase rent – it will differ from landlord to landlord. Landlords can increase rent more than once a year with a tenant’s prior written consent in the tenancy agreement. This isn’t usual though and most landlords don’t increase the rent before the end of the fixed term.
If you’re a mortgage-free landlord, you’ll rarely need to increase the rent if you’re achieving a good rental yield. But for highly leveraged landlords, you are at the mercy of interest rate rises and changes to taxation legislation, such as Section 24. So you may find that you need to increase rent to avoid wiping out your profits.
With Section 24 almost in the second-year phase, landlords should be considering their finances now to see how much extra they will end up paying and how severely their profits will be affected. But one thing is worth remembering: don’t increase rent ‘just because you can’, as this will drive away good tenants and affect local market prices. Bad news for landlords.
The amount of rent increase will depend on many factors, such as the local market, the UK market and what a tenant is currently paying. Anything up to a 5% increase is unlikely to ruffle a tenant’s feathers too much, but you need to consider if that’s even worth it for you. More than a 10% increase could risk losing good tenants and pricing yourself out of the market.
Landlords should always research the local property market before increasing rents. If there’s a new development of plush homes on the way or a glut of buy-to-let purchases flooding the market, you’ll have difficulty increasing the rent. You also need to consider the condition of other properties on the market; if standards are being driven up with free extras included or a new kitchen and bathroom, you may find it difficult to charge more for your property.
Always ensure you insert a clause into the rental contract to allow for rent increases – it doesn’t mean you need to use it, but it’s there and legally enforceable if needed. Once you’ve had a verbal discussion with tenants about a rent increase, follow this up in writing, particularly any details of the negotiation so it can’t be disputed later. Then send a Section 13 rent increase notice in the post giving your tenants a minimum of one months’ notice before enforcing the change. Tenants don’t need to agree to the rise in writing, it will be effective from the date stated on the documents. All tenants need to do is amend their standing order payments.
If the tenancy has reached a fixed term, it may be easier to issue a new tenancy agreement with the agreed new rental amount. But you’ll need to discuss this with your tenants: do they want a new fixed term or would they rather let the tenancy go periodic?
Potential problems with rent increases include forcing tenants to leave if they can’t pay the increased amount. This means more costs for you as a landlord in the long run as you’ll need to re-advertise the property and could experience a void period where the property is empty. If tenants agree to the increase, but later find themselves unable to pay, it could lead to arrears and worst-case scenario, eviction proceedings. Benefits of a rent increase are increased profits, a more attractive rental yield and staying in line with the local rental market. The latter is important if you need to re-mortgage your property at any point.
If a tenant refuses the proposed rent increase, try to negotiate. If £50 more is too much, would they accept £30? Tenants’ affordability has been stretched over the past few years, particularly as rents continue to increase across the UK, so it can be a tricky subject to broach. If they still won’t accept the increase, decide if you really need the extra money. If you do, serve them notice to leave or a Section 21 notice so you can find new tenants. If you don’t really need the increased income, you might allow the tenant to stay on the existing rent with an agreement that you will increase it at a later date, say in the next six to 12 months.
If you have a good rental yield and capital appreciation, you are getting what you need from your investment so there’s no need to increase the rent. It’s better to have a happy tenant than an empty property, which will cost you more in the long run.
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