Raising the rent: keeping it fair and reasonable

2014 saw the buy-to-let market positively flourishing. The most recent statistics put the annual increase in mortgage lending for rental property purchase at 22% by volume and 29% by value 1. Nevertheless, some landlords have entered the new year with a small amount of trepidation.

Though uncertainty about market and regulatory conditions following May’s general election certainly play a part, this unease is mostly caused by economic factors. Experts predict a year of slower growth than the last, and thanks to low levels of disposable income, rents are forecast to grow more slowly as well 2.

With borrowing costs likely to start to rise again this year, landlords are looking at shrinking returns, at least in the short term. Despite the glass ceiling imposed by tenants’ incomes, however, research suggests that one quarter of landlords are still planning to increase the rent they charge by more than 3% 3.

The first things you need to know about raising the rent

If you are planning a rent increase for 2015, there are a few things you need to know:

1. You cannot raise the rent without your tenant’s agreement if you are still in the fixed term of an assured shorthold tenancy.

2. You normally cannot raise the rent more than once per year without your tenant’s agreement if you are in the periodic stage of a tenancy.

3. For a tenancy where rent is payable more often than once a year, you must  give your tenant at least one month’s notice. For a yearly tenancy, the minimum notice is six months.

How much should you raise the rent by?

Theoretically, rent levels are influenced by the traditional market forces of supply and demand. Whilst many other factors also have a say, it is true that there is no definitive indicator for when rents will and won’t rise.

Inflation – as measured by the Consumer and Retail Price Indices (CPI and RPI) – is vague, and unrepresentative of how local markets work. Whilst rents nationally rose roughly in line with inflation last year, on a regional level, the story is very different, with the fastest-growing region (the East of England) witnessing gains over three times this amount, and the worst-performing region (the North East) actually seeing a fall in rents 4. To use inflation as a guideline in an area where demand won’t meet it is foolhardy, as you’ll be pricing yourself out of the market.

Local factors play a far more prominent part in rent levels. New transport links might increase interest in an area and push up rents, whilst a new housing development could ease demand and cause them to fall.

It is therefore far more prudent to use the rents of properties in your area that are comparable to your own as a gauge for how much you could raise your rent by. It has always been a simple matter to check listings in local papers, and the emergence in recent years of online property portals have made researching local prices even easier.

Alternatively, you could instruct a professional rental valuation. You would likely get a more precise and realistic figure that will take into account unique features and assets of your property others in the area might not share; however, this will usually cost you money.

How to raise the rent

 Before taking any steps to increase rent you should discuss it with the tenant first; particularly if this is the first time their rent has risen. Receiving a formal notice can be intimidating, and an informal discussion might be beneficial for both parties, enabling you to agree on a figure that is affordable for your tenant and acceptable for you.

Losing out on rent can be bad for business, but losing out on a good tenant can be worse. Keep in mind that if your tenant leaves because you have demanded a level of rent they cannot afford, you will incur the added cost of marketing your property and preparing it for your next tenant, as well as the void period where the property is generating no money. Most landlords agree that if keeping a good tenant means reining in the extra rent you wish to charge, or even keeping the rent level for another year, it is worth it.

If the decision is taken to increase rent, most landlords will then serve a section 13 (2) notice, as outlined in the Housing Act 1988 (and amended by the Regulatory Reform (Assured Periodic Tenancies) (Rent Increases) Order 2003). A section 13 notice applies only to a statutory periodic tenancy that has arisen as a result of a fixed term tenancy coming to an end. The date on the notice cannot be earlier than one year after the last rent increase via a section 13 notice.

You can download a free section 13 (2) notice from the Commercial Trust website.

Written by Ben Gosling at Commercial Trust

References

[1]     http://www.cml.org.uk/cml/media/press/4103

[2]     “Rent increases likely to be muted in the UK in 2015, it is predicted”. Property Wire. 23 Dec 2014.

[3]     Christie, S. “One in four landlords line up rent rises of more than 3pc for 2015”. The Telegraph. 24 Dec 2014.

[4]     http://www.lslps.co.uk/documents/buy_to_let_index_oct14.pdf


Posted by on 16 January 2015

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