Reading Time: 3 Minutes
You’re a landlord renting out your property, and the end of the lease is nearing. Your tenants would be happy to stay for another year, so the next question is: should you escalate the rent? And if so, by how much? In this blog post, we’ll cover the pros and cons, as well as 4 tips to get the most out of your renewal.
First, let’s look at why you might want to raise your price. In South Africa, inflation has hovered between 4% and 7% for the past 10 years (4.2% in 2019). That means that if you do not raise your rental income to keep up with inflation each year, the value of your rental income will go down slightly each year. In other words, you’ll make the same amount of money but will be able to buy fewer things with it as time goes on. In addition, rates and taxes go up each year. This is why, historically, residential rental escalation rates of 7-10% have been considered reasonable.
Sounds like a no-brainer. Why then, would landlords not want to raise rent? There are a few reasons why you may want to be wary of raising the rental price. Firstly, you could end up pricing your tenant out of your property. Although every year, goods and services cost 4-7% more, workers’ wages are not automatically adjusted to reflect this inflation. If your tenant’s income has not gone up, they may no longer be able to comfortably afford renting your property. This may cause them to seek a lower rental elsewhere, leaving you without an otherwise reliable tenant.
In today’s property market, searching for a new tenant is riskier than ever. With many new property developments flooding the market, there is currently a bigger supply of properties on the market than there is demand by tenants.
This means that tenants are spoiled for choice and overpriced properties risk falling vacant as they struggle to attract tenants for a price that even last year would have been easy to fill. Credit bureau TPN recently reported a nationwide increase in vacancy rates from 5.4% at the end of 2017 to 8.1% by the end of 2018.
In short, losing your current tenant to a price hike puts you at risk of having to maintain or lower the rental price after all, or worse still, face vacancy. This is one of the reasons why the residential property market is characterised by a growth rate of only 4% in 2018, which lags behind national inflation.
Ok, but your tenant might choose to stay, right? They’ve known all along that there was a chance of escalation on the rental price and your property is like a home to them… Even if they do, be cautious about the impact this might have on their finances. Again, wages are not always adjusted to keep up with inflation, as was confirmed by PayProp, who calculated that the average tenant’s salary increased by only 1.6% between 2017 and 2018. Every year their wallet gets more squeezed by rising prices, now compounded by a higher rental too. Whereas last year they might have been able to afford your property, their financial situation could have changed since.
PayProp calculated that the average debt-to-income ratio of South African tenants deteriorated from 42.3% in 2017 to 45.5% in 2018. TPN reported that the percentage of tenants who paid rent on time decreased from 73% in 2014 to 66% in 2018. The economy hits tenants hard and as landlords this could affect you in the form of late payments or defaults. Although you may be cashing in a higher rental each month post-escalation, late payments can interfere with your bond repayments and defaults can cause loss of income, and, worst case, expensive eviction fees.
So what should you do then? Here are four steps you can take to get closer to the right answer for you and your tenant in today’s economy:
- Ask your tenant for updated bank statements and credit report, so that you can establish if their financial situation has changed and if they can afford a rental increase.
- To get a sense of what the current market value of your property might be, check online property marketplaces such as Gumtree to see what prices similar properties in your neighbourhood are going for.
- Next, have a conversation with your tenant about escalation. Approach them with your request but be prepared to negotiate and try to find middle ground. We have found that with a bit of good will, win-win solutions are common in this space.
- Another good tactic is to cover yourself for risks in the current rental market. Managing your property through our online rental platform HouseME gives you access to our credit checks, 98% rental collection rate, rental guarantee which guarantees on time payment and covers you in case of default and eviction coverage. And if your tenant does choose to move out, HouseME’s innovative technology helps you avoid vacancy by finding the best market rate for your property based on real-time supply and demand.
At the end of the day, the rental property market is a market like every other. Inflation aside, it has supply and demand forces of its own, and successful property entrepreneurs and landlords will know when to take a chance on increasing their price, when rather to cover their risks, and will treat each rental as a two-sided negotiation.
About The Author:
Ben Shaw is the CEO and Co-founder of Proptech Company, HouseME, Winner of Seedstars World’s Best Start-Up Company in Cape Town.
To Sign up with HouseME as a Landlord or Tenant, Click Here.
HouseME’s Co-Founders, Ben Shaw and Kyle Bradley.