What is Considered a Reasonable Rent Increase?

Every year, it becomes more expensive to live and the price of pretty much anything goes up. And, unfortunately, this does not exclude rent.

Landlords often push up their rent to accommodate for increased rates and taxes or increased water and electricity bills. Tenants will always have a choice to renew their contract at the end of the rental period at an increased rental amount.

And, this is often an issue that causes tension between the landlord and the tenant because the tenant might already feel that s/he is under enough financial strain as it is. Having said that, the landlord might also be experiencing the same feeling.

Here is a breakdown of the main elements in this discussion:

Factors

The real challenge lies in a reasonable increase that is fair towards both parties. Real estate industry leaders report that rental amounts usually go up between 6% and 8%, which tends to be in-line with the rate of inflation. 

Both parties need to bear in mind the state of the overall economy and how it can play a role in rental increases!

Landlords thus need to keep the Consumer Price Index in mind, which is used to calculate inflation on products purchased by consumers. They can then calculate a reasonable rental increase based on that number.

Inflation is key

The inflation rate hiked up to 4.7% in December 2017, which means that inflation could affect a landlord’s profitability and a tenant’s affordability if the rent is not reasonable enough.

Landlords who increase the amount by more than the inflation rate are at risk of losing their timely-paying tenants, as they might find other accommodation.

In the economic climate such as the one we are currently in, tenants who pay regularly and who adhere to the due date stipulated in the contract are becoming increasingly hard to find.

Statistics have shown that tenants who paid in full and stood on time were 67% last year. This has dropped considerably since 2014.

Safeguard investment

Tenants are finding it more and more difficult to pay on time and in full, which makes a correctly-paying tenant all the more financially challenging.

To safeguard their investment, landlords need to do homework and thorough research in order to calculate a fair rental amount!

A number of market factors need to be taken into account. A new development or complex, for instance, might reflect positively on rental calculations, whilst dilapidating buildings and overall bad neighborhoods might impact it negatively.

Importance of debt record

A rise in inflation has resulted in a rise of debt in households which contribute to deteriorating credit records.

Many rental agencies have reported that more than half of rental applications that they perform checks on have impaired credit records. This is due to the rising cost of month-to-month living.

Bearing this in mind, landlords need to consider the tenant’s behavior over the rental agreement period. So, it may actually be worth the landlord’s while to slowly increase the annual rent adjustment based on the good paying behavior of the tenants as a type of reward.

Mutual respect

In order to maintain and build a good relationship between these two parties, there has to be a sense of mutual respect from both sides.

Real estate agents are often mediators in situations of rental increases and can provide sound advice on emerging trends within the rental real estate market. They are also more familiar with area-based factors that might affect the rental increase and rental returns.

In the current economic climate, it is now more important than ever to work with and walk alongside a reputable real estate agency who will be able to negotiate the best terms for both the landlord and the tenant.

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