Increasing Rent: A cautionary tale:
With news stories rife about rents for residential property going through the roof, you would be forgiven for contemplating hiking up your tenant’s monthly rental to maximise your yield. However, proceed with caution. Over confident news reports and misinterpreted statistics on the property industry coupled with a landlords natural urge to boost investment returns often lead to an upsurge in landlord rent reviews. In doing so landlords often forget one of the most important rules of property investment- metaphorically speaking ‘Don’t rock the boat’, if you have good quality tenants who are paying rent regularly and not ringing you up at 9 o clock in the evening asking if you can change a light bulb, then it’s a good idea to try and keep it that way. On too many occasions I speak to landlords who have been hasty in serving a section 13 notice at the end of the fixed term period to increase the rent, and ended up with the tenant vacating, leaving the property unoccupied and most of the time, instead of increasing their annual returns, they are diminished.
I recently acted for a reasonably experienced landlord in the local area who was receiving £795 per calendar month for a 3 bed detached property in a modern development. The tenancy had been unproblematic, had run for nearly 11 months and was coming to the end of the fixed term contract. On reading a press article about rent rises coupled with a similar property in the same development being marketed at £815 pcm (per calendar month) and against my advice, he decided to serve the requisite notice asking the tenant to pay a further £20 a month to bring it in line. The tenants’ who were clearly stretching their finances at the existing rent, saw the £20 as a ‘tipping point’. To make matters worse for the landlord, rather than informing him that they would be gratefully declining the increase they set about secretly searching for a new property. As an experienced landlord will know, in accordance with the Housing Act legislation, tenants are not obligated to give any notice to terminate the tenancy at the end of a fixed term. They can simply relinquish keys to the landlord on the last day of the tenancy and clear off without even a cursory goodbye. This is precisely what his tenant did, leaving the incredulous landlord with an empty property no incoming rent and no time to re-let. It then took a further 3 months to re-occupy the property, as is the norm, the agents fees took a good chunk of the 1st month’s rent received and, with no hint of ‘I told you so’, I learned that he had been forced to accept a rent of £795 in order to clinch the application.
The tale of woe didn’t end there. The new tenant proved not to be as consistent about paying the rent than the previous one and, ultimately, the landlord was forced to serve a statutory Section 21 notice to dispossess them after the 1st 6 months had expired. I am not sure whether the landlord managed to retrieve all rent owed up to date or whether the property was left in ‘half way’ reasonable condition, but arrears often accompany adverse condition, in any case, a seemingly innocuous rent increase resulted in spiralling misfortune.
This is a cautionary tale which is not uncommon, but it is not to say that using your statutory right to increase the rent is always wrong. Where a property is clearly under rented it is entirely acceptable. However, I would suggest seeking advice from a good local agent who can advise of whether rents have increased in real terms rather than speculatively. Relying on media reports can be dangerous as they are often far too generalised and national statistics can be skewed by London’s completely disconnected market. Rents can be incredibly localised, the microeconomics within a town or even village can be completely different from that of a town 10 miles away. A local agent who can assess actual transactional evidence rather than relying on information from websites supplying speculative asking prices is crucial to advising the appropriateness of a rent increase.
It is also worth considering that if a tenant does not decide to vacate the property, rather than accept an increase, they can, if they feel aggrieved enough, refer your proposal to a Rent Assessment Committee (RAC). They are an independent body who are part of the Residential Property Tribunal Service. They have the power to set rent levels at an acceptable rate should they believe a tenant (or landlord for that matter) is being exploited. The RAC must assess comparable properties that have let on the open market before setting a reasonable rent for the property, therefore it is not worth trying to increase to above basic market level, unless there is considerable evidence to suggest your property is under rented.
I suppose the real crux of the matter is whether the financial risk is really worth the potential gain? This is the question which should be applied in all cases. In my cautionary tale, it clearly wasn’t, but had it gone to plan what exactly would the increase in income equate to? It would have produced an extra £20 a month or £240 a year to be exact. In real terms, that could be a replacement washing machine or a contribution towards some redecoration etc. Investors would call it ‘sweating the asset’, and, granted, it’s better than a nothing, but if you consider the actual losses it doesn’t stack up as a general rule. The subject of the unfortunate story probably endured a deficit of more than a quarter of the landlords expected annual return.
Property Investment, as with any other, is about risk and return, minimising one and maximising the other, but this is one example where the risk: return ratio is stacked against you. Good reliable tenants are worth their weight in gold and current legislation does not allow them to be held to ransom. For this reason you should proceed with caution when looking to eke out a bit more income. Is it really worth the bother?
I must acknowledge help from my joint author and pass thanks to Ed Chute, who works in our residential lettings department for assistance with preparing this article.
Tony Rowland. The Authors website A Cautionary Tale regarding rent increases .
Member since: 10th July 2012
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