TENANT SCREENING ARTICLE 4/11/06

Taking the rise - how to put up the rent without tears

What's the best way to increase the rent and when and how should you do it? Should you increase it at all? Here's what you need to know, writes David Lawrenson

Increasing the rent has the obvious attraction of bringing in more income. But before you increase the rent, you need to consider if it is really the wisest policy.

More on that later!

First, let's have a look at the legal aspects of increasing rent.

Please note, in this article, I'll be talking today exclusively about the position for the commonly used assured shorthold tenancy contract, which is what most Property Secrets members will probably have.

I'll deal with what happens when you want to raise the rent for a Rent Act tenancy in a later article.

Assured shorthold tenancies

Most assured shorthold tenancies nowadays will have a fixed term of six months, after which time, if both you and your tenant agree, the tenancy can be extended.

To extend the tenancy it is best to have the tenant agree in writing that they wish to stay on. If they do, the tenancy then becomes "periodic."

You cannot increase the rent at all during the period of the fixed term. If you wish to increase it after the end of the fixed term, you could choose to offer a new tenancy with a new fixed term at a new rent.

The frequency with which you can review rents after the end of the fixed term (i.e. when the tenancy becomes periodic) is something that ideally should be written into your tenancy agreement.

It's best to set the frequency of rent reviews to be at annual intervals.

Very frequent rent reviews are now frowned upon in the OFT's new guidelines on unfair terns in tenancy contracts - and will not be popular with tenants - who have a right to expect a fair contract.

Once the initial six month fixed period has ended, and if the tenancy has been extended, you will need to give at least a month's notice of an increase in rent - with the new rent taking effect from the beginning of a new "period" of the tenancy. So, if the tenancy agreement started on 16th of the month - then each new period will start from the 16th too!

This means that, in this case, if you gave notice on say 10th January, the new rent could not take effect until 16th February.

My preference is to give the tenants at least two months notice of a rent increase.

Whilst this may give them more time to possibly look at new properties, I feel it is fairer to them so they can plan their finances accordingly.

To increase or not to increase

However, this leads me on to the next consideration - whether it is economic for you to increase the rent at all.

Many experienced landlords (and their agents), argue that it is best to always price rents at slightly below market levels. This ensures you get lots of enquiries and are in position to select the best tenants.

It should also minimise void periods.

If you increase the rent too often or by too much, it's likely that your current tenants will leave and you will have to get new ones in, and this always involves high cost.

So, you need to ask is it worth putting the rent up?

My view is that if you have good tenants who always pay on time and are no trouble, you should only put the rent up if the gap between what they are paying and what the market rent is, is more than say, 15%.

Even small increases in rent will make a tenant think about getting a cheaper place to rent or about buying a property themselves! And if they give notice to leave, you'll have to get new tenants in.

So let's look at the possible costs tenant changeover.

If you employ a letting agent, you'll be facing a finding fee of between 10 and 12% plus Vat (though amounts will depend on where you are and the market at the time.)

If you find tenants yourself, you'll have the cost of your own time in arranging and going to viewings, advertising costs and the costs of doing tenant screening.

In addition, you'll have all the administration work that goes with the changeover of tenants - doing inventory check-ins and check-outs, dealing with tenant's deposits, meter readings and preparing and signing tenancy agreements.

If you have a flat, some freeholders even demand that leaseholders pay a fee to the freeholder so they can note the names of each new set of tenants.

And when tenants leave, you will probably end up bringing forward costs of maintenance too!

This is because when any tenant moves out, you will probably find a number of "snags" that will need fixing as well as also having to possibly re-paint or replace carpets that have become worn as a result of normal wear and tear.

If you can't do all this while your tenant is still in-situ (and unless your tenant is very accommodating, you won't) then you will have to do it in the gap between the old tenant moving out and the new one moving in, which means that you'll have a void in which you'll lose rent. (You'll usually also have to pay council tax during voids too!)

If your existing tenant had stayed, the chances are that they would happily live with the little "snags" and wouldn't worry that the painting had got a bit tired.

If your increased rent of $52 per month results in your old tenant moving, and you incurring all this cost, then you have to ask if it was worth it.

Of course, you may want to significantly upgrade the property to achieve or justify a higher rent.

In this case, you will need to be sure that the rent you hope to get in an upgraded property is really achievable and not above the acceptable "ceiling rent" locally.

It might just be that you could "over engineer" and have a place that while very attractive in terms of décor, is at a rent above what people are prepared to pay in your area!