Rental Increases – Advice to Landlords & Tenants
Landlords balance the rising costs of owning a property with growing investment returns. Tenants, on the other hand, are doing their own balancing act when it comes to juggling rising household expenses, employment uncertainty and numerous economic pressures. Negotiating a fair and justifiable rental increase can seem unlikely at best.
Rental accommodation remains in high demand. With today’s financial pressures many South Africans are unable to afford the high costs involved in owning their own home or in securing a bond – the only other option available to them is to rent. The downside? The demand for quality residential property has far out-stripped the supply.
The nationwide residential stock shortage has placed landlords in an advantageous position, but as the saying goes, with great power comes great responsibility, and in this case; the exercising of that power should not impose an unreasonable and unrealistic rental increase on the tenant come time for the renewal of the lease agreement. Increasing the rent to more than the current rate of inflation in an effort to maximise investment returns could potentially cost a landlord a very good tenant.
This is a particularly hard knock for landlords with reliable, paying tenants because quality tenants are hard to come by. According to TPN’s Rental Payment Monitor for the 4th quarter of 2014, only 68% of tenants in Gauteng paid on time and in full every month. This could potentially worsen with the rising financial pressures experienced in households across the country as a result of cost-of-living increases, employment uncertainty and slow economic growth. The worst case scenario being that more and more households are unable to keep up financially, and many are falling behind on their rental payments.
Data released by the National Credit Regulator confirms this, showing 44.7% of consumers, almost half, with impaired credit records. A disconcerting 1 in every 2. Therefore, there is not only a chronic shortage of quality stock – where supply continues to fail to meet rising demand – but a shortage of quality tenants too.
This should persuade landlords to retain reliable tenants by posing a reasonable, inflation-related escalation when it comes time for the renewal, and being negotiable where appropriate.
If the tenant feels that the landlord is being unreasonable they may give notice of the lease’s termination and seek more affordable accommodation. For tenants with a good payment and rental history it’s relatively simple to find something that better suits their budget. Trustworthy tenants are highly sought-after given the high number of tenants paying late, in-part or not at all.
Landlords are advised to take the cost of finding a new tenant into consideration should their tenant decide to move on. Agent fees, advertising, cleaning, maintenance and repairs are all possible expenses the landlord faces should their tenant decide not to renew. The risk of a long-term vacancy and the time and energy needed to find a suitable replacement are major inconveniences. There is nothing more crippling to investment returns than a lack of rental income!
Advice to Landlords
Be careful not to sacrifice a good, paying, long-term tenant who requests a lower increase for a potentially higher return. Determine an appropriate rental increase year-on-year.
The Rental Housing Act Unfair Practices Regulations states that a fair and reasonable increase needs to be negotiated with the tenant – as is often the case, the agreed percentage is stipulated in the lease agreement before both parties sign.
Should the tenant request a lower rental increase, base the decision on their rental history (did he/she pay on time and in full?), tenant history (has he/she looked after the property in question?), market trends and economic conditions (is this increase sustainable to the tenant?), inflation rate and the landlord’s current return on investment.
Advice to Tenants
A tenant that pays on time and in full every month and takes care of the property to the best of their abilities will be in a better position to request a lower increase. A general idea of the market and area trends will assist in proposing a fair increase. Demanding impractical changes and maintenance to the property on a continual basis will not give the landlord any incentive to consider a lower increase.