LANDLORDS - Are You Charging Below-Market Rent?
Every month a property is rented below the market rate this is lost money. Yet, jacking the rent up will likely lead to a vacancy and even more lost rent, at least in the short term.
Having an occupied property rented substantially below market price is a problem that’s afflicted many landlords.
Every month a property is rented below the market rate this is lost money. Yet, jacking the rent up will likely lead to a vacancy and even more lost rent, at least in the short term.
You will also likely have an angry tenant on your hands and definitely might carry the bad karma of pushing someone to move out of the home they’ve lived in, potentially for a long time.
So what should you do?
Should you leave the rent in place? Not renew the tenant’s lease? Bring the rent immediately to market price? Somewhere in between?
Unfortunately, there is no perfect solution because much of it depends on your situation and what you are looking to accomplish.
Fortunately, there are guidelines to help.
How Below-Market Rent Typically Occurs
This article will not go into how to find and set the market rent price for a property. Instead, it will focus only on what to do when a tenant is paying well below market rent.
First, however, there are typically three reasons why you will find yourself in this position. Knowing these can help you prevent yourself from getting into this position in the first place.
1. Inherited residents
Sometimes we buy properties that already have a tenant in them. This is virtually always the case with multifamily properties. Fortunately, tenants often know that when a property changes hands, the rent will likely go up (especially if the new owner makes capital improvements). This is why many are nervous when hearing a property is up for sale. But it also means most won’t be surprised when they see their rent increased.
2. Not raising rents annually
You do not want your tenants to be surprised by a rent increase. Many smaller landlords find themselves with severely below market-rented properties because they refuse to raise the rent (or don’t come close to keeping up with the market). They do this often because they’re afraid of a vacancy. But it ends up costing a lot more to have a severely under-rented property. So, make sure to raise rents every year.
3. Not renewing your fixed term tenancies
Since there is no renewal date, there’s no reminder for you to increase the rent. All of a sudden, the previously above-market rent is now below-market. The market will dictate the rent that you are able to achieve, you can’t be afraid to lose someone by raising the rent.
Why This is So Important
In the current economy, I would contend a fourth reason has entered the fray: It is very hard to keep up with this scorching hot market.
Nationwide, rents have gone through the roof due to constant tinkering by the government with the private rented sector and the increasing & often ominous wave of legislation being placed onto landlords.
Below-market rented properties are an endemic problem for landlords right now. This can also lead to tenants not being able to find other alternative accommodation given that their rent is vastly under the current market price for properties of a similar size.
Understanding Tenant Psychology
Tenants are not surprised to see rent increases. Unfortunately, they are surprised (and quite upset) to see really large ones. If you are looking to increase your rents then talk to your letting agent and discuss what is 'realistic' in the current market place and go from there.
“A good rule of thumb: don’t raise the rent by more than 5% per year. Any more and the sharp rent increase often jolts the tenant into moving—even if you’re raising the rent no higher than nearby market rates.”
How to Decide
Ethical considerations
So, what should you do?
First and foremost, some people feel guilty about raising the rent to market rates, especially if it’s a long-term tenant who is paying substantially under market. And even more so if raising the rent to market will likely require them to move.
The most important thing to internalize here is that there is nothing immoral about charging the market rate. It may be jarring to some tenants, and they may even get mad at you. But you could simply turn it around and note that they have been living in that home at a discount for some time. Of course, the discounted rent was what had been agreed to, so they were not doing anything immoral either.
Thereby, I would lean toward seeing this as simply a business decision. That being said, if you are in a good and comfortable spot and can afford to charge your tenant less than market and feel that would benefit them more than the extra money would benefit you, then go ahead and charge less.
Conclusion
Generally, it’s important to keep up with rent increases to avoid finding yourself in this situation. But particularly in this market, you will find yourself with a below-market rented property from time to time. The key is treating the tenant fairly but approaching this as a business decision. Because in the end, that’s what this is, business.
For an up to date value of your rental property contact James Allen directly on 07773 412300 or email :- james@allen-residential.co.uk
