Tips to help landlords maintain their business profits
Many buy-to-let landlords find it hard to increase rent, especially if their tenants are good, long-term tenants. However, not increasing rents each year could be a big mistake. You have rising costs to consider, and a tougher mortgage and tax regime have made it more difficult to make money in the buy-to-let market. Here is why you should increase rents every year.
Why buy-to-let landlords don’t increase rents each year
The idea of increasing the rent charged to tenants fills many landlords with dread. You may fear that the tenant will move out, leaving you with a costly void period to pay for. You may also be concerned about your reputation – you are a responsible buy-to-let landlord, not a money-grabbing, greed-fuelled property mogul. Should you really risk your business and your reputation for a few extra pounds each month?
Remember your buy-to-let property is a business
All those concerns and fears you have about increasing rents are emotional thoughts. That’s not an entirely bad thing – it shows you are human. However, your buy-to-let property is a business. It is meant to be profitable. You’ve invested to make a change to your lifestyle while providing a decent home to your tenants.
Here’s something you should think about when considering whether to raise rents or not:
- If you don’t raise rents and your profits fall, how long will it be before you are forced to sell the property?
- When will it become unviable to remain the owner and rent to tenants?
- If you do sell because you aren’t making a worthwhile profit anymore, what will happen to your tenants?
Suddenly, your tenants could find themselves homeless, all because you thought you were doing the right thing by not increasing rents.
Why you should increase rents each year
Now that you’ve balanced those emotions and are thinking rationally, let’s get over the next hurdle – how often should you increase rents?
Though it depends upon the terms of your tenancy agreement – and certain landlord laws such as fairness in tenancy agreements – the ideal is to increase rents each year. However, you may still need to rationalise the rental increase to the tenant.
Rationalising a rent increase
If your tenancy agreement states that there will be an automatic increase in rent of X%, you could simply make the increase without expectations of a dispute. However, it is good practice to show the tenant that you have considered the rent increase before it is made. Making a logical and evidence-based case for a rental increase will help to maintain a good landlord/tenant relationship.
Here are some of the factors that you should consider (and may decide to document) when deciding on making a rental increase.
As prices rise, your profits will fall. You’ll spend more money on maintenance and other costs associated with owning a buy-to-let property. Your accountant is likely to increase their charge to you. Landlord insurance premiums never seem to fall. Service charges are likely to rise.
It may be possible to cut out some expenses associated with your buy-to-let business, but cost-cutting is not the answer to your cash flow issues caused by inflation. If you don’t increase rents, the reduction in your profits is, in effect, subsiding your tenant living in your property.
· Mortgage rates
If your mortgage rate rises, you should seek to compensate for the rise through an increase in rent. Your tenant will probably be aware of the general interest rate environment, so it is unlikely to be a surprise. However, you will still need to consider fairness – if your interest rate payments balloon, it is unlikely that you will be able to pass on the full increase to your tenant.
· Comparative local rental prices
It is imperative that you maintain rents in line with local rental prices. If you fail to do this, your rental prices may raise eyebrows, with tenants wondering why the rent is set so low (“What is wrong with this property?”). Additionally, you may be forced to raise rents by a larger amount further down the line. This could come as a shock to the tenant, and it may risk the good relationship that you have worked so hard to build.
Factors that may impact local market rental prices are centred on the local economy. New employers, improving infrastructure and better transport links are elements that are likely to increase the liveability of an area, and so attract more homebuyers and renters – leading to increased demand for homes and higher rental prices.
· Home improvements or increased value
If you have made improvements to the tenant’s home over the last 12 months, you may be able to increase the rent to reflect this. Of course, you should have this conversation prior to the improvement being made, so that it comes as no surprise that the rent increase is as a result of the improvement/upgrade.
Always increase rents gradually
Our final tip is to always increase rents gradually. Increasing rents steadily, year-on-year, will help you remain profitable and ensure that there is no shock to your tenant to upset the applecart.
Taking a sensible approach to rental increases should help to maintain a profitable business and a good landlord/tenant relationship. Your tenant is likely to expect a rental increase – it should be included in the tenancy agreement, and tenants understand that prices rise. It is also likely that they will have received a salary increase, too.
The bottom line
If your property’s rental price is broadly in line with competitor properties in the local area, it is extremely unlikely that your tenant will wish to move out – especially if they have rented from you for a long time and understand you to be a fair and reasonable landlord.
Increasing rental prices is part of the business of being a landlord. If you do not increase rents, then you could risk your buy-to-let business. Making gradual, annual rental price increases removes the shock factor and helps to maintain business profitability.
At Ezytrac, we monitor local rents and ensure that we maintain a good relationship with the tenants of the properties we manage for landlords. According to the ONS, rental prices in the private rented sector increased by 1% in the year to January 2019. Here at Ezytrac, we have raised rents for our landlords by an average of 4.6% over the last year (as we discuss in this video).
Have you got a handle on what rents you can and should be charging your tenants? Contact us at +44 0 1522 503 717 to discover how Ezytrac ensures that landlords earn what they should from their properties.
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