Isn't it time you raised the rent?!
Brett Alegre-WoodChairman, YPC Group
Hey guys,
Everyone is aware that interest rates have increased throughout 2007, but I wonder if the same could be said about the rent you receive on your portfolio? All too often we're happy just to sit around and listen to the agent telling us stories about why the market is down and why the rent cannot go up.
Consider this...
Your property is valued at Â?100,000 and your mortgage is Â?80,000.
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The interest rate was 5% and you were paying Â?334 per month in interest only mortgage repayments.
But now the interest rate is 6% and you are now paying Â?400 per month in interest only mortgage repayments.
Interest Rate Effect
The rent you receive is and always has been Â?400 per month. So effectively you are suffering a Â?66 pounds loss in cash flow because the market changed. Fine you might say!
Now Â?66 per month might not seem like much but if you have already paid tax on that money at say 22% then in effect you would actually need to earn an extra Â?85.
Well now consider that you own a portfolio of 10 properties all in the same situation. You would need to earn at least Â?850 more. Now assuming you cannot just walk into you boss and say I want a raise every time that interest rates move, then you must find it from somewhereâ?? Of course for most people it will come out of your lifestyle (unless you have allowed for it).
Some assuming you have provided for an increase in interest rates and the extra Â?850 is not problem on your cashflow (or the boss gave you a raiseâ?? on this occasion). Well the fact is that the real winner is the tenant in your property. Now as much as I love tenants, I certainly donâ??t like them getting a break at my expense.
Inflation Effect
The other thing to consider is that as inflation takes hold of the rent it actually devalues it. So if inflation is running at 3% for a year and you haven't put the rent up then you have effectively lost 3% of its earning capacity. 10 properties x Â?400 at 3% means that the effectively power of the rent is like you actually earnt Â?3880. This is Â?120 less.
So if you didnâ??t raise your rents by at least Â?120 you are actually going backwards with and without any interest rate changes. Inflation is often something that investors donâ??t normally consider.
So how do you go about raising the rent on your property?
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The short answer is that there are easy ways of doing this and there are no guarantees that you will end up being able to raise the rents.
Never forget that there are only two reasons why your place will not be let out. (see blog Rentals - Moving with the market for more details)
Â? Incompetent agent and,
Â? You havenâ??t found the realistic market rent.
Both of these play an important part in trying to raise the rent.
1. First of all speak to each of your agents and get some feedback on what they think you can charge in the market, if they say you cannot don't be to discouraged, second guess them and do a bit of phoning around to see what the realistic market rent is for your place with other agents.
2. If you donâ??t have a tenant right now then put the rent up by Â?25 and see what happens over the next 2 weeks. If you get nothing then you may have to sack you agent or lower the rent again.
3. If you have a tenant in the property and you are in the rolling rent period then simply have your agent inform the tenant that you are raising the rent. They will either accept it or they will inform you they are leaving. You can then decide if you really want to raise the rent. If you really really donâ??t want them to leave then contact them and say that you will leave the rent the same. If you donâ??t mind them start marketing it as soon as possible at the higher amount. You will now have between 1 and 2 months to find a new tenant at the higher price.
As a general rule, I look to raise the rent by Â?25 outside of London and Â?50 in London. Realistically I have been successful about 30% of the time but thatâ??s doesnâ??t mean I donâ??t continue to try. That 30% has probably resulted in an extra cashflow of Â?300-Â?400 a month over the past 2 or 3 years.
Better to raise a small amount (say Â?25) once per year than to raise once a decade (Â?250). Smaller increments are easy for people to adjust to and make a huge difference to your cashflow in the long and short term.
So if you have owned a property for over a year and havenâ??t been back to the agent to increase the rent then you should consider it.
Live with passion,
Brett Wood
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