As the worldwide real estate market continues to show signs of improvement many landlords are now asking the question, should they increase rent for their tenants on an annual basis. There are many different aspects to take into account when looking at rental values going forward although for many people one simple fact needs to be taken into consideration, should your rental income at the very minimum keep pace with inflation?
We will take a look at the various elements which you need to consider when looking at rental value changes and how this may impact your tenants and security of income going forward.
Protecting your income
As we touched on above, for many people the minimum target for rental income is to at least ensure that it retains its value going forward. This means that rents should at the very minimum increase by inflation each and every year to ensure that the pound in your pocket retains its value. There are obviously other factors to take into consideration which include the price of property and whether indeed you can hedge some of the increase in property values against your rental income. Then again, why should you?
Security of rental income
There may well come a time when you look to increase the rent on your properties or a tenant who has been there for some time sees a change in their finances and is unable to cover future rental obligations. You might assume that the simplest course of action is to eject that particular tenant and bring in a new tenant on the “market rate rent” but what do you know about these new tenants and is their rental income safe on a long-term basis?
Quote from PropertyForum.com : “While much of the focus over the last decade has been upon the UK housing market, and also to a lesser extent the commercial market, it seems that many investors have missed the boat on another area of the UK property market.”
This is perhaps one of the more difficult decisions, balancing the need for long-term rental security against obtaining a rate as close as possible to the local market rate. We are not suggesting that you should offer a long-term real term rent reduction for a long-term tenant but if they are having short-term issues then perhaps there is the opportunity to assist them until they get back on their feet?
Covering your costs
The average yield on property will vary widely across the world with a suggestion that some London luxury properties were changing hands with rental yields of less than 3% while other markets may provide rental income of 10% and above. If you are not able to cover your ongoing carrying costs for any property with the rent paid by your tenant then you seriously need to look at your cost base and your strategy going forward. The average rental yield should be more than enough to cover any financing costs, maintenance costs and unforeseen costs and in a perfect world should also leave you with some excess. However, each property must be considered on its own merits and what you would expect in a perfect world is not always what you receive.
The first thing is that you should look to obtain the “going market rate” for rent in your area and you should look to increase this by at least the rate of inflation on an annual basis. There are also other factors to take into consideration, which we have covered above, some of which are short-term and some of which may affect your long-term security of income. There is no one strategy fits all in the world of real estate although you do need to ensure you retain the value of your rental income as best you can going forward, while doing as much as possible to protect your long-term income.