Residential rental income is one of my favourite type of quasi-passive income. With the right property you literally do the work upfront once per year and then let a steady cheque coming your way every month. If you are lucky and find a long-term tenant then that income stream could continue long into the horizon.
The aspect of the rental business that gets me most excited is rent increase. Some may dismiss a £50 per month increase as trivial. However that £50 over the space of a year suddenly becomes £600, which is sufficient for a long-haul flight ticket to Asia. Equally if that £600 was invested into the stock market over 10 years, then you will double your money (based on a compounded annual average return of 7%). Imagine if you could achieve a year-on-year increase!
To-date I’ve managed to increase rent on the properties that I manage every single year and here’s how I do it.
1. Know the laws well, know the market better
The first is the most fundamental aspect of rent increase. You need to do it legally, period. In the U.K., The Housing Act of 1988 provides most of the legal foundation governing rent increase, which essentially states the following :
Rent increase must be mutually agreed between the tenant and the landlord (i.e. the landlord cannot unilaterally hike up the rent).
A notice period of at least 2 months must be provided prior to the rent rise takes effect unless mutually agreed by both parties.
Pretty sensible stuff!
The second part is even more important. You need to know what the market rate for properties similar to you is. Property, like any asset, is a supply and demand game. The more people desiring yours, the higher rent you can charge and vice versa. So you need to know the competition landscape (i.e. other properties on the market at the same time).
You will never get it 100% right because property is a heterogeneous asset, each with their unique characteristics, however you can get a pretty good approximation. I normally
Set the search radius to 1/2 miles
Set other parameters to match the nature of my property (e.g. number of bedrooms, property type etc)
Then look at the photos and floor plan of each filtered property carefully to understand their conditions and layout and then compare the rent against mine
Isolate 3-5 properties that have similar characteristics to mine and take the average asking rent, which serves as a good approximation of the market rate.
2. Increase rent only when you change tenants
My favourite time of increasing rent is when there’s a tenant change. It’s very difficult to reach more than 2% rise with existing tenants however with new tenants that rate increase to around 4%. I believe it’s to do with expectation management: existing tenants become accustomed to the old rate and find it much harder to stomach a rise whereas new tenants have no prior encounter with the property and thus there’s little expectation apart from the market rate mentioned above.
Having said that, please do not evict your existing tenants purely for the sake of £100 per month! A good and reliable tenant worth far more than any incremental rent increase you will receive. Plus tenant churns are very normal and you will get your shot eventually.
3. Incentivise the outgoing tenants
So this is a left field one. I’m usually on friendly terms with my tenants and whenever there’s a tenant churn, I would always provide them with an incentive, such as covering the cleaning cost or contribute to their moving van if they showed the prospective tenants around and an offer was made on the property.
The obvious benefit of this measure is that it frees up my time so that I don’t have to go to the property every time there’s a viewing. The existing tenants would also act as my sounding board to filter out any non-desirable prospects.
A hidden gem in this approach is that because the outgoing tenants’ interests are now much more aligned with yours (i.e. getting a prospective tenant to move in at the advertised rent), the existing tenants wouldn’t make too much fuss about the increased advertised rent. This way a natural rent rise is smoothly achieved.
So there we have it. Rent is one of my favourite passive income stream and thus the more the merrier. To achieve a smooth rent rise, make sure you
Follow the law
Know your market
Only increase when there’s a tenancy change
Provide an incentive to your existing tenants and let them be part of the letting process
Any other ideas you’d like to share? Please comment away.