Rental increases: what is fair?

Many landlords want to know by what amounts and when they could increase the rentals on their properties.

These property owners would possibly prefer to automatically increase this each year (many use a standard rate of 10%) but the yearly increment does depend on various factors, and landlords need to understand what these are because not all increases can be passed on to the tenant, says Michael Bauer, managing director of IHPC estate agency.

Tenants, too, must understand that increases each year are often necessary, he said.

Commercial and residential property rentals differ, so these should be separated and worked out differently.

With commercial property there is usually a pre-negotiated escalation clause but what the landlord here needs to take into account is his potential loss of income and the increase in running expenses, said Bauer. The base rent might escalate by 8% and he might lose because the interest rate might increase that year by 1% and that increase on his monthly bond repayments cannot be passed on to his tenant.

The commercial operating expenses, i.e. water, electricity, etc. are usually pre-negotiated, with possibly around 12% increase each year.

With residential properties, particularly sectional title units where there aren't pre-paid meters for the water and electricity, the levies might go up by a large sum because of increases to water and electricity charges and, because the landlord cannot meter these separately, cannot pass the actual consumption on to the tenant, but only the year to year increases (the difference) in those operating expenses, he said.

The usual thought by tenants is that an increase based on the inflation rate is fair, but this isn't always enough to cover the landlord's increased expenditure on the property, said Bauer.

'What has to be assessed is the budgets on both landlord and tenant's sides and demand for the unit in the market, which could affect how much rent can be charged each month. In some cases the landlord might benefit from losing one tenant who cannot pay the increased amount but he might be able to charge 30% more to a new tenant, because the demand is so high for units in that particular area or upgrades have been made to the building or unit,' he said.

'The key for all landlords, is not to buy property at too high a price because you will be under pressure to charge higher rentals to make a reasonable return. Don't price yourself out of the market by charging too high a rental and maintain and upgrade your property to stay competitive with your operating expenses,' advised Bauer.

  Comment on this Article

  Please login to post comments

Post to my facebook wall
Characters remaining

    Latest Property News
    • 20 Mar 2018
      Located close to the fast growing Fourways precinct, Dainfern continues to attract local and international interest from buyers seeking a secure lifestyle with affordable entry price of approximately R3 million.
    • 20 Mar 2018
      Property owners in the Durban CBD are addressing the affordability challenge that faces many prospective tenants in their area – and reconfiguring the inner city rental market in the process.
    • 20 Mar 2018
      One of the most misunderstood concepts in the process of selling a property is an exclusive or sole mandate.
    • 19 Mar 2018
      If a landlord opts to use a managing agent for the rental of his or her property, the inspection process can be easier as the agent is not emotionally involved and will certainly have concluded an in-depth inspection report in the interests of all parties.
    • 19 Mar 2018
      We all wish we could have the cheat sheet for selling a property – a simple Ctrl+Shift+C code that will magically secure an offer on your home in an instant. Though it is not possible to provide you with this cheat code (sadly, reality does not come with such perks), it is possible to provide you with a list of the most common blunders some of your neighbours have committed in their efforts to sell their homes
    • 19 Mar 2018
      Although property technology is now widely accepted as an established trend, especially in the international real estate arena, the industry has been cautious to advance and smaller markets like South Africa are still hesitantly dipping their toes in the water.
    • 16 Mar 2018
      Strange as it may seem, there is a stock shortage looming now in the luxury sector of the Johannesburg property market, because astute buyers have for the past few months been hurrying to snap up high-end homes being offered at excellent prices.
    • 16 Mar 2018
      No one likes having to claim but having insurance for your household contents is vital, and at the start of a new financial year, homeowners either applying for new household insurance or revising their existing insurance should take a comprehensive inventory of their possessions and keep track of the total value.
    Subscribe to the MyProperty Newsletter

    Last Name  
    Email Address  
    Email Frequency
    Share this Page

    For Sale Property
    Rental Property
    More Options
    Connect with us