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Here’s how your annual rental increase is calculated

29 Jun 2017

In these tight financial times, nobody wants their rent increased, but landlords and agents have to adjust their rentals in relation to market factors. Having some insight into the contributing factors in a rental calculation will help you to understand what influenced your rental increase this year.

“It’s also worth bearing in mind that many of the costs of property ownership – including interest rates, insurance and municipal rates – do not remain static, so landlords have to recalculate annually to ensure that their operating costs remain viable,” says Janse van Rensburg.

As a rule of thumb, rents are usually increased by 8% to 10% annually, but Pieter Janse van Rensburg, franchisee for Just Property in George, says a number of different factors are taken into account when calculating a rental, and shifts in all of these will be passed on to the tenant.

“It’s also worth bearing in mind that many of the costs of property ownership – including interest rates, insurance and municipal rates – do not remain static, so landlords have to recalculate annually to ensure that their operating costs remain viable,” says Janse van Rensburg.

He shares insight on some of the factors that could influence an increase:

The market value of the property

Rental prices are usually calculated at between 0.8% and 1.1% of the value of the property monthly, therefore, each year, the increased market value will have an influence on the rent that is charged. Tenants should be aware of fluctuations in local property prices so that increases don’t catch them off guard.

Historical trends

Generally speaking, with all other factors remaining more or less the same, the annual rent increase is likely to follow the same pattern as previous increases. If this is your first year of letting, find out what the increases have been in the past so that you can prepare for what they will be in future.

Consumer Price Index (CPI)

As a rule of thumb, rents are usually increased by 8% to 10% annually, but Pieter Janse van Rensburg, franchisee for Just Property in George, says a number of different factors are taken into account when calculating a rental, and shifts in all of these will be passed on to the tenant.

The Consumer Price Index, which measures inflation that affects consumers, will also be taken into account. Landlords and agents will have to consider the affordability of their tenants in high-inflation years, while also securing their own profitability under the same conditions.

Developments in the area

Changes in the surrounding neighbourhood may also influence rental increases. A new shopping centre or school may make the area more desirable for families or workers. “Obviously, any improvements in the suburb in which the tenant is renting will also benefit the tenant, so increases for these reasons also need to be considered,” says Van Rensburg.

The market

While there are many external factors at play that affect how rental increases are determined, landlords and agents are also influenced by what the market dictates. They can only increase their rentals to an amount that tenants are willing to pay, so they will have to take care to make any adjustments fairly and realistically.

Any room for negotiation?

While tenants should bear in mind that all lease agreements are business transactions and rent increases are calculated for this purpose, your best hope for the lowest possible increase is to be an exemplary tenant.

“Always pay your rent on time and take good care of the property that you have been entrusted with. For many landlords, a bird in the hand is a valuable asset, so they would like to keep you on if the relationship has been positive,” says Van Rensburg.

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