What Percentage can you Escalate Your Tenant’s Rent?
It is a contractual norm to have your tenants rent escalated each year when the lease agreement is up for renewal, but at what rate can your rental escalate by?
Each area has a different growth rate according to The suburb and its surrounding amenities. Properties with new malls and large buildings developing in the nearby surrounds tend to have higher growth rates due to the attraction of more people into the area. The question of What price to escalate your rent by solely depends on the demand for your property type and the risk of your tenant defaulting.
Its a norm for landlords to include a 10% escalation In the lease agreement renewal conditions, however, your tenant may negotiate this rate when it comes time to renew the contractual terms. You will be able to value properties nearby utilizing a simple comparative market analysis if your competitors' prices are higher, it will be a smart move to escalate your tenants rental by the same percentage that will make your pricing equal or more competitive than your competitor. Raising your escalation too high may cause your tenant to move to an alternative property for cost-saving.
That being said, if your tenant has defaulted in the last year, you may also consider a higher escalation to offset part of the risk of your tenant defaulting again, this, of course, raises the issue of affordability, as most defaults are most likely to default 3 months after your tenants have renewed their leases and escalations have been imposed. This is also a good time to relook at your tenant's affordability to decrease the risk associated with short or non-payment.