KUALA LUMPUR: Most Malaysian landlords shy away from increasing their rental rates, observes K L See, director of real estate agency Metro Homes Sdn Bhd.
“Our laws do not provide many avenues for the landlords to take action against tenants who do not pay up. In other words, evicting a tenant is a lengthy process, so landlords tend to cherish tenants who are good paymasters.”
The lack of professional property caretakers to assist in rental collection and the steady supply of properties that flow into the market each year have also led to competition among landlords to find good tenants. As such, landlords avoid raising rents as it could result in a vacant property.
But the rental rates of properties should increase in line with rising maintenance costs and inflationary pressure. See says a hike in rents should be on a landlord's to-do list once every two years, when the tenancy agreement is up for renewal.
“When a property starts to give problems due to wear and tear, your maintenance cost will go up. If you don't increase your rent from time to time, how are you going to maintain your unit?”
Rising rental rates also translate into higher property values. “When the rent you're getting is high, you have a good story to tell prospective buyers. If you manage to raise the yield of your property, its capital value should go up as well,” says See.
The right time
Timing is a key to increasing your rent successfully. Clearly, if you own a property in a neighbourhood that enjoys high demand, you would not face major hurdles when increasing its rent. The best time to raise your rent is when the occupancy rate in the neighbourhood is 80% to 90%, says See.
Landlords of commercial properties generally find it easier to raise their rental rates. One reason is that business owners are reluctant to relocate.
“Renovation costs of a business premise can cost RM60,000 to RM100,000. Business owners are usually unwilling to move if they have to renovate a new place. Tenants may choose to pay a bit more each month,” says See.
Commercial property owners can consider revising their rental rates when new projects are launched nearby. New developments often command higher rents (than the prevailing market price) and this can be the impetus to increase your rates, as long as your property still remains attractive to tenants.
“For example, your shophouse is valued at RM1 million, and you're getting RM5,500 a month in rent. Then you have just-completed RM2 million shoplots nearby, and the owners are renting them out at RM9,000 to RM11,000 a month. Tenants might still be interested in your unit even if you raise your rent to RM7,000 a month since it is much cheaper,” says See.
He adds that, based on this principle, the ample supply of residential properties along with the price-sensitive nature of this market make it harder for landlords to increase rental rates for homes.
According to Sonny Thoo, a mortgage broker and landlord, it is not wise to raise rents during an economic downturn as it would be akin to “asking for a raise when your employer is not doing well”.
There are also times when you may need to reduce your rates. “If your unit has been vacant for a long time, consider reducing the rent,” says Milan Doshi, author and speaker on property investments.
See recalls that “during the Asian financial crisis in 1997/98, some offices in the KL city centre were offering a few rent-free months for tenants who signed two-year agreements”.
The right amount
Once you have decided to raise your rent, the next consideration is quantum. See recommends an increase of 5% to 10% every two years.
“If your rent is lower than RM1,000 a month, you should raise it by a round figure of RM50 or RM100, he says. “Consider putting this term in your tenancy agreement. For example, state that there is an option for renewal with a 5% increase in the gross monthly rent.”
You can also ask for a higher amount and allow room for negotiation. “Assuming your current rent is RM600, you can ask for RM700, then end up with RM650 after negotiation,” See suggests.
Indicating the possibility of future rate hikes prepares your tenant psychologically when your tenancy agreement is due, says Milan. “Then, the question would be ‘how much is the new rental rate?', not whether or not there is an increase.”
It is more difficult to estimate the increment for commercial properties. According to See, this quantum depends more on how much sales can be generated as opposed to the amount of rent that they are paying per square foot.
Dealing with objections
When facing objections from your tenants, explain why your rent should be revised. “Explain to them that the tenancy agreement has expired, and that you need to raise the rental rate based on the market value. Don't threaten them. Be reasonable,” says See.
Providing your tenant with additional information should ease the process of raising your rental rates. “I accumulate data such as the current rents of neighbouring properties. It justifies the hike. Consider asking a real estate agent to provide you with current rental rates. You can also go online for this information,” he adds.
Thoo, who has been a landlord since 2000, agrees that explanations are important. “Generally, I'd break the news to my tenants gently. I treat them as a friend, with mutual respect. Normally, I'd say something like: ‘Your tenancy is coming to an end. The cost of living is going up. Would it be possible to re-look your rent?'”
Your relationship with your tenant plays a critical role here. Landlords should build up a good relationship with their tenants from day one, stresses Thoo.
“If you've been keeping in touch with your tenant and have attended to his needs and maintenance issues promptly, then you might find it easier to raise the rent,” he reckons.
“This is a two-way street. If your tenants like you, they will be afraid of losing the relationship they have with you and the challenges of dealing with a new landlord. Being a good landlord gives you bargaining power.”
If your tenant is reluctant to pay more, you may try sweetening the deal with an offer to add value to your property.
“Ask your tenant: ‘What improvements do you want to see in this unit? Let me see if I can meet your needs',” says Thoo. “Try to make them feel more comfortable in your property. For instance, you can offer a fresh coat of paint. If the cost of such renovations is very high, ask if he can share it with you.”
See says the total upgrading costs should not exceed the annual incremental amount in your rent. “For instance, if your rent increases by RM50 a month, you should not spend more than RM600 on your property.”
Thoo has a similar view. “Work out a sensible budget for this. Let's say you extend the contract by one more year, and the new rent is going to cost your tenant an additional RM100 every month, or RM1,200 a year. A RM5,000 upgrade would not be justifiable.”