How can I bring a low-rent property up to market rates?
Property Clinic: Rent cap discourages landlords from investing as there is no return
A relative bought a rental property about 15 years ago and has been lucky enough to have the same tenant in occupation ever since. This tenant has just moved out so the property now needs to be re-let.
The rent was set fairly originally, reduced during the bust and never increased in line with market rents as my relative wanted to set it at a rent the tenants could comfortably afford. This means that under the rent pressure zone (RPZ) guidelines, the rent can be increased by only 4 per cent a year retrospectively since they were introduced, which brings the rent nowhere near the actual market rate (20 per cent below it).
I am trying to convince my relative to refurbish the home prior to re-letting – new carpets, fully painted, new bathroom, improve the kitchen, new lighting, new heating – but their argument is that it will easily rent in its current condition at such a low rent so no investment is warranted.
This is correct, as although it is in pretty poor condition there is nothing wrong with it that would breach tenancy standards; it just would not be very pleasant to live in. However, it means that the rent cap is having the effect of discouraging small-time landlords from investing in their properties as there is absolutely no return. The new tenants then, although paying less rent, will have to live in quite an unpleasant home.
My question is, is there any way the rent can be brought up to meet market rents without knocking walls? My relative is more than happy to invest €10,000-plus but only, understandably, if there is an upside.
The reason your relative find themselves in this position is a consequence of the amendments to the 2004 Tenancies Act in 2015, 2016 and 2019.
It is important you understand that if you wish to re-let this property, you have to comply with minimum housing standards which apply to every residential rented property. Accordingly, each property has to be re-painted every four years; the boiler, gas or oil, has to be serviced every year; and the electrical wiring in the house has to be up to a safe electrical standard. These are prerequisites to letting any residential property. Therefore, you will have to do some refurbishment on the property and this cannot be built into any rent increase.
In order to achieve open market rent and not be affected by the rent pressure zone, the options open to you are as follows: You have to undergo “substantial change” within the meaning of the Act. In order to do so you will need to increase the floor area of the dwelling by not less than 25 per cent; change the internal layout of the dwelling which results in an increase of rooms; or you increase the energy ratings. You should consult the relevant sections of the Act in this regard.
Needless to say, if the property is an apartment, is it highly unlikely you will be able to effect these changes, ie you do not own the roof and walls of an apartment, unlike a house. Nonetheless, these changes, without question, will be expensive but you can then receive the open market rent for the property.
Your relative has, like many other landlords, found themselves in a position where they are penalised for being fair with their tenants by not increasing the rent. There are thousands of landlords who have been put in this position since the imposition of the rent pressure zones which is why official statistics are seeing landlords leaving the market. The shortage of available rental properties will continue indefinitely.
The choices before you are as follows:
1. Engage in substantial change under the definition of the Act and put yourself in a position to obtain open market rental value.
2. Sell the property if you are in a positive equity situation.
3. Finally, take an approach I have encountered recently with landlords taking the property off the market for two years and leaving it vacant, refurbishing it and then going to the market looking for the open market rent.
While the latter approach may seem radical, it may make financial sense when the various scenarios are computed.
Kersten Mehl is a chartered residential agency surveyor and member of the Society of Chartered Surveyors Ireland, scsi.ie.
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