Q&A – Property Advice: Do I choose higher rentals over good tenants? 

Question 

Dear REIMag team, 

I have a Spanish rental property that I bought almost two years ago. Lately, the rents here in Spain have gone up a lot so my rental income is below market nowadays. However, my tenants are quite good since they always pay on time every month and they do not call me for almost anything. 

What would you recommend when the lease will finish? Should I raise the rent? On the other hand, my big fear is losing the tenants if do this. 

 

Lisa Bathurst, of international property advisory firm Hurst & Wills, answers this week’s property question. 

@HurstandWillsfacebook.com/www.hurstandwills.com 

Answer 

 The rent increase combined with currently having low-maintenance tenants creates an understandable dilemma.  

 The rental prices in Spain have risen considerably over recent years. In fact, 18% over last four years, though this has now slowed down and according to the real estate portal Fotocasa, rents rose by 2.7% last year after rising 8.8% the year before. This of course depends on where your property is located, which I do not know in your case 

Ultimately, I believe that you cannot put a price on good tenants. Having had some personal horror stories on this front, my advice would be to keep them there as long as you can.  Especially if you are an overseas landlord, which can make things trickier.  

The cost of finding new tenants in Spain is equal to about a months rent, and then there is the cost of making the property rent-ready.  When old tenants leave, you generally need to give the place a freshen up which involves cleaning, maybe painting.  Rental agreements, inventories and credit checks also come at a price.  And we must also factor in any void period… it would be a tad overoptimistic to think that the new tenants will move in within days of the old ones leaving, so you could lose a months rent here.  

All of that considered, I would say a change of tenant can cost you up to 15% of your annual rental income. Depending on your area, you may get a rental increase for this, but the national statistics suggest it would be optimistic.  

 My suggestion is to call your tenants and gauge their thoughts on an increase.  Say that given the increases in the area, you are considering a +/-5% increase and wish to hear their thoughts.  If they’re reluctant, you can follow up with an email saying that on reflection, you value them as tenants and would be happy to continue as you are this coming year, however you may have to consider a small increase in line with market rents from the following period.   

 What should also be taken into consideration is the recent rental law changes primarily around lease lengths.  Up until now, new leases have been fixed at three years. However, the new law stipulates that this minimum period will now be five years for all new contracts. Automatic contract extensions have also been increased and should either tenant or owner choose to terminate the contract by its end date, it automatically extends for three years. The previous extension period was just one year.  

I wish you the best of luck with your decision.  

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