My post on Friday (Rent or Buy: All The Eggs, One Basket) was based on this moneyweb article: Buying or Renting a property?

In the comments, I found this absurdity making an appearance multiple times:

Rentals usually escalate at between 8% and 10% per annum

Other examples:

 The rental escalation in SA is usually 10%pm*.
*Though I assume she/he means pa – because escalations at 10% per month are plainly untrue.

Only, that sort of thing is only true in two scenarios:

1. If your rental agreement is a commercial one, with a three to five year contract and annual prescribed escalation clauses; or
2. You just accept the landlord’s escalation thumb-suck.

As I see it, many landlords are historically-minded. They have very clear ideas of just what is owed to them as a result of having purchased property to let. But unfortunately, that’s just not how the market works.

Here is South African inflation since 2008:

Here’s what that should be telling you:

1. Between 2008 and 2010, rental escalations of between 8% and 10% were necessary in order to keep in line with inflation.
2. Since then, less so.
3. Meaning that the assertion about rental increase rates refers to a brief period of time half a decade ago.

The Power In The Renter’s Court

Most people assume that the renter is stuck in an awkward scenario where the landlord can always evict him in the event that there is no agreement on the rental escalation.

This is still true – if you can’t reach agreement, then that’s a possible outcome.

However.

Consider this from the landlord’s perspective:

1. Good tenants are hard to come by. But I mean – really though. Most landlords have plenty of horror stories. And the truth is, in South Africa particularly, there is currently a culture of home-buying – meaning that most of the people that would otherwise have been good tenants are mortgage-indebted themselves.
2. When you try to let a place out, it takes time to find new tenants. The landlord risks losing a few months’ of rental in the interim.
3. Here’s an example:
   1. You’re paying R12,000 per month in rent.
   2. The landlord says “I’m increasing the rent by 10% from January.”
   3. You say “Sorry, but no. Inflation was only 4% – and other rentals in the area are actually lower than what I’m paying you already. I don’t want to move – but if I have to, I will. In the interests of convenience, I’m happy to do a 5% increase, which I’m told by my real estate friend is actually very reasonable. Let me know.”
   4. The landlord might feel as though accepting your offer means that he’s giving you a R600 monthly discount (or a R7,200 annual discount).
   5. But on the other hand, if he loses a single month’s rental by forcing the issue and having to look for new tenants, that’s a R12,000 loss of income.
   6. And it might all be for nothing if it turns out that he can only get R11,000 for it when he puts it back on the market.
   7. So all in all, the landlord has quite a strong incentive to accept the lower increase.
   8. Especially if you lay out the potential losses.
4. And in the end, if the landlord won’t budge and you really do want to stay, you can always just back down and accept the 10% increase.
5. Nothing ventured…

Some caveats:

1. Your position is particularly strong in a time and area of falling rental yields. When rents in the area are going up – less so.
2. You have to be quite prepared to follow through on the move. Although, like I said, you can usually back down and accept the increase if you really would rather stay.
3. Make sure that you have the rental increase conversation before the start of your required notice period. Otherwise, you’ll risk losing your deposit to cover the lost rental.

Particular emphasis on that last one.

Happy Monday!

Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.