Rohit Agarwal, 47, a retired army officer based in Delhi, recently shifted from a rented two-bedroom-hall-kitchen house to a three-bedroom house in the same locality. But strangely, the rent for the bigger house was the same. The Agarwals had been living in the earlier house for the past 7 years, during which time the rent had doubled to what it was initially. “Almost every year, the house owner increased the rent by 10% or more, as is the norm in Delhi,” he said.
The compounding impact of a 10% hike each year means that rent will double in 8 years. But there is evidence that such steady hikes are not necessary. Demonetization and the slump in real estate has affected rentals. Therefore, there are many like the Agarwals who prefer to change house than adhere to the annual rent increment clause in the lease agreement. If you are in the similar situation, evaluate your options and don’t hesitate to negotiate with the house owner. Here are a few ways to go about it.
Rent increase is not mandatory
“The rental market trends in India are not homogenous and price trends vary from place to place,” said Kanika Gupta Shori, chief operating officer, Square Yards, a real estate advisory. “There are micro-markets where rental price movements have been static whereas there are also micro-markets where it has moved up and down, subject to the local dynamics of demand and supply,” she added.
According to ArthaYantra’s Annual Buy v/s Rent Report 2017, there was an average decline of 7.67% in annual rent of residential properties in the past 1 year in Delhi. Many localities have seen a much steeper decline. According to the report, there was a decline of about 27% in rental values in Safdarjung Enclave in South Delhi. Other cities too have seen rents fall in the past 1 year, for example: Bengaluru, Kolkata, Pune and Ahmedabad. However, rents have increased in cities like Mumbai, Chennai and Hyderabad during the same period.
Typically, rent agreements include clauses to increase the rent, usually 10% per annum, after a certain period. But this is not a rule. Earlier, there was little room for tenants to negotiate the clauses in the agreement, or even the periodic rent increases. But things have changed now—property prices now have either remained constant or have come down in many localities.
“As prices have not appreciated much, many investors have decided rent their property rather than sell it. This has increased supply and put pressure on the rental market,” said Ankur Dhawan, chief business officer, at a real estate portal. As a tenant, you can use this opportunity to negotiate things such as monthly rent, escalation clauses, maintenance expenses and even repairs or to the house.
Negotiate with owner
For many people, rent is 30-40% of the total monthly household expense. Therefore, it is important to negotiate it, even at the time of renewal of the lease.
Remember that letting out the property afresh, involves costs for the house owner. There is also the risk of the house lying vacant, and an agent may have to be paid to find a new tenant (usually one month’s rent). Plus, it is not certain that a better-paying tenant can be found easily.
A 1-month delay in getting a tenant would cost the house owner about 8.5% of the total annual rental income. Apart from that, getting new tenants means sprucing up the house with, say, a whitewash and at least some repairs. This will cost, on average, another month’s rent. So, in all, it can cost a house owner 25% of the annual rental income to lease the house again. And if the house remains vacant for longer than a month, then the loss increases further.
Let’s say, the rent of a house is Rs.50,000 a month or Rs.6 lakh a year. If will cost the owner about Rs.1.5 lakh (25% of Rs.6 lakh) to rent out the property again. It will take her more than 2 years to recover this loss, provided she finds a tenant who pays 10% more rent and then also agrees to increase it at the same rate on lease renewal.
Do your homework
Before you speak with the owner, familiarize yourself with you market conditions. “The tenant needs to know the going rentals in her area, to be able to better negotiate the escalation clause,” said Dhawan. Talk to other tenants and ask them how much they are paying and how much their rent has been increased, or not. Contact a local property dealer and find out how many properties are available for rent and at what price. If there many options in your locality—either at the same rent or lower—you can better negotiate with your house owner.
Also, make a list of other things that you may want to negotiate on, if the owner won’t budge on rent. For instance, “You can ask her to upgrade the amenities, fix the bathroom fixtures and so on,” said Dhawan. The least you can ask for is to “keep the security deposit the same even if the rental is increased,” added Dhawan.
Being aware will help you to negotiate better and also look for other houses. It serves your purpose if the house owner knows that you have other options. A lot may also depend on how you have kept the house and paid rent on time.