To 4% or not to 4%

DubCount

I am a Landlord of a property in Dublin (one of the original RPZ's). Currently, rent is about 20% below market value. In January, it will be 1 year since the last rent review, and I could increase the rent by 4%. I am considering not undertaking a rent review at all. The RPZ in Dublin began on 24 December 2016 and is supposed to be for a maximum of 3 years (ending 23/24 December 2019). I assume that when the RPZ ends, the existing legislation will apply and a Landlord will not be able to implement a rent review until 2 years after the previous rent review (i.e. if rent was reviewed in January 2018, it cant be reviewed again until January 2020). Given that our wonderful government is not going to solve the rental crisis in the next 2 years, I suspect that a new 3 year RPZ will be implemented shortly after the end of the current one. However, I would like to be free to increase to market value if there is a window between the ending of one RPZ, and the start of another.

So the question is, do you think it is worthwhile doing without the 4% p.a. increases in the hope of a 20%+ increase when the current RPZ term ends in December 2019?

Baby01032012

2 points. Firstly the first rent review since the legislation was introduced needs to be 2 years so you won't be able to do a rent review now. I nearly made same mistake but got the correct advice. Secondly, rpz will not end it will be extended or replaced. 3 years the market will not have corrected itself as the government would like to think.

spaceHopper

Take the circumstances as you know them now, I'd go with 4%

The Student

DubCount wrote: »

I am a Landlord of a property in Dublin (one of the original RPZ's). Currently, rent is about 20% below market value. In January, it will be 1 year since the last rent review, and I could increase the rent by 4%. I am considering not undertaking a rent review at all. The RPZ in Dublin began on 24 December 2016 and is supposed to be for a maximum of 3 years (ending 23/24 December 2019). I assume that when the RPZ ends, the existing legislation will apply and a Landlord will not be able to implement a rent review until 2 years after the previous rent review (i.e. if rent was reviewed in January 2018, it cant be reviewed again until January 2020). Given that our wonderful government is not going to solve the rental crisis in the next 2 years, I suspect that a new 3 year RPZ will be implemented shortly after the end of the current one. However, I would like to be free to increase to market value if there is a window between the ending of one RPZ, and the start of another.

So the question is, do you think it is worthwhile doing without the 4% p.a. increases in the hope of a 20%+ increase when the current RPZ term ends in December 2019?

In my personal opinion I don't expect the current RPZ to end in Dec 2019. Due to the interference of the Govt I would get what I increases I could. I appreciate you may have a very good tenant but if they leave you are left with the lower rate applicable to the new tenant and God only knows what hare brained scheme the Govt will come up with between now and then.

The_Conductor

The issue is- regardless of how good your current tenants are- whatever rent you agree with them- is what is on offer to the next tenant. You cannot simply reset the rent when your current tenant leaves- so if you give them a below market rate- you're stuck with a below market rate.

pwurple

Rent review was one year ago. You're stuck, no choice.

Michael D Not Higgins

pwurple wrote: »

Rent review was one year ago. You're stuck, no choice.

Baby01032012 wrote: »

2 points. Firstly the first rent review since the legislation was introduced needs to be 2 years so you won't be able to do a rent review now. I nearly made same mistake but got the correct advice. Secondly, rpz will not end it will be extended or replaced. 3 years the market will not have corrected itself as the government would like to think.

If the last review was in January of this year, it was after the RPZ came in and the next review can take place in January of next year.

antoinolachtnai

You should review as early as possible.

josip

If you have a good tenant that you'd like to keep, is it ok to increase the rent by 4% at the review time but give them a rebate later in the year as an incentive to stay?

DubCount

The_Conductor wrote: »

The issue is- regardless of how good your current tenants are- whatever rent you agree with them- is what is on offer to the next tenant. You cannot simply reset the rent when your current tenant leaves- so if you give them a below market rate- you're stuck with a below market rate.

Thats a good point. if the current tenant leaves, the rent chargeable to a new tenant would be restricted to the old rate plus whatever increase is allowed under the RPZ calculation to when the new tenant commences the tenancy. I would have forgone the increased rent which could have been charged, and would still be restricted to not increasing the rent further until 2 years after the new tenant moves in.

The Student

josip wrote: »

If you have a good tenant that you'd like to keep, is it ok to increase the rent by 4% at the review time but give them a rebate later in the year as an incentive to stay?

Unless you get an invoice from them for the rebate you have lost your 4% and you cant claim it as a legitimate expense.

I suspect the RTB would find against you should you not extend the same deal to your next tenant.

DubCount

The Student wrote: »

In my personal opinion I don't expect the current RPZ to end in Dec 2019. Due to the interference of the Govt I would get what I increases I could. I appreciate you may have a very good tenant but if they leave you are left with the lower rate applicable to the new tenant and God only knows what hare brained scheme the Govt will come up with between now and then.

That really is the question. I suspect the 3 year timescale was to avoid breaking constitutional property rights. When the RPZ ends, it will be replaced with something else. However, there may be a narrow window between the ending of one RPZ period, and the beginning of another. I know its a complete unknown as to whether a window will exist at all or not. I just dont want to be in a position where I cant issue a rent review to market rate if I am restricted based on the timing of previous rent reviews. My plan is to sell up if the magic window is not available (the 4% will not make a large difference after tax, and I expect some capital gain in the mean time)

Fian

Your first review - assuming the last one took place before teh legislaiton came into effect, will be two years after your last review. It will be limited to 4% over those two years - so 2% per annum. Thereafter you can review annually at 4% per annum. If you were to wait 4 years from your last review it would be 8% maximimum increase - 2% per annum, assuming current tenancy persists. So you need to review as soon as you can to stop the 2% limit continuing.

You must wait until 24 months after last review, and give 90 days notice before the rent increase takes effect.

There is zero chance that the RPZ legislation will be allowed to lapse after 3 years, there is every possibility that if will persist on a semi permanent basis. I would not think it at all sensible to try to "wait it out". You can terminate your pre-existing part 4 tenancy after 4 years if you need to. It is also not clear whether the rent review period will revert to 24 months between reviews - personally i think that is unlikely.

The Student

DubCount wrote: »

That really is the question. I suspect the 3 year timescale was to avoid breaking constitutional property rights. When the RPZ ends, it will be replaced with something else. However, there may be a narrow window between the ending of one RPZ period, and the beginning of another. I know its a complete unknown as to whether a window will exist at all or not. I just dont want to be in a position where I cant issue a rent review to market rate if I am restricted based on the timing of previous rent reviews. My plan is to sell up if the magic window is not available (the 4% will not make a large difference after tax, and I expect some capital gain in the mean time)

I never considered any constitutionality implications regarding the 3 yr timescale I just assumed it was a timeframe against which either (a) the govt would have run its 3 budget agreement with Fianna Fail and it would be a problem for the next govt or (b) they thought supply would have come on board to alleviate the supply issue.

To date supply has come no where near whats needed and I am not aware of anything currently ongoing that will definitely increase it within the next couple of years.

I suspect the Govt think the vacant property tax will increase supply, but I have my doubts on that, I believe appeals have already been lodged to An Bord Pleanala (I think) regarding this.

The only way I think the market certainly in the RPZ will cool down without additional supply will be to decrease demand. The only way I can see that happening is a change in Govt policy regarding the various schemes (HAP/RAS etc). Whereby limits are lowered and tenants are left to find accommodation within those limits.

I know I have gone a bit off topic for this I apologise.

L1011

The Student wrote: »

In my personal opinion I don't expect the current RPZ to end in Dec 2019. Due to the interference of the Govt I would get what I increases I could. I appreciate you may have a very good tenant but if they leave you are left with the lower rate applicable to the new tenant and God only knows what hare brained scheme the Govt will come up with between now and then.

If the RPZ structure is extended for too long, the various REITs will take cases testing its constitutionality. The last rent control legislation was struck down - albeit at what has been pointed out was the era of the strictest interpretation possible being the norm and never any consideration for societal impacts etc. The time limits on the RPZ legislation were done to make it extremely unlikely anyone would bother taking a case.

pwurple

Michael D Not Higgins wrote: »

If the last review was in January of this year, it was after the RPZ came in and the next review can take place in January of next year.

No, sorry, that is not correct.

“For tenancies that are already in existence a review is only permitted 24 months after the tenancy came in to existence or 24 months from the date the rent was last set”

exaisle

The Student wrote: »

Unless you get an invoice from them for the rebate you have lost your 4% and you cant claim it as a legitimate expense.
<snip>

The gross rent for tax purposes is the "rent receivable". If the landlord and tenant mutually agree to a reduction in rent, then the receivable amount is that which is agreed, which effectively amounts to an amendment to the lease, so the question of an expense doesn't arise...the gross rent reduces instead...

The Student

exaisle wrote: »

The gross rent for tax purposes is the "rent receivable". If the landlord and tenant mutually agree to a reduction in rent, then the receivable amount is that which is agreed, which effectively amounts to an amendment to the lease, so the question of an expense doesn't arise...the gross rent reduces instead...

So there is no benefit in giving a rebate.

The Student

L1011 wrote: »

If the RPZ structure is extended for too long, the various REITs will take cases testing its constitutionality. The last rent control legislation was struck down - albeit at what has been pointed out was the era of the strictest interpretation possible being the norm and never any consideration for societal impacts etc. The time limits on the RPZ legislation were done to make it extremely unlikely anyone would bother taking a case.

Just curious does the constitution cover REITS as they are not natural persons. I would think individual landlords as natural people could take a case but would not have the finances to do so.

davindub

pwurple wrote: »

No, sorry, that is not correct.

“For tenancies that are already in existence a review is only permitted 24 months after the tenancy came in to existence or 24 months from the date the rent was last set”

The Rpz allows for the 1st review 24 months after the last review prior to Dec 2017. Which would have been the review in January. Thereafter reviews are every 12 months.

The RTB site is a little confusing on the point, but the 2016 planning and development act is clearer.

beauf

You have to think of the next tenants rent. As it's now linked to the current tenants rent.

murphaph

josip wrote: »

If you have a good tenant that you'd like to keep, is it ok to increase the rent by 4% at the review time but give them a rebate later in the year as an incentive to stay?

Just increase 4% and forget about rebates. Where do you think your tenant is going to go?

exaisle

The Student wrote: »

So there is no benefit in giving a rebate.

I didn't say that...the point I was making is that if you give a rebate, you'll only be taxed on the amount of rent you actually receive.

The rebate you give is up to you...and can be for any reason...the rent is whatever's on the lease...

Graham

exaisle wrote: »

I didn't say that...the point I was making is that if you give a rebate, you'll only be taxed on the amount of rent you actually receive.

The rebate you give is up to you...and can be for any reason...the rent is whatever's on the lease...

Interesting theory that's cropped up a couple of times before.

As presumably the rent has already been paid in full prior to the rebate, is there anything to suggest the rebate is an allowable expense for the landlord?

VonBeanie

Graham wrote: »

Interesting theory that's cropped up a couple of times before.

As presumably the rent has already been paid in full prior to the rebate, is there anything to suggest the rebate is an allowable expense for the landlord?

Its definitely a difficult tax question. IMHO I think it comes down to the substance of the rebate. If it was agreed between the LL and tenant, even informally, as being part of their overall contractual arrangement, then it should be allowable as part of the LL's income tax. However, if the substance is that the LL is just doing it for his/her own reasons, then the substance of this is that its a gift, and not allowable for income tax. Proving what the substance is could be very difficult, and it would be risky including this as part of an income tax return.

The_Conductor

VonBeanie wrote: »

Its definitely a difficult tax question. IMHO I think it comes down to the substance of the rebate. If it was agreed between the LL and tenant, even informally, as being part of their overall contractual arrangement, then it should be allowable as part of the LL's income tax. However, if the substance is that the LL is just doing it for his/her own reasons, then the substance of this is that its a gift, and not allowable for income tax. Proving what the substance is could be very difficult, and it would be risky including this as part of an income tax return.

The tax issue- revolves around the fact that Revenue are playing fast and loose with whether or not the business of letting property is actually a business transaction (at all) or not- whereas other arms of the government are insistent that it is (notably the RTB).

Revenue are insistent that it is not a business transaction- rather it is 'unearned income' and you pay taxes and charges on the gross sum of this unearned income (USC etc- is on the gross rather than the NET). If you go down the road of declaring a rebate to the tenant- it will be viewed by Revenue as a gift- and the tenant will be expected to declare it and pay tax on it- and....... it comes out of your net income- not your gross- its one of those 'no good deed goes unpunished' instances.

Keep in mind- Revenue still do not allow property tax as an allowable cost for landlords- on the basis that its unearned income- and Josephine is on record in Committee saying this. If they won't allow property tax as a cost- which any other business is allowed- do you really think they are going to allow rebates?

If you want to give the tenant some of your net- rather than gross- income- fine- however, its after tax income- and the tenant still has to declare the rebate and pay tax on it...........

The business of letting property- is not viewed by Revenue as a business- and is not eligible for business costs in the manner other businesses are.

Just up the rent as much as you can whenever you can and don't even think about all this missing with giving reductions etc. You are in the business to make money so you should maximise your profit at all times.

exaisle

The_Conductor wrote: »

The tax issue- revolves around the fact that Revenue are playing fast and loose with whether or not the business of letting property is actually a business transaction (at all) or not- whereas other arms of the government are insistent that it is (notably the RTB).

Revenue are insistent that it is not a business transaction- rather it is 'unearned income' and you pay taxes and charges on the gross sum of this unearned income (USC etc- is on the gross rather than the NET). If you go down the road of declaring a rebate to the tenant- it will be viewed by Revenue as a gift- and the tenant will be expected to declare it and pay tax on it- and....... it comes out of your net income- not your gross- its one of those 'no good deed goes unpunished' instances.

Keep in mind- Revenue still do not allow property tax as an allowable cost for landlords- on the basis that its unearned income- and Josephine is on record in Committee saying this. If they won't allow property tax as a cost- which any other business is allowed- do you really think they are going to allow rebates?

If you want to give the tenant some of your net- rather than gross- income- fine- however, its after tax income- and the tenant still has to declare the rebate and pay tax on it...........

The business of letting property- is not viewed by Revenue as a business- and is not eligible for business costs in the manner other businesses are.

I think this is over-egging the pudding a bit and introducing complications that aren't really there....the point being, that the OP's rental account will start off with "Gross Rent Receivable". If the rent per the lease is €12,000 and OP decides (with the tenant in agreement...and what tenant would refuse) to reduce the rent for December by €500, then the Gross Rent Receivable has become €11,500. There is no expense involved as it is a reduction in Income rather than an expense.
If (in the highly unlikely event) Revenue query this, OP can explain that the rent was reduced by agreement with the tenant. End of story. He doesn't have to give any reason. It is a valid agreed change to the lease. There are several valid reasons for reducing rent, none of which are any business of Revenue, no more than the amount of rent charged in the first place, as long as the amount is declared correctly.

Graham

exaisle wrote: »

If the rent per the lease is €12,000 and OP decides (with the tenant in agreement...and what tenant would refuse) to reduce the rent for December by €500, then the Gross Rent Receivable has become €11,500. There is no expense involved as it is a reduction in Income rather than an expense.
If (in the highly unlikely event) Revenue query this, OP can explain that the rent was reduced by agreement with the tenant. End of story.

That may or may not be the end of the chapter, not the end of the story:

If there is a change of rent, a landlord is required to notify the RTB within one month of that change and when doing so, is required to advise of any other change of the tenancy details that have arisen in the interim.