LEASE RATE ESCALATION

How much should you raise the rent?

Clients ask me this all the time. Should it be 5%? 7%? 10%? Or should the rent stay the same?

First, it helps to remember why lessors raise rent at all. The main reason is to keep up with the cost of living, which is inflation. The second is the market, meaning supply and demand.

Escalation is usually discussed before the lease is signed. But because it's a touchy point, many lease contracts are silent about it, and the parties just "cross the bridge when they get there." Others set a ceiling instead, like "the rent in the second year shall not increase by more than 5%."

So how much is reasonable?

From 2018 to 2022, Philippine inflation averaged about 4% a year. That's a good floor if you want the rent to simply keep its value. In practice, many lessors have kept rents flat in recent years because there are a lot of units competing for tenants.

My suggestion is to raise the rent every year, even by a small amount like P500 to P1,000. Small yearly increases are easier for tenants to accept than a sudden P5,000 jump every three years.

Some lessors want 10% or more. That's fine if you're sure the tenant will accept it, or you're confident other tenants will pay that rate.

Before you push for a big increase, do the math on a vacancy:

• Each month a unit sits empty costs you about 8.3% of a year's rent.

• In my experience, it usually takes at least two months to re-lease a unit: one month for repairs and preparation, and another to find a tenant and move them in.

• You'll also pay another month's rent as broker's commission.

A good tenant who pays on time is worth more than a few hundred pesos of extra rent.