Whether you are a landlord or a tenant of a home, it is likely that your rental agreement has a section dedicated to updating the rent. Although this procedure is not mandatory (as long as both parties agree), it is a clause that is usually present in all leases. Next, we will tell you everything you need to know to update the rental income: what it consists of and how to calculate it .
What does the rental income update consist of?
What do we mean when we talk about the update of the rental income? Well, as its name suggests, it is about reviewing the monthly fee that the tenant pays for the home .
This, following the guidelines set by the Urban Leasing Law (LAU, from now on), must be updated only once a year , coinciding with "the date on which each year of validity expires". In this way, if the rental contract was signed in April, the review of the rent will be made for the month of April of the following year and not based on the calendar year (from January to January).
The LAU does not specifically specify which variable should be taken into account when updating the rental income, although, as a general rule, the Consumer Price Index (CPI) is usually used . On the other hand, it does specify that, in the event that the value that will be used for the update is not established in the contract, the Competitiveness Guarantee Index (IGC) will be taken into account.
In addition, something that the LAU makes clear in its Article 18 is that "the annual update of income may not exceed the result of applying the percentage variation experienced by the Consumer Price Index" . That is, regardless of the value that is taken into account to carry out the update, the percentage can never be higher than the IPC.
Steps to follow to update the rental income
Updating the rental income is a relatively simple process that consists of 3 fundamental steps that we explain below.
Step 1: Contract Review
The first step will be to check what is indicated in the contract in relation to the update of the rental income. It is important to bear in mind that there may be variations depending on the date on which the lease was signed, since the LAU has undergone several modifications in recent years.
There are four assumptions:
Rental contracts signed between January 1995 and June 2013 : the first Urban Leasing Law, approved in November 1994, established that the rent would be updated according to the CPI during the first 5 years of the contract, with freedom of agreement as of sixth year of lease.
Leases signed between June 2013 and March 2015 : the revision of the law in June 2013 incorporated as a novelty that the rent update clause would be made in accordance with the agreement agreed by the landlord and tenant and, in the event that no If there were a specific clause or, if there was one, the update variable was not indicated, it would always be done in accordance with the IPC.
Contracts signed between April 2015 and March 2019 : the LAU changed again some aspects related to updating the rental income on March 31, 2015. Two new features would then be introduced with respect to the previous version. Namely: that, if there is no specific update clause in the rental contract, the rent is not updated during the first three years, and that, if the clause exists, but the variable to be used is not indicated, the IGC will be taken as reference.
Leases signed as of March 2019 : the last update of the Urban Leasing Law, of March 2019, included as a novelty a detail that we have already pointed out previously and it is none other than, regardless of whether the signing parties of the contract arrive to an agreement to choose a variable other than the IPC or the IGC, in no case may the percentage set by the IPC be exceeded.
Step 2: Check the variation of the CPI (or of the chosen variable)
Once we are clear about how the rent update appears in the rental contract, it is time to do the calculations. Both in the event that the CPI and the IGC are taken as a reference, both data can be found on the website of the National Institute of Statistics (INE).
In the next section we will explain how the update of the rental income is calculated.
Step 3: Written Notice to Tenant
The last step, and the most fundamental of all, is to notify the tenant if the monthly rent paid for the home or the premises has any upward or downward variation. This notification must be delivered in writing , indicating in detail the data that has been taken into account to make the calculation.
It is very important to keep in mind that this notification must be made to the tenant at least 15 days in advance . Bearing in mind that the monthly CPI data is published around the 15th, it is best to perform the calculation on the same day in order to notify it as soon as possible.
In this way, if the rent ends the year in April, you will have to make the calculation according to the data published on March 15.
Formula to calculate the rental income update
Now, when it's time to update the rental income, how do I do the calculations? We explain the procedure for the two most common cases such as updating according to the IPC and according to the IGC.
How is a rent updated taking into account the CPI?
If you update the income according to the CPI, the INE website has a tool that facilitates this calculation. You will only have to enter the validity period of the contract and the rent to update and in a few seconds it will give you the results.
In case you want to be the one to perform the calculations to check that the ones the tool throws at you are real, the formula you should use is very simple:
(Rental income x (100 + % CPI)) / 100
Keep in mind that variations according to the CPI can lead to both an increase and a reduction in income. Everything will depend on whether the CPI is positive or negative.
Update the rent according to the IGC
The update of the income according to the IGC follows the same formula that we have just seen:
(Rental income x (100 + %IGC)) / 100
This index differs from the CPI for two fundamental reasons. The first is that it can never exceed 2%. Secondly, and what would harm the tenant the most, the rental income is not updated if it is negative.
Rent your house with Pro Realty
If you are thinking of renting your home and want help regarding how to update the rental income, how to include this clause in the contract, which reference index may be more beneficial for you or any other question in this regard, trust Pro Realty .
As a real estate agency specializing in the sale and rental of homes, we have the best professionals who can advise you throughout the process.
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