Rents: to lift or not to lift?- Guardian Property Specialists (GPS)

Author: Michaela Ryan, Australian Property Investor magazine
Date: October 20, 2006

At the end of a lease, it’s a great opportunity to increase the rent and improve your cash flow. But is it always wise to lift rents? And by how much?

Now is a prime time to review your rentals. Rents have been going up as a result of strong demand for rental properties, and vacancy rates across Australia are at all-time lows, according to the Real Estate Institute of Australia/Mortgage Choice Real Estate Market Facts.

To determine the market rental for your property, Regina McInnes from McInnes Management says you need to factor in the rate of inflation. And you need to find out the rent being charged for comparable properties that have recently been leased. She points out that these can vary from the advertised rentals, so you can’t rely solely on data from advertisements.

Your property manager can tell you the market rental for your property. They can refer to their rental roll, as well as data from sources such as the real estate institute in your state.

If you’re managing the property yourself, you can always get local property managers to give you an obligation-free rental appraisal.

What if I lose my tenant?

The more settled your tenants are, the more likely they are to cop a rental increase rather than deal with the upheaval of moving. However, a significant rent hike will definitely make some tenants consider leaving.

James Chalmers from prorentals.com.au says you need to consider “the current tenants’ payment history and standard of care for the property”.

If you’re afraid of losing a good tenant or if you just want to be nice, then you might leave the rental untouched, or opt for a token increase.

Another reason to go down this route is the high cost of finding a new tenant. You’ll have the cost of the vacancy (for example, two weeks of lost rent), as well as advertising costs and a new letting fee if you use a property manager.

You might also negotiate to leave the rent unchanged if you need to have the tenant on side, for example if you’re planning to renovate soon.

Token increase

Melbourne-based McInnes says, “It’s good practice to increase the rent each year, even if it’s a minimal amount. Otherwise the tenants start to expect that the rent will stay the same. And it becomes very difficult to bring it up to market (level) down the track.”

Flora Costanzo of North East Home Rentals in Adelaide says she would typically approach the tenant and explain, for example, that market rental is actually $20 above their current rental. However, since they’re looking after the place, the owner is happy to only increase the rent by $5 or $10. In such circumstances the tenants tend to be fine with the change, she says.

If you opt to raise rents by more than a token amount, it probably pays not to be too greedy. So how far can you push the envelope?

Brisbane-based Chalmers suggests you wouldn’t want to ask anything greater than market level. Costanzo suggests that if you increased the rent on a $240-a-week home by $20 the tenant might “shop around”.

So what if you’re struggling with cash flow? Is it possible to ask for a rent above the market rate?

When interest rates went up earlier this year, a few landlords on Costanzo’s rental roll asked her whether she could lift the rents by $10 or $15. Her response was: “Your property is worth what it’s worth”. Even in a tight rental market, she couldn’t have increased the rents purely on the basis of the owner’s financial circumstances.

McInnes admits investors need to consider their yield. However, she says that’s only one part of the picture.

“I think a lot of owners boil it down to just figures and returns, and it doesn’t work that way. Unless there’s somebody out there prepared to pay the rental, you’re not going to get that return anyway.”

She also believes it’s not worth accepting above-market rent from a bad tenant.

“The stress and effort you go to trying to resolve issues for a tenant that isn’t doing the right thing doesn’t justify the increase in rent that you’ll get. Somebody who’s prepared to pay rent that’s above the market rent has huge expectations.”