Wednesday, 9 April 2014

Raising the rent on your investment property

Regular readers may have noticed that I have not written about investing in property for a while.  This is because once the initial work is done the amount of effort it takes to manage your property is largely a function of how involved you want to be.  I want as little involvement as possible and this is the way that it has panned out.

However, even if you are a low involvement landlord, one thing you will need to think about is when and if to raise the rent.

Keep on top of your contract renewals

In a previous post I wrote about how you should keep on top of your contract renewals.  One of the main reasons that you want to do this is that it provides an opportune moment to review what your tenants are paying and consider increasing the rent.

The process for setting the rent at this point should be pretty similar to when you first got the tenants into the property.  However make sure you take advice from your agent.  Your agent will often tell you whether you can increase your rent and if so by how much.  Sometimes, if the market is particularly soft, the agent may advise you against increasing your rent at all.

You shouldn't follow your agent's advice blindly

It is a reasonably tough rental market in Melbourne for landlords.  For the last few years, every time I've had a contract renewal come up the agent has advised me to keep my rent flat, and given the circumstances I have agreed.  Note that I haven't done this blindly - when I moved out of home I saw how easy it was to negotiate better rent with landlords or for repairs and work that they would not normally do.

However sometimes you have to back your own judgement.  I hadn't raised the rent on my investment property in 3 years.  In this time I have had the same tenants and I have largely agreed to all the maintenance (albeit minor) that they have requested.  I have also agreed to their request to have a pet.  I like them and they seem to maintain the property well.  It is a good relationship but it is not a charitable one.  After doing my own search on the internet I found that, although my property is not under-rented, it is certainly not far ahead of the market.

Agents often look at how many properties they have on their books versus how many people are coming to view those properties.  They are less nuanced about the
quality of the property.  I went back to my agent and discussed the fact that I hadn't raised the rent on the same tenants in 3 years and she agreed that after considering all the facts (which I was surprised she hadn't done) that a small rent increase would probably be fair.

There is always the risk that your tenants will move out

The big risk in raising your rent is that the tenant will use that opportunity to decide whether they really want to be in your property.  Whereas before they may have just let things roll, a rent increase may cause them to look elsewhere and find something they prefer.  The incremental rent that you receive will never make up for the cost of re-letting the property and the period for which it is empty.

Even if you assume you get a new tenant incredibly fast (i.e. 2 weeks) it will take a significant amount of time at the increase level of rent to make back those two weeks.

  • For example my property rents for $355 per week
  • 2 weeks lost rent is $710 in lost rent
  • I want to increase my rent by $5 per week (incredibly small increase)
  • It would take me 142 weeks at the higher rent just to make back the amount I lost
This is the downside case and something you should really think about.  This higher the rent bump, the more likely you are to see tenant churn so make sure you think about it before you increase the rent.

But don't get stuck on this downside.  Think about it from the tenants point of view

As a landlord, you naturally think about everything from the landlord's point of view.  It sometimes helps to consider it from the tenants point of view.  I just moved into my new place a few months ago and it was a pain in the backside - organising vans and friends to help move not to mention having to find a place and the open for inspections that I had to was just a huge pain in the backside.

Would I move for $5 per week (or $260 per year)?  There is no way known I would move for that kind of increase.  If I was considering moving anyway it may provide the impetus to move but in and of itself a small rent increase that wasn't going to break the bank would not cause me to move.

Obviously each situation will be different and as you will never have perfect information it will always be quite a tense time whenever you do this.  I gave my tenants notice of their rent increase (via my agent) ~7 weeks ago.  They have not responded to the agent signing the new contract.  The increased rent will automatically go into effect although I would not be surprised if I am searching for new tenants soon.  I hope they wills stay on but I'm pretty confident of finding someone else even if they do move on.

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