For most renters, a rent increase ranks right next to a root canal on the desirability chart. However, it is crucial for landlords to maximise returns on their investment properties and part of that is raising the rent when it is appropriate to do so. Ultimately, no renter likes to hear that rent is being raised, so there is always the possibility that the renter will move out rather than pay the increase. Here are a few ways to increase rent without alienating your tenants.
Slow, Steady and Regular
Some landlords raise rents a small amount of say $10-$15 with every lease renewal, regardless of what is going in the rental market. The problem with this approach is that the market can increase by a lot over a 12 month period and you can be short changing yourself.
Change with the Market
I recommend that you adjust your rents in line with market values for the area. If rents have gone up $40 and you only raise yours $10 you will be leaving money on the table. On the other hand, if rents have gone down and you are raising yours above market value, you may suffer a vacancy that costs you a lot more money than keeping rents current with the market. I suggest that your property manager explains this method to your tenants at their lease sign up and that they provide both you and the tenant with a comparative market analysis to substantiate the market rental price at the time of doing their review. That way it is clear to everyone.
If the tenants have resistance on paying the increase, make sure you property manager uses their negotiation skills explaining it would cost this amount to rent the same property elsewhere not to mention costs and hassle to move.
Consider a Long Term Lease in an Unsteady Market
For landlords, rental prices must be balanced with vacancy rates. In some suburbs of Perth, rental market prices are now dropping and vacancy rates are increasing. If you raise your rents $20 to $450pw but your house sits vacant for a month, you are likely losing the equivalent of $34 per week over a 12 month lease. So it would have been smarter (and cheaper) to rent the property out at $430pw, reducing your rental time and being able to choose from a larger tenant pool.
If you have good tenants in your investment property who are resistant to having their rent raised even after some good negotiation, you may want to offer them long term tenancy in exchange for a stable rental rate.
We think two years is a very good starting point, but give thought to what you plan to do with the property over that time. Remember a lease stays in place even when a property is sold unless the tenants agree to move out. Whatever the case, figure out what it would be worth to you to not have to worry about vacancy for two years or about losing good tenants.
Is there a “Right” or “Wrong” Time of the Year to Raise Rents?
There are conflicting schools of thought on this. The first is to raise rents at times like Christmas when nobody wants to move, in hopes that your tenants will just accept the raise and stay in your property. While this passes as “conventional wisdom” to many, we think it is “customer service in reverse” and can cause tenants to perceive you as “The Grinch Who Stole Christmas.” Also, if they do move, your home may stay vacant for an unacceptable period of time because there are less tenants shopping for a new house.
Instead, we recommend raising rents when the market is more active, such as autumn or spring. That way, if the tenant does want to look elsewhere, the market will be full of prospective renters for your property and you are less likely to be stuck with vacancy for even a short period of time.
Don’t Devalue Your Home
Believe it or not, one of the criteria used by valuers if you want to refinance your investment property is how much rent it brings in. In other words, the more you charge for rent, the higher value your property will hold, both to buyers and to lenders. It is important to charge rent that reflects the market value of your home to avoid devaluing it and leaving money on the table if you ever decided to sell with tenants in place.
Why a Great Property Manager is Important
At Investors Edge, we have access to a lot of research. We keep a very close eye on property values and rental rates in the entire Perth market, from the CBD to the outer suburbs. While we always advise investors to do their “due diligence” and keep abreast of the market, we also think you should always have a professional property management firm to do the job for you.
Great property managers are worth far more than you will pay for their services. They will keep your home filled with high quality tenants while staying on top of maintenance and repairs. They keep an eye on rental prices in any market and will inform you when they think it is time to raise rents and handle the difficult negotiation leaving your tenants feeling as good as possible about it.
If you would like to leave property management to the professionals, call 1300 472 427.
Read an article on: “The Best Ways to Navigate a Rent Increase on Your Rental Property“