Unlike the frequently quoted Wall Street mantra, “greed” is not always good. When deciding to increase the rent, charging far above what the rest of your market is renting at won’t do you any favours. It increases the chance of a long-term vacancy and in the world of property investing, there’s little that sounds worse.
To keep a grounded view to the market and ensure you don’t lose quality tenants, it is essential you follow these simple steps.
1. Regularly review the rent
Rob Farmer, CEO of the RUN Property Group, says that one of the best ways to keep rental increases sustainable is to always know how your rent compares to the market.
“You should regularly review your rents and ensure they are at market levels. A small regular review is much better than an infrequent review where the increase is so high that it shocks the tenant and they move out of the property.”
He adds that it is best not to be timid. “As a new landlord it might feel daunting to increase the rent for the first time fearing that your tenant may not like it and move out. The reality is, as long as the increase is reasonable you should have no problems with your tenant.”
One way to keep an ear to the ground is to attend open house inspections and notice how other properties compare to yours.
A more mathematical guide to setting the rent would be to do a gross yield calculation and compare it to the rental yields in your suburb. Multiply the average rental yield for your suburb by the estimated value of your property and you will get a ballpark figure of the annual rent you should be achieving.
2. Give tenants good notice of increases
Another thing to consider is that tenants will almost always think their rent is too high. It’s about as inevitable as getting email spam. At the same time, most landlords will want to maximise their investment returns. The result is two forces in a perpetual tug-of-war with each other.
Who usually wins? To appease both parties, the law tries to be fair to both sides. Landlords are allowed to increase the rent to a level they see fit, provided they do so under the strict provisions of legislation.
This means that you cannot just increase the rent whenever you want. If you have a standard lease, you can’t increase your rent until the end of the fixed term, unless your agreement states otherwise. You also can’t increase the rent more than once every six months.
You, or your agent, are further obliged to give the tenant at least 60 days notice of any proposed rent increase. Farmer advises making sure that the rent increase can lock in from the first day the lease expires, which means landlords should give notice about rental increases before the lease expires.
This has the added benefit of giving you enough time to gauge market rents and get advice from agents on current market values.
3. Include rent-rise clauses
One way to increase the rent, while insuring quality tenants stay, is to include rent-rise clauses in the lease if it is to apply for longer than a year. This is particularly important if the property is in a market where rents are increasing rapidly.
In fact, landlords with properties in tight rental markets could even consider offering six-month leases. Shorter leases have the advantage of allowing landlords to raise rents faster. The drawback is that this also removes the security of a long-term lease.
4. Good tenants can trump high rents
A further issue to consider when increasing the rent is what the repair and maintenance impact will be for having a good tenant versus a bad one. If you’ve got a bad tenant that pays a higher rent, but fails to take care of the property, it might make more financial sense to have a good tenant pay less.
Bad tenants could require the house to be painted more often or wreak havoc on drainage systems when they pour fat down the kitchen sink and a whole host of other concerns. On the other hand, a good tenant might require the house to be painted once every 10 years, instead of once every five, saving you money.
If you can factor in the reduced maintenance into your costs, it may well work out that $10 a week extra rent, at the risk of having a bad tenant replace a good one, might work out more expensive in the long run.
Keeping a good tenant has the added benefit of having the property remain tenanted. Vacancies can kill your profit line. In most situations, if a rental increase might result in the property being vacant for longer than three weeks, it might pay to keep the rent as it is.
5. Be visible
If a tenant complains about a leaking tap or a squeaky door, try to address the problems quickly. Good tenants always appreciate it.
But while it’s a good thing to have a working relationship with the tenant, don’t get to close, Farmer advises. “A trap for first time investors is forming a direct relationship with tenants. Certain aspects of this can be rewarding, but it can sometimes make it difficult to make the right business decisions.”
Farmer believes that by being too personal with your tenants it will be much harder to increase the rent. “A tenant is more likely to be late paying the rent if they know you and perhaps think you won’t mind. You will [also] need to be a special kind of person to successfully separate your business relationship from your personal one when serving rental increases.”