Expert Advice with Brett Warren 10/04/2018
Owning an investment property can be a great opportunity to build your wealth, but the reality is there can be stressful aspects to being a landlord.
One of the pain-points that landlords can come up against is deciding whether they should raise the rent on their property.
Obviously, all investors want to maximise their returns – but properties are a unique and interesting asset class.
And while your investment is an income-producing asset to you, it’s a home for another person.
That said… the rental market is constantly fluctuating
As an investor, it’s in your best interests to stay on top of the average market rental prices in your property’s area.
Failing to keep an eye on it is essentially saying "goodbye" to extra income.
However, there are a few things to consider before you raise the rent.
- How long since your last rent hike?
The first consideration is whether you're actually able to increase the rent, depending on the lease signed by your tenant.
If they've signed on to a fixed term tenancy, you may not be able to increase the rent until that lease period ends.
The one exemption to this rule is if there was a rental review clause written into the agreement upon signing, in which case you are well within your rights to consider increasing rent.
- What can the rental market support?
The next thing you need to think about is how much you’ll raise your rent by.
Generally, if the increases are regular but small (say three to five per cent per calendar year), your tenant shouldn’t feel too overwhelmed or hard done by.
Keep in mind that whatever amount you decide to increase the rent by, your tenant does have the right to dispute it.
So it’s best to try and match the average rental prices and/or increases in the surrounding area.
- What does your property manager recommend?
It’s a good idea to discuss your intentions to raise the rent with your property manager.
They have their finger on the pulse and can tell you whether tenants are in short supply – and therefore you should hold off on increasing the rent for now – or whether demand is high, therefore giving you a back-up if your current tenant wants to move on.
If you do decide to raise the rent, you should let your tenants know in writing as soon as possible.
This is both a courtesy to them and legally required.
The mandatory notice period is usually between 30 and 60 days, depending on which state the property is located in.
Your property manager will assist in meeting your legal obligations when increasing the rent.
It may also be a good idea to just explain why the rent is being increased, as it’ll give them a better understanding of why they’re to be charged more.
For instance, your letter could state, “Rental demand is high and the current market rent for your property is $500 per week. You’re currently paying $460 per week, but as we value your tenancy, we’d like to offer you a discounted rent of $475”.
This demonstrates to your tenant that…
- The rental increase is in-line with market conditions
b) You value their tenancy
c) You’re willing to reward their loyalty.
While it may feel like you’re doing your tenants a disservice by raising the rent, you also have to consider your own circumstances.
And, if you’re looking to raise your rent, it’s likely that many other property owners in the same area are looking at doing it, too.
If it does cause such an issue that your tenants decide to move, there will generally be more potential tenants looking for a place just like yours.
On the other hand, if you've got a fantastic tenant in your investment property, you may want to weigh up the projected cash flow increase with the risk of having them move out?
Ultimately, a vacant investment property – even if just for a few weeks – will be more damaging to your cash flow than leaving the rental price at its current rate.
Liaising with your property manager and drawing on facts and figures related to the local market will be your ideal guide in making your final decision.
Brett Warren is the Senior Property Strategist at Metropole Properties in Brisbane and uses his 12 plus years property investment experience and economics education to advice clients how to build their portfolios.
He is a regular commentator for Michael Yardney's Property Update.
Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.