Investors should be seeking a combination of capital growth and cash flow over the long term when they make their property investment decisions. It is usually the case that there are periods of capital growth when values increase rapidly and then other times when values plateau but cash flows are strong. Rarely do you get both performing strongly at the same time.
Currently, in many ‘hot’ markets around Australia, particularly in parts of Sydney and Melbourne, rental returns are stagnant or falling and this is expected to continue to be the trend. The NAB Quarterly Report predicts a national rent increase of only 0.5 per cent in the next 12 months (1.8 per cent in Victoria, 0.9 per cent in New South Wales and 0.6 per cent in Queensland). Looking further out over the next two years, nationally an increase of 1.2 per cent is expected, with Victoria leading the way (2.4 per cent) and New South Wales (1 per cent).
This is not cause for any knee-jerk reaction on the part of landlords. Tempting as it may be to increase the rents to make their investments look better, this is not a decision to be taken lightly. It doesn’t pay to be too greedy and any increase must be within the law.
It’s different in each state
Legislation in each state prevents landlords from putting up rents too often. In New South Wales, under a ﬁxed term agreement for less than two years, the rent cannot be increased during this period unless the agreement speciﬁes a rent increase. If it is for longer than two years, the rent must not be increased more than once in any period of 12 months. In Victoria, you can only increase the rent when the lease is up for renewal. If the tenancy is under a month-by-month agreement (a periodic tenancy) then you cannot increase the rent more frequently than every six months; whereas in Queensland, if your tenants are on a periodic tenancy you can increase the rent at any time. There are also rules regarding how much notice must be given prior to an increase. As it is a complex area, it’s vital that you check with your property manager, the Office of Fair Trading or Residential Tenancies Authority in your state (the information is usually available on the authorities’ websites).
Look at the inflation rate and cost of living
As well as making sure that you can legally increase the rent, investors need to apply some judgment. Inflation has been very low over the past 12 months and borrowing costs are at all-time lows, so it may not be justifiable to ask for an increase, even if it is allowable. That said, few tenants would give notice if the rental increase was nominal. It’s worth weighing up your judgment against possible consequences.
Vacancies can quickly offset rental increases
One such consequence is that you lose your tenants and the property is vacant for two weeks, or even longer. If you increase rent on your property by, for example, $20 per week, that will add an extra $1,040 gross to your annual cash flow. However, if the property rents at $500 a week and is vacant for two weeks then you have lost this advantage within a very short vacancy period.
Research the competition
The best advice when considering increasing rent on your investment property is to discuss the current market with your managing agent and also research the competition. Ensure you compare like with like. What are similar properties renting for in the same area? If your property is a strata-titled apartment in a multi-dwelling block, you may be able to find out what a similar unit is renting for. The rent you are proposing needs to be in line with the competition. In some cases you may have added extras that tenants will value and can justify a slightly higher rent, for example an air-conditioning unit, a sunny aspect and great view, or an upgraded kitchen or bathroom.
Remember, when setting rents – as with all aspects of property investing – keep sight of the big picture. Property is a long-term investment.
Philippe Brach is CEO of Multifocus Properties and Finance
Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.