Ive just responded to someone in WA dealing with what she percieves to be an excessive increase in rental at the end of a 12 months lease. I was wondering if other investors here have a strategy they use when setting rent levels or whether you just look at it on a case by case basis?
My approach (based on a good tenant) is to look for something slightly above what I perceive to be inflation during leases. If I have a change of tenants I then ratchet it up (if needed) to something like the top half of the market. I keep the properties maintained and refresh stuff as it ages but nothing special.
I'd be interested to hear from others.
I look at what the rental market is doing and set accordingly. It won't always align with inflation figures (look at the current market).
does that approach cause many to leave or is it normally accepted?
No, I've never had anyone leave because of an increase. I've had tenants negotiate before which is fine. In the current rental market the negotiation power is well and truly with the landlord.
"It wont always align with inflation"
Well if we're talking CPI there is a pretty good chance it will given that in the measure residential rents are calculated and included.
Best way to determine market rental is to ask your property manager, then check it out with one of the larger realestate website. Do an area comparison for yourself.
Market rental being a little different to the question here though. You can always increase it above the current market rental to factor for future interest rates rises for example.
At this point in time a recomendation for a 6 month lease would allow the flexibility to keep in time with the market, especially the Perth metro rental market.
Though right now you'd be wanting a 7 month lease to well and trully miss the Christmas and New Year period which can be hit and miss for finding good tenants and no doubt when the consumer spending figures come through for Christmas interest rates will be on the move again anyway.
Always remember that top rents don't always attract top tenants.
Check the rental market in Melbourne and Sydney over the last year and compare it to CPI. Conversely, compare the two six years ago when rents were stagnating. Main thing is the fairest and most risk free way to increase rents is to price according to the market as you've said.
Investing in property is like running a business. Are you getting adequate return on investment from the funds you have tied up in the property? It should not only be about inflation or local rent returns.
Do the math – what percentage return are you getting today on the "value" of the property and compare it to the "risk free" rate of return from bank deposits (take into account an average capital growth factor of course on the property). Add a "risk premium" to the bank deposit rate.
The issue I see is that the landlord has stretched themselves so far that they can't afford to "take the risk" of the tenant leaving as they are so negatively geared. So they don't increase the rents.
You could use your net equity for something else – you are taking the investment risk, cashflow risk, liability (injury onsite) risk. So charge appropriately for it! Don't go overboard but be rewarded for the risks you are taking!
Just because the next landlord might want to go to the wall and have no life as they are providing "cheap" accomodation for their tenant you don't have to! Don't get personally involved – it is a business transaction.
You probably bitch about the fuel price rising, the tenant may bitch about the rent rising – its human nature. Believe me they won't come to you and say "look you not charging enough rent why don't you increase it".
you appear to be saying stay out of residential property unless you get commercial type returns , say 8% +. Is that a fair summary?
You also didn't mention the leverage factor which is important if comparing rates of return.
yarpos wrote:you appear to be saying stay out of residential property unless you get commercial type returns , say 8% +. Is that a fair summary?No, not at all, just these things should be part of the consideration in what rent to charge as well.
Residential property can be a great forced savings plan – which is what many need – without the requirement to make debt repayments many pull out when the next best thing comes along.
The thing I often see is that the landlord gets to know the client and then is emotionally connected to decision making.
Investable capital for many is a rare commodity so they need to make sure they make the most of it.
troyhunt wrote:You also didn't mention the leverage factor which is important if comparing rates of return.I didn't get into the specific detail of return calculation, but when looking at investment opportunities one has to compare apples with apples and ensure they take into account not just gross return, but expenses, tax and other related considerations.
Leverage is an important part of the wealth accumulation process – as long as the borrower has the ability to finance the costs in good and bad times it can greatly improve wealth acummulation opportunities.
Yours in wealth and lifestyle
Wealth Accumulator wrote:Leverage is an important part of the wealth accumulation process – as long as the borrower has the ability to finance the costs in good and bad times it can greatly improve wealth acummulation opportunities.I think we're in agreement
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