How to increase rents in line with market

Discussion in 'Property Management' started by standtall, 26th May, 2022.

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  1. standtall

    standtall Well-Known Member

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    I am sure many other investors find themselves in the same position.

    I have two properties where rents have fallen significantly behind market rents mainly due to long term tenants. Most others are still behind but here I am talking about $100 per month weekly difference.

    Property A QLD - market rent $750, tenant pays $620. They started leasing 6 years ago at $550pw. They are excellent tenants but we are losing around $8k per annum in lost rent. Lease is up for renewal in 3 months.

    Property B NSW - market rent $550, tenant pays $380. Again long term lease.

    And I am a big fan of keeping good tenants even if it means small losses but with rising rates and economic uncertainty, it’s very hard to lose $15-$20k per annum on a regular basis. Due to our leniency on rents, the difference between what they pay and what should be the market rent has already grown way too much and we certainly aren’t in the business of subsidising rents.

    Would love to hear ideas about bringing rent to market rent?
     
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  2. Heinz57

    Heinz57 Well-Known Member

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    I would give plenty of advance warning and then just put the rent up. Most people know from the news what’s happening with rents and they can check comparable online.
     
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  3. Harris

    Harris Well-Known Member

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    We were in very similar situation as mrs dealt with all agents and neither of us had the time to compare our prop rents with the market rents etc for over a decade.

    We have a diverse national portfolio and I decided to bring most rents to market rates during covid but given we had significant maintenance issues across a large part of our portfolio (old houses), I started with Frankston, VIC and had a team of tradies do minor renos (new paint, revamping bathrooms & kitchen (priming, new tiles etc), new floor coverings/ floor polish), adding ACs, updating garden/ fences etc, addressing any other issues etc. This was capital intensive but did 3 things:

    1- We addressed significant maintenance issues in one go and given most of this is on expense account rather than capital account so will assist with pre tax dollars in claiming maintenance.
    In some properties, a new bathroom was added or a wall going up to add a new bathroom (however I wouldn't do it again as costs could easily get out of hand).

    2- The value of the prop/ street appeal increased immediately and so did the value of the property. For the first lot of approx 8 houses (all Frankston), the ROI (cap) was more than 100% (if prop was sold pre vs post reno).

    3- The quality of tenants and rent increased significantly. I calculated the net increase in rent, post renos to generate 15% ROI (in yield terms) over & above the base rental increase bringing to market rent with new tenants.

    The budget per prop was c $30k however ended up around $40k per prop in the end. I expect no major maintenance from the first lot of renos for the next 10-12 years.

    We have a few more to go in Frankston and then we will extend to rest of Mel and then interstate (provided we can find reasonable trade for interstate prop). This was one of the best uses for some of my cash which I have been very keen to deploy to get it working.

    The ROI (for yield) will be amplified with a couple of rooming houses (next in line) which per the agent could generate 50% higher rent (against minor renos).

    With the renos (if maintenance issues persist) it also allows for the notice to tenants to vacate the property without them approaching VCAT etc.
     
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  4. virhlpool

    virhlpool Well-Known Member

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    Does one have to wait till the lease renewal or is there a scope to increase the rent in the middle? I am sure there will be several landlords who signed the lease 3-4 months back with a minimal or no rent increase and now they realise the next lease renewal is too far away.
     
  5. standtall

    standtall Well-Known Member

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    This is very useful post. Thanks mate.

    Perhaps I could start with NSW property and renovate it a bit. It really would just need some cosmetic uplift, just the new paint, new carpets, new floorboards in common areas, retiling sidewalks and pool surrounds. All up $20k at the higher end at most and 3-4 weeks vacancy but rent could go up to $650.

    ROI of a year. Just need to check with the accountant to see any implications.
     
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  6. standtall

    standtall Well-Known Member

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    You have to wait until the lease renewal in case of a fixed lease.

    Last 12-18 months have been quite a ride. We bought one property with rent appraisal of $800pw, listed it for $900pw as market really tightened between sale and settlement and ended up leasing it to a lady who offered $1050 and a 24 months lease in a hurry. Fortunately we only allowed 12 months. Current rent appraisal on the property is $1200pw and there is no supply whatsoever. It would be quite hard to increase the rent to $1200 though as she was already stretching it to her max at $950 and I was quite reluctant leasing the property to her on affordability concerns but she showed proof of savings to get the agent on her side.

    I received a call from the principal of agency we use in Brisbane last week to let me know she was letting go off our favorite property manager because they have fewer and fewer properties to manage. No new supply and FHB surge meant significant reduction in properties available to manage for RE agents.

    Interesting times ahead with low property supply and rising interest rates.
     
    Last edited: 26th May, 2022
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  7. Harris

    Harris Well-Known Member

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    I suspect so long as you are not putting up new walls and adding new bathrooms etc, it should all be expensed. There is a fine line re adding new window furnishings, carpets etc but mostly if it is to address maintenance & fixing issues, this could be claimed.

    From ROI pov it is a no-brainer (both for increase in cap value & rental yield) but it also brings forward the expense which will have to be incurred regardless in maintaining the upkeep of the prop and then gives an opportunity to bring rents to market level.

    @sash deploys this strategy through his selling off old portfolio and then mitigating large part of CGT (not possible for me) and investing in new builds and then claiming depreciation etc. I am sure he will have something to add here too..
     
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  8. standtall

    standtall Well-Known Member

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    Would love to hear his views .. My portfolio has a lot of subdivision potential so selling isn't an option I would like. Perhaps sell some to develop others at some stage.
     
  9. skater

    skater Well-Known Member

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    Just speak to your PM. What do they say/recommend? We've been putting up rents everywhere.
     
  10. sash

    sash Well-Known Member

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    Most people underestimate the cost of maintenance in holding properties. Most people underestimate this.....

    In my view I have started exiting out of older properties which I do not plan to hold over the longer term. If I do hold them I am giving them 20-30k total refreshes (bathroom, kitchen, flooring, painting, window coverings..basically everything new). The reason for this is to keep maintenance lower and get better tenants but this comes at long vacancy whilst organizing trades which is a PIA at the moment.

    My real love is to build new house on the blocks I am holding as this not only increases returns...but also capital...and also dramatically lowers maintenance.

    I plan is to convert 80-90% of my portfolio into new or fully renovated properties...whilst exiting out of older properties.

    In my view a lot on here are holding for the sake of holding and not enjoying their gains over the years which leaves them CF and income poor. Decide how to lower maintenance and admin and work on a exit strategy ..that would be my advice.

    You will regret if you end up with 30 older house.....it will sink you if you don't have a large bank of funds! I have this...but it is amazing how much a few places can consume of this bank. A simple roof replacement could cost 15-25k.
     
    Last edited: 26th May, 2022
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  11. jins13

    jins13 Well-Known Member

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    Sash is right and we've talked about this particular issue in the last meet. Generally my portfolio is older in nature and I've had the misfortune of having 3 or 4 HWS replacement in the one FY period among many maintenance requests.

    My first IP requires a renovation to be completed and it's going to cost around $50,000 to give it a good facelift but the upside to this is that I am able to increase the rent from $440 to $650 to $670 per week. I can't say it's purely the renovation work but the rental market is very hot in the area and I have not kept up to date.
     
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  12. standtall

    standtall Well-Known Member

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    Agents have been hopeless. I got an email from an agent informing me about lease expiry in 2 months and that they recommended we keep the same rent based on their analysis. I asked details about their analysis and it turned out email was auto generated. I pushed for a $40 increase which was accepted by the tenant same day.

    Most agents take the easiest path which is not changing the rent.
     
  13. MTR

    MTR Well-Known Member

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    Similar scenario

    A matter of weighing up

    quality of tenant
    Repairs on property over xx years. Income vs outgoings

    Then work out whether or what would work best for each property with above in mind
     
  14. Lacrim

    Lacrim Well-Known Member

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    Just be careful with NSW leases though. You're only allowed one increase every 12 months:mad:.....so make it count!
     
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  15. hieund85

    hieund85 Well-Known Member

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    I have a very similar experience. PM advised to have a very modest increase of $10 per week everytime the lease was up for renewal in the last 4 years. I have been too busy with other commitment and what I have now is that my current rent is 20% (>$100) below market rate. Quite a lot of agents just take the easy path.
     
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  16. gman65

    gman65 Well-Known Member

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    Brisbane agents are useless... I had to tell them to increase double their recommended increase of 3%, and I was being cautious. Tenants accepted it without a quibble of course..

    I also had to lecture them the state of the current rental market based on simple observations :rolleyes: and I don't even work in the industry.. You'd think they should be the absolute experts on this, but they don't GAF.

    You'd think they'd want another +5% across their roll, which would raise their profits also in their agency. I think for many of them it's not their bread and butter, just a way to get their name out there, so it's just a side business for them that they don't really put much effort into.
     
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  17. wylie

    wylie Moderator Staff Member

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    All of them? :confused:

    There are a few on here that seem to be pretty good. And I have a really good one who increases the rents much more aggressively than I ever did.

    Maybe find a better one. ;)
     
  18. gman65

    gman65 Well-Known Member

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    I've had bout 4 different agencies in the last 5 years.. although much of that is a change of ownership over the years as the roll gets churned to another - at first I was trying to support the smaller guys, but they just get bought by the bigger guys as that is often their play.

    I don't think I've had the same PM for more than 18 months either because of high turn over and low morale. All have been bad, some worse than others.

    Last one cost me $1400 in a month's lost rent... Call a few months ago was "oh yes, they quit suddenly, don't know the history of that...". Wipe hands, DGAF.
     
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  19. standtall

    standtall Well-Known Member

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    It makes all the sense for them to push for higher rents specially when their rolls are shrinking due to fewer and fewer properties they are managing due to rental properties shortage. However they try to sell you unnecessary maintenance and make money that way.
     
  20. skater

    skater Well-Known Member

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    Sheesh, if mine did that, I'd be looking for a new agent. Mind you, I always check what's happening and never trust what the agents say.
     
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