Rent increase advice

Discussion in 'Property Management' started by TazCaz, 13th Nov, 2018.

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  1. TazCaz

    TazCaz Well-Known Member

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    Hi all,

    I’ve had my first investment property for almost 12 months and have recently been contacted by my agent about lease renewal and a rental increase. She did a market evaluation and suggested a $10 a week increase, which I agreed on. That agent has since left the company and the new agent has just come back to me saying the tenant would like to renew but has questioned the $10 a week increase, saying this would make her hesitant to sign. (This is after having to chase her for an answer a month after she was supposed to get back to the agent). She’s a fantastic tenant and keeps the place immaculate - so I realise that, if I’m not desperate for the extra money, then it’s worth keeping a good tenant in place rather than lose her. On the other hand, am I setting myself up to be held ransom each year at renewal time if I give in and say she doesn’t need to pay more? I mean, that’s still $520 a year extra off my mortgage too (and rates did go up a couple of months ago). I’ve rented in Sydney and Melbourne, where annual rent increases of $80+ a month were regular, and this property is in Hobart so I didn’t think this was excessive.

    The agent has said the next step if she doesn’t sign is issuing a notice to evict, which means finding another tenant. I’m currently in the UK for an extended trip, so could do without the stress of trying to do that from afar. In saying that, if I am forced to find a new tenant, I could increase the rent a bit more (the main reason for doing so would be to find a high quality tenant, more than strict financial gain, as the place itself is in perfect, newly renovated condition and I want to keep it that way).

    Has anyone been in the same position and can offer advice? I guess my options are to stick to my guns, give in, or compromise - by going back with a $5 a week increase or putting a two year fixed lease on the table.

    As it’s my first time going through this, I’d appreciate any suggestions.

    Thanks in advance!
     
  2. Stoffo

    Stoffo Well-Known Member

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    Ask the property manager/agent what the going market rate would be "if you have to market the property again"
    This will be the basis for your decision..
    Hobart property values have increased considerably, so the going rate should be higher !
    Or, compromise, set a $5 increase, and enjoy your time away (and sleep soundly)
     
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  3. Blueskies

    Blueskies Well-Known Member

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    I would guess pretty much everyone here who owns a rental property would have been in the same position.

    Each lease renewal needs to be assessed case by case to decide if rent can be increased.

    Questions to ask yourself (and PM)
    - market rents in area
    - vacancy rates
    - good/bad tennant
    - tennant capacity to pay
    - when will vacancy be if they call your bluff and leave ie we are coming up to Christmas, bad time for finding tennants
    - worth the hassle if you have other things on
    - how 'entrenched' is the tennant, remember it is a pain for them to move too.

    Personally, I think rent should be pushed in small increments annually whenever possible.
     
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  4. Marg4000

    Marg4000 Well-Known Member

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    You will have to factor in he week vacancy, re-letting fee (at least one week’s plus gst). This will probably add up to more than $520 (unless rent is less than $260 per week). So financially you are better off keeping the tenant, especially a good tenant. The next tenant may not be anywhere near as good.

    You don’t say how your rent compares to the current market. Forget rates going up, you don’t drop the rent when interest rates go down, do you?

    And just because you don’t raise the rent this time has no bearing on what you charge next renewal.

    Perhaps suggest a $5 per week increase as a compromise.
    Marg
     
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  5. TazCaz

    TazCaz Well-Known Member

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    Thanks all for your very helpful comments and suggestions - most appreciated!
     
  6. Shogun

    Shogun Well-Known Member

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    To me a good in place tenant is worth a discount on current rate.
    I would leave the same for a 12 month lease.
    Maybe $5 for a 6 month lease or $10 for periodic
     
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  7. SeafordSunshine

    SeafordSunshine Well-Known Member

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    PM'd you
    cheers
     
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  8. Tom Rivera

    Tom Rivera Property Manager Business Member

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    Your PM should be able to give you a sense as to whether they think this is the kind of tenant who would hold you to ransom on the rent each year or not. There are plenty of this type out there, they know they're great tenants and are highly value conscious, so they will happily play the bluff game with you on renewals.

    If the agent can show clear market movement to substantiate the increase, you have a good chance of justifying to the tenant why you're going ahead with the increase. If you've increased it because you wanted to increase it and there's no evidence, then fair enough of your tenant to question it.

    I also like the idea of offering a $5wk compromise. "Market evidence justifies a $10wk increase, but we are very happy with your tenancy and would like to subsidize the market rent to a $5wk increase to show our appreciation".
     
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  9. Beelzebub

    Beelzebub Well-Known Member

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    My understanding is that rents are rising fast in Hobart and that vacancy rates are below 1%. If it were me I would call her bluff and up the rent.
     
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  10. MyPropertyPro

    MyPropertyPro REBAA Buyer's Agents Sydney Multiple Areas Business Member

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    My two cents via an article I wrote a couple of years ago...

    When it comes to rent reviews on an investment property, one of the most common mistakes that investors make is thinking that raising the rent will cause a good tenant to vacate a premises. The investor therefore does not raise the rent at all, creating a downward spiral in relation to their ongoing cash flow and therefore their ability to maximise their return or grow their portfolio. What do we mean by ‘downward spiral’? Well, if an investor fails to raise the rent over any given period whilst market rents are going up, in effect, their premises becomes rented at below market value. If this happens over a reasonable period of time, sometimes even only a year or two, the amount can be so significantly below market rent, that raising it even just to market rent can cause problems. This is because the resulting raise, if and when it finally happens, will be relatively large. This shocks the tenant and can possibly even lead them to challenging the raise in the tribunal, even if it’s only to market rent. If the rent is never raised, then the landlord continues to have an under performing yield and therefore is not being true to the reason for owning an investment property in the first place.

    The psychology in paying rent is relatively simple. As we have now said many times, property investment should be treated as a business. As with any business, the tenant is paying for a product and for their payment, they expect a standard of service and a product that meets their needs and expectations. As with any product, almost all tenants will expect rents to increase over time as the cost of doing business for the landlord also increases with inflation. In return, they will expect their maintenance requests to be completed in a timely fashion, their security upheld and most importantly, to be treated like a customer with the respect that they deserve.

    If these basic principles of customer service are upheld, and provided that the rent is raised in a timely fashion and in line with or just below market rates, most tenants will have no problem accepting a rent increase. The tenant will come to expect these increases and will be able to factor them into their ongoing cost of living, just like any other living expense. It is a single rental increase that is too excessive which will cause concern, which can easily be managed and avoided by simply meeting market rent with expectations throughout the duration of the tenancy.

    On occasions, it is possible that even a market rent increase will be a catalyst for a tenant to advise that this is the reason that they are moving out. In the event that this happens, it is highly unlikely that your tenant is moving out solely because of a rental increase and was probably planning to move out anyway. Your property manager should confer with the tenant to find out if there were any problems with the property or service that they were receiving that they were not happy with. More often than not, if the property manager is doing their job and the landlord is providing the required upkeep to the property, it will turn out to be other reasons that the tenant is vacating the premises, such as up-sizing, completely changing areas or other non-related reasons.

    Think about the maths – if a tenant is planning to stay in the same area or in the same type of property, any other property they move into will more than likely be at or close to the rent they are paying now. So a small increase of say, $10 per week, will only equate to $520 per year. It does not make sense for a tenant to (more than likely) spend more than this amount in moving costs, just to live in the same or similar property to the one they are moving out of, only to pay the same rent that they apparently moved out to avoid. This does not even take into account the significant non-monetary downside of moving, such as stress, time and down-right hard work!

    By conducting accurate and regular rent reviews and keeping rents at or just below market rates, you are managing the expectations of your tenants whilst ensuring that you are always maximising your cash flow and therefore the returns on your investment. We are not suggesting that landlords be greedy or increase rents beyond market rates at any time, or even at all if the market is flat – it always pays to treat your tenant as you would expect to be treated yourself. However, if you maintain good customer service and a well maintained dwelling for them to reside in, small rent increases will not affect tenant sentiment and will actually ensure you give yourself the best possible chance that they remain a long term tenant.
     
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  11. Dark Phoenix

    Dark Phoenix Active Member

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    If I were you, I would go ahead with the $10 increase in rent per week. My two friends have recently moved to Hobart midyear this year. This is exactly what they each went through:

    1. Could not find a room due to high demand of accommodation
    2. Stayed at different boarding houses sharing a room with eight bunk beds no joke!
    3. Every house inspection they have been to, there were around twenty people with filled application ready to submit
    4. Took them four to five months to find a decent private room
    5. the landlord already informed that there will be a rent increase as long as the lease expires given that they only moved in less than 3 months LOL
    The agent explained the Tasmanian Government announced last year there would a special state nomination visa scheme with far less competitive criteria compared to that of NSW.

    So good luck with your property investing journey!

    Cheers,
     
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