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In a rising market, investors often consider raising their asking rents – but is it actually justified? Here’s how you can raise your rent, increase your bottom line and hang onto your tenants.
Why investors raise the rent
In order for an investment property to remain profitable, landlords must regularly review and increase the rent of their properties. There are a number of reasons why this may be necessary.
Mortgage rates going up
If mortgage rates go up significantly, landlords are faced with the decision of where they will get the money to cover the increased outgoings. Raising the rent on their investment property can assist with this, as long as it remains within market rates.
Council rates/strata levies going up
Similarly, if council rates and/or strata levies are raised, property investors must cover these increases without putting themselves out of pocket. A rent increase is a viable solution.
Demand for rental properties
Supply and demand is a big reason for a rent increase. If you have a property in a popular area, on a tree-lined street, walking distance to amenities and public transport, you will always have demand. When the demand for property in the area outnumbers the supply, a rent increase may well be warranted.
People will pay the price for the property they want in the area they want to live in, and renters understand it is going to be competitive in the more sought-after areas. It is, however, still important not to exceed the market rate or you will risk deterring tenants and facing long vacancy periods with no incoming rent.
When to increase the rent
It is recommended that landlords increase the rent for their rental properties on a regular basis, to keep increases minimal and manageable, and to avoid shocking tenants with a large increase down the track simply to keep up with market rates.
It is advisable to provide your tenants with as much notice of the increase as possible, to allow them time to prepare and adjust their budget. Keep in mind that there are minimum notice period requirements when increasing the rent for your property. In Australia, all states and territories require landlords to provide written notice to tenants at a minimum of 60 days prior to the proposed increase – with the exception of the Northern Territory which enforces a 30-day minimum.
On top of this, a landlord cannot increase the rent of their property within a fixed-term lease, unless a rent rise clause has been signed with the lease. This is an important thing to consider for leases longer than 12 months, since you should be reviewing your rent at least as often as once per year. It is also not permitted for a landlord to increase the rent more than once every six months.
Comparing your property with others to establish a suitable rent
To get an idea of what you could be charging for your rental property, you should be comparing it to other properties in the area that are similar to yours.
Monitor local rents each quarter to ensure you stay in line with the competition. You can also get a feel for how much you could be charging by attending open homes of other rental properties on the market, and taking note of what they are offering that your property isn’t, and vice versa. That way you can position your property on the scale of rental prices in the area and get an idea of what you should be charging for yours.
There are certain aspects of rental properties that allow you to ask for rent that is above market price, but only if your property excels above others in the area.
These features could be anything from a property that accepts pets, has air-conditioning or a pool, or is situated in a secure apartment complex. Certain features such as these will attract tenants who are happy to pay extra for the use of these facilities.
Another way to compare your property’s rent with others in the area is to calculate and compare rental yields. It is important to review the yield of your property on a regular basis to get the most out of your investment.
How to increase the rent
There are several steps you should follow when increasing the rent of your investment property.
1. Establish a solid relationship with your tenants. Handle maintenance issues promptly when they arise, and communicate professionally.
2. Review your rent. Compare your rent with other rental properties in the same market.
3. Calculate a reasonable rent increase. Typically around a 4 to 5 per cent increase is acceptable.
4. Give tenants at least the minimum required notice – 60 days (30 in the Northern Territory). This must also be outside of a fixed-term lease.
5. Explain to the tenants the reason why the rent is rising. This will justify the increase and allow tenants to be more understanding and accepting.
6. Deal with any disputes in a timely and professional manner. A negotiation may be on the cards.
Issues you may face when increasing the rent
Tenants are never going to be happy about a rent increase, but the more transparent you are with them, the more likely they are to take it in their stride. Rent increases must happen in a growing market in order for your investment to remain profitable.
If a tenant is unhappy, however, he or she may argue against the increase.
Landlords have to consider whether the rent increase is worth the risk of losing a good tenant. If a good tenant disputes a rent increase proposal, it is worth listening to their argument. Good tenants tend to respect their rental property, slowing wear and tear and limiting money out of your pocket for maintenance. If you lose a tenant to a rent increase, there is the risk of leasing the property to a bad tenant, which can often mean that the extra money coming in each week will only end up going towards extra maintenance.
It is, however, unlikely that you will lose a tenant due to a reasonable rent increase. What the tenant will find is that most landlords in the area have also raised their property’s rent, to keep in line with market prices.
Sometimes landlords and tenants can negotiate and come to an agreement on the increase rate. If the parties are unable to reach an amount that they agree on, the matter can be taken to a local tribunal, like the Consumer, Trader and Tenancy Tribunal, which differs from state to state. They can assess the property, the market, and the proposed rent and make a decision as to what the maximum rent for your property should be.