For much of the last few decades, property investors have been fortunate enough to have operated in what can only be described as a landlord’s market.
A landlord’s market is characterised by rising rents and relative ease in finding new tenants.
While the rental market varies greatly according to suburb specific factors, many landlords found that as soon as one tenant left they were able to quickly replace them with another. This meant they could consistently raise rents without fear of their property sitting vacant for an extended period of time if the tenant instead chose to vacate.
The last 24 months have seen that dynamic flipped on its head with tenants now firmly in control. The vacancy rate in Sydney has more than doubled from 1.4 per cent in April 2017 to 3.4 per cent as of July 2019.
It now takes 37 days on average for a tenant to be found in Sydney, with this stretching up to 60 days in suburbs that have seen huge increases in supply. A similar scenario has played out in Brisbane and Melbourne. Hobart is perhaps the only major city with a tight rental market and has a vacancy rate under 1 per cent.
The result of this has been falling rents in most major cities and landlords finding that they have to be very accommodative to attract the high-quality tenants that used to be a given.
Nevertheless, if your investment properties are managed by a diligent property manager they should assess whether it is in your best interests and proceed to seek a rise in rent (or not) accordingly. Given current market conditions any rent rise should be at a level that is small enough that the tenant doesn’t look to vacate the property at the end of their lease or consider other options – as in most areas in major cities there are currently many.
Landlords should assume that if their property is vacant they will forgo approximately five weeks’ rent when you include both the actual period of vacancy, advertising and agent’s letting fees. They must also consider the fact that an existing tenant is most likely to be willing to pay a higher rent than someone who has not yet moved in given the hassle and expense they would bear to move.
If a tenant baulks at the higher rent it is a strong indicator that the rent you’re seeking is out of line with what you would actually get from a new tenant.
Consider this scenario. You have an investment property that’s currently tenanted for $500 per week.
Your property manager seeks to increase the rent to $520 per week but is rebuffed by the tenant and the tenant ends the lease at its natural expiration date. It takes four weeks to find a new tenant that accepts $520 per week. Your property manager charges a $1.5 letting fee a week and the advertisements on the relevant portals cost $300.
Despite now receiving $520 per week you will be more than $2000 worse off over a 12-month period than had the existing tenant extended their lease at $500 per week.
It’s for this reason that you need a property manager that takes a completely financial approach to managing your investment property.
One of the best ways to increase the likelihood of successfully increasing the rent is to ensure your property manager is maintaining excellent relations with the tenants. This doesn’t mean approving unnecessary maintenance requests or ceding to every wish of the tenant. It can be as simple as a check in call every quarter to understand their intentions and letting them know that you’re responsive to their needs.
Sometimes it’s the smaller things that make the biggest difference.
Simon Peisley is the investment manager at Certainty Property, a property management firm that pays the rent when your property is vacant or your tenant is in arrears.