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In a rising market, it is essential to regularly review the rent for your investment property – but there are a few strategies you can implement that will soften the blow.
Blogger: Philippe Brach, CEO, Multifocus Properties and Finance
I met someone over Christmas who was something of an “accidental investor”.
He wasn’t someone who was investing in property with purpose, planning and direction. Rather, he was someone who lucked into a decent property deal in his own neighbourhood many years ago, and he managed to hold onto the property for a couple of decades and make a decent profit.
He’d purchased the home in a suburb of Melbourne for $84,000 in the mid-90s, he told me, and it had recently been valued at $450,000.
Now, up until this point, I was thinking he’d done pretty well for himself, as he’d stumbled his way into a healthy real estate profit.
But what he said next changed my mind.
“The property has never been a hassle to own,” he said.
“I think it’s mainly because I’ve had the same tenant living there for more than 20 years. She’s fantastic and treats the property as if it’s her own, so I’ve never had any problems.”
Immediately, a warning bell went off. I already knew the answer to my next question, but I asked it anyway.
“That’s great!” I said, choosing my words carefully. “Would you say you’ve increased the rent regularly over the years?”
He waved his hand dismissively. “Oh, I’ve increased it here and there. But she’s honestly such a great tenant, it’s worth giving her a small discount to keep her happy.”
A small discount on the rent is one thing. But I’m willing to bet that 20 years' worth of low or no rental increases have added up. In fact, I’d estimate that this investor has missed out on thousands and thousands of dollars in lost profits.
It happens all the time in property – and it doesn’t need to!
Landlords are often afraid to raise the rent on their tenants for fear that they’ll move out. But the reality is, rising rents is part of a healthy rental market; tenants don’t expect to pay the same amount for their living quarters, year after year, after year.
Furthermore, for those property owners who are worried about increasing the rent and potentially losing a tenant, there are a few strategies you can use to soften the blow financially and encourage a mutually beneficial outcome.
1. Use an experienced property manager
For a variety of reasons, using an experienced property manager to manage your property is a must. This will ensure that the rent will be kept up to market rate. It will also ensure that you do not negotiate directly with the tenant, and this takes the emotional aspect of the relationship out of the equation. Just as importantly, a good property manager can save you from wasting your time on conversations with your tenant that go back and forth without moving forward.
2. Gather evidence
Discuss with your property manager the market conditions, vacancy rates, comparable rentals, what advice they have for you about increasing the rent and then agree a course of action. The property manager will then implement the strategy you discussed. He/she will start by explaining to your tenant that you are going to increase the rent in line with market conditions. It’s best if this can be backed up with recent comparable rentals. The idea here is to show them that you’re not arbitrarily raising the rent to squeeze them for every possible dollar, but that you’re making an informed decision based on the current rental market.
3. Offer a discount
Let’s say the current rental return you’re achieving is $400 per week. The evidence may help you to demonstrate that the market could support an increase to $420. When your property manager is negotiating the lease extension with your tenant, consider offering a discount. He/she will tell the tenants how pleased you are with how well they treat your property, so if they sign on for another 12 months, you’ll only increase the rent by $10 per week in recognition of their loyalty. Everyone likes to be rewarded and discounts are hard to pass up! Plus, as the landlord, you get the added bonus of a long-term lease.
4. Stagger the increase
Your tenants would likely appreciate the opportunity to work up to a rental increase, so if you’re not keen to offer a full discount, perhaps you could offer to stagger the rental increase? In the above scenario, you might negotiate a new 12-month lease where the rent increases by $10 immediately, and a further $10 in six months' time.
It goes without saying that any proposed rental increase should be provided to your tenant in writing, and you should give them the required amount of notice as dictated by your state or territory. Again, your property manager is across the legal side of things and will contact you with enough notice.