Rental properties stand as one of the most common ways for investors to maintain cash flow. Is there a way to increase rent prices as the market moves without having to suffer from a high percentage of tenant turnover or extended vacancy?
Due to the unpredictable movements of the property market, there could be no foolproof way to determine the perfect rent price – one that will meet the market and also match the tenant’s capability to pay.
According to Managed’s Thom Richards and Nick Bouris, while many investors often go by the median price of the “suburb average” when setting rent prices, the best way to arrive at a good value is to find comparable properties.
“Most landlords, they forget that the market can go up and down. Property values are increasing quite dramatically but rents do fluctuate a little bit more –
they definitely don’t grow at the same rate that the property’ value has been,” Mr Richards said.
As the rental market changes, he advised investors to take advantage of the infinite data available through realestate.com and other similar websites and companies to make the process of determining prices more convenient.
According to Mr Bouris: “The property market in Australia is probably one of the richest markets in terms of data, so there’s plenty of stuff to point to – whether it be from your tenants to your landlord [or] whoever you’re trying to convince that what you’re proposing in terms of rental increase is justified.”
“Check out the photos, make sure that the likeness is close enough so you can say, ‘That one’s got $750,’ but he’s got a slightly newer kitchen, so I’m probably going to sit around that $730 mark.’ I think that’s the best yardstick for choosing where your property should sit.”
A good property manager stands as one of the most important professionals to have in an investment team, and they especially come in handy when the investor feels overwhelmed or undecided about increasing rent.
Property managers essentially analyse markets on behalf of the landlord and, thus, say with certainty whether or not an increase in rent prices is justified.
They may also pull property investors back and say that a rent decrease is more likely to help the asset’s overall performance.
“Sometimes, going the other way makes sense to avoid things like vacancy, which can really hurt you. A rental decrease of $10 a week or something like that can save you three or four weeks of lost rent,” Mr Bouris said.
One property investor, for instance, initially set a $300 rent for a property in Mount Druitt when, all of a sudden, there was a huge influx of property investors in the area – a market movement that ultimately affected the demand for rental properties.
The investor and his team decided to bring the rates down in order to get a tenant in.
While a rent decrease may seem like negative for the portfolio, having a trusted tenant in the property is better than leaving it vacant, even for a short period of time.
As property managers help investors navigate their way through the unpredictability of the rental market, Mr Bouris and Mr Richards advise investors to set aside time each year to have a thorough discussion with them about their plan of action for the months to come – or an “annual health check”.
“Have that conversation even just before the term of the lease… depending on where you come into the cycle. Even after every six months, you should be having that conversation,” Mr Richards said.
“Continuously check in with them in case things change.”
With good property management, many landlords are able to establish a good relationship with their tenants over a period of time.
While this is advisable to a certain extent, Mr Bouris and Mr Richards warn against the possibility of it leading to an emotional attachment which can make rent increases harder to implement.
In some cases, tenants who stay long and take care of the property as if it’s their own tend to earn the favor of landlords and get additional perks.
According to Mr Richards: “If they’re actually being open and communicating with their tenant, they advise them what the market’s doing.”
“They’re letting them know that… ‘Maybe the market is $30 away from where we are but you guys have been great, so how about we agree to a $15 [to $20] increase and we re-sign a new term?’”
However, this relationship may lead to a “delicate situation” once the tenant becomes unable to comply with the increase.
“Little Johnny had problems in school” and “The car broke down” are some of the most common reasons that appeal to the landlord’s pity, and it may be hard to deal with the matter without seeming heartless and inconsiderate, Mr Bouris said.
To avoid any uncomfortable situation, he advised engaging property managers, who can act as intermediaries between tenants and landlords in order for them to maintain a good relationship without having to sacrifice the asset’s growth.
“It’s important to have someone in the middle as a broker so that you’re not the guy hearing the issues directly coming from the person asking it,” according to Mr Bouris.
“Having someone in there that can point to themselves as an intermediary and say that they’re only acting on behalf of someone else is important because then you can really step back and play hardball.”
While most reasons for not paying rent on time are less than adequate but reasonably founded, property investors should give themselves space to step back from all of that and just put their directive forward.
An effective property manager makes it easier to deal with this type of situations because, after all, it’s their business to push for the continuous growth of the investment – a task that is undeniably hard but absolutely necessary.
“We position ourselves where we could influence the growth of these assets. We are often the people who are right alongside you throughout that process of owning the investment property,” Mr Richards concluded.