Article by Philippe Brach:
Your investment property may be someone else’s home, but to you it’s an income-producing asset. So it’s important to carefully consider the question: how often you should increase the rent?
I field this question from investors every now and then and the reality is that a ‘one size fits all’ answer isn’t appropriate.
Generally speaking, you should review your property’s rental rate every six months – but that doesn’t mean you should necessarily increase it. I tend to increase my properties’ rents every 12 months on average, but that always depends on a number of factors.
Reviewing the rental market
Just as real estate prices change and sales markets evolve from month to month, so do rental markets.
When vacancy rates are tight (sub 3%) the market is more competitive and landlords can be more choosey. When vacancies are really low (at 1% or less), this can put pressure on asking rents and allow landlords to increase their profits by pushing up the rent.
However, when vacancy rates are soft, such is presently the case in pockets of Perth and Darwin, it can be harder to find a tenant. Landlords in these cities can find themselves discounting their asking rents or offering one or two weeks’ free rent to entice someone to sign a lease.
This is why it’s so important to review the rental market every few months, so you can keep your finger on the pulse and avoid being caught by surprise as a landlord. Your property manager will also advise you of current market conditions, but you should be checking out competitive listings on a regular basis (every 3-6 months) to ensure your property is well priced within current market conditions.
Raising the rent
If you’ve identified that your property is underpriced and you feel it’s appropriate to increase the rent, you’ll need to give your tenant appropriate legal notice. This differs between states, but is often around 30 to 60 days.
If your tenant is on a fixed term lease, rent increases are generally only allowed if they have been stipulated in the tenancy agreement.
You’ll be guided by the legislation in your state or territory in regards to how often you can increase your property’s rent, too. As an example, in Queensland you’re only allowed to increase the rent every six months, while the bond can only be increased if it’s been at least 11 months since the last bond increase. It’s a similar situation in Victoria, where at last six months must pass before you’re entitled to increase the rent again.
The ‘I don’t want to upset my tenants’ excuse
Some investors choose not to increase their property’s rent on a regular basis because they don’t want to upset the tenants.
They feel that having a tenant who cares for the property and causes no headaches is worth losing a few dollars in potential profits, so they don’t impose a rental increase for six months… Then 12 months… And before they know it, five years have passed with no rental increase whatsoever.
This is an emotional response as a landlord and emotion has no place in a business transaction.
It’s also usually an unfounded fear. Realistically, if you treat your tenants with respect and respond promptly to maintenance requests, then they are not going to move out just because you increased their rent by $10 or $20 per week. It will cost them far more money to move than it would to accept the rental increase, not to mention the hassle and time involved in shifting house.
Regular, small increases in rent that are just above the Consumer Price Index will ensure that you stay ahead of inflation. For instance, an increase of 3-5% every year is generally palatable; on a home that rents for $500, it would add around $15-$25 to the weekly rent.
This not only ensures you’re earning a fair market rent, but it will also prevent your tenants from being financially overwhelmed by a sudden large rental increase, should you wait a few years to raise the rent.
Remember, as a landlord you are providing someone with a home, but you’re also (meant to be) profiting from an asset. At the end of the day your goal is to make money from your property, so while giving your tenants a discount may be doing them a huge favour, it does no favours to you and your long-term wealth.