When and how often should you increase your tenant's rent?

When it comes to rent reviews on an investment property, one of the most common mistakes that investors make is thinking that raising the rent will cause a good tenant to vacate a premises. The landlord therefore does not raise the rent at all, creating a downward spiral in relation to their ongoing cash flow and therefore their ability to maximise their return or grow their portfolio.

What do we mean by ‘downward spiral’? Well, if a landlord fails to raise the rent over any given period whilst market rents are going up, in effect, their premises becomes rented at below market value. If this happens over a reasonable period of time, sometimes even only a year or two, the amount can be so significantly below market rent, that raising it even just to market rent can cause friction between the landlord and tenant. This is because the resulting raise, if and when it finally happens, will be relatively substantial and shocks the tenant. It can possibly even lead them to challenging the raise in the tribunal as it is seen as an excessive raise given the history of the tenancy. If the rent is never raised, then the landlord continues to have an under performing yield and therefore is not being true to the reason for owning an investment property in the first place.

Property investment should be treated as a business. As with any business, the tenant is paying for a product and for their payment, they expect a standard of service and a product that meets their needs and expectations. As with any product, almost all tenants will expect rents to increase over time as the cost of doing business for the landlord also increases with inflation.

Tenants expect their maintenance requests to be completed in a timely fashion, their security upheld and most importantly, to be treated like a customer with the respect that they deserve. If these basic principles of customer service are upheld, and provided that the rent is raised in a timely fashion and in line with or just below market rates, most tenants will have no problem accepting a rent increase. Just like any other living expense rent increases becomes a fact of their tenure.

On occasions, it is possible that even a market rent increase will be a catalyst for a tenant to advise that this is the reason that they are moving out. In the event that this happens, it is highly unlikely that your tenant is moving out solely because of a rental increase and was probably planning to move out anyway. Your property manager should find out if there were any problems with the property or service that they were receiving that they were not happy with.

More often than not, if the property manager is doing their job and the landlord is providing the required upkeep to the property, it will turn out to be other reasons that the tenant is vacating the premises, such as up-sizing, they have bought their own home or completely changing areas or other non-related reasons.

Think about the maths – if a tenant is planning to stay in the same area or in the same type of property, any other property they move into will more than likely be at or close to the rent they are paying now. So a small increase of say, $10 per week, will only equate to $520 per year. It does not make sense for a tenant to (more than likely) spend more than this amount in moving costs, just to live in the same or similar property to the one they are moving out of, only to pay the same rent that they apparently moved out to avoid.

By conducting accurate and regular rent reviews and keeping rents at or just slightly below market rates (say 95% of market rent), you are managing the expectations of your tenants whilst ensuring that you are always maximising your cash flow and therefore the returns on your investment.

However, if you maintain good customer service and a well maintained dwelling for them to reside in, small rent increases will not affect tenant sentiment and will actually ensure you give yourself the best possible chance that they remain a long term trouble free tenant.

If you would like to know whether it's time to increase your tenant's rent, feel free to contact John Gilmovich on 0418 600 806 or [email protected]. You can also contact us via our website at http://www.realpropertymanager.com.au/contact.