The fine art of raising the rent

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As a landlord, there are a number of things you have to contend with. Shifting market dynamics, ongoing financial pressures and property maintenance issues are just a few. Perhaps the most delicate dance of all is performed when it’s time to increase the weekly rent.

In most capital city markets, weekly rents have been rising at a pretty decent pace for some time now. It’s due to a combination of factors, but primarily a constraint on supply and a sharp growth in demand.

For one, fewer first homebuyers have been out and about lately, choosing instead to rent for longer rather than purchase a home of their own. Simultaneously, our population has grown rapidly – the net overseas migration figure was 400,000 last year.

At the same time, construction activity in many areas has been pretty flat in the wake of the GFC, so there aren’t as many new dwellings coming online.

Head out to an open for inspection in Sydney, Perth, Adelaide or Brisbane, and even some parts of Melbourne, and a decent rental property will have a queue of people out the door. By the end of the day, the managing agent should have at least one solid application to take to their client.

It’s a great time to own a rental property. But this ‘perfect storm’ doesn’t give landlords a license to price gouge. While tenants might be desperate to get into new digs, few will stand by and gleefully allow themselves to be abused. Should you increase?

Carolyn Majda is the general manager of a specialist landlord insurer and says educating yourself on average market rents in the area should be an essential activity for every investor. Is your rental too low, too high or on par with similar, comparable properties in the area? Consider any competing features as well as the quality and condition of fixtures and fittings.

That other two-bedroom unit might get an extra $40 per week, but if the complex has a pool and lift while yours is a rundown six-pack with a broken down combi in the front yard, you’re not comparing apples with apples.

Regular checks of the local market will ensure your property is earning its maximum potential income and could help decide whether jacking up the rent is a good idea.

Your assessment should go wider than suburb-wide factors, Majda says.

“Changes to the overall economy or the value of the currency can also impact on rents, so you should monitor local rents each quarter to ensure you stay in line with the competition. If the prices go up you’re missing out on income and if they go down you’ll lose tenants to other landlords offering cheaper rents.”

It’s easier to raise the rent without alienating your tenants if you harness a decent relationship with them, Majda says. For example, if the property is well maintained and you’re reasonable about requests for repairs that have been made, a modest increase might go down without too much fuss.

If you’re acting as an amateur slumlord and refuse to fix leaking taps or take care of a cockroach infestation, you might find yourself with a vacant property at the end of the lease.

Also, be up front and explain your rationale for lifting the rent – whether it’s related to supply and demand changes, an assessment of fair market prices in the area or some other reason.

“Regular small increases in rent, say an additional four to five per cent once each year, prevents tenants from being overwhelmed by a significant sudden increase in living expenses and ensures that the landlord is receiving a fair monthly sum for their property,” Majda says.

Staying just above the consumer price index will ensure a landlord stays ahead of inflation, she suggests.

Regardless of the amount you decide to lift the rent by, it’s critical that you do it properly and within the confines of the relevant legislation. You might own the dwelling, but that doesn’t give you the right to act to your own timeframes. Those are carefully regulated by authorities.

In all jurisdictions except for the Northern Territory, landlords must give their tenant 60 days written notice before increasing the rent. In the NT, it’s only 30 days. In fixed term agreements, rent rises are only allowed if it was stipulated in the tenancy agreement and can’t be more frequent than once every six months.

At the end of the day, tossing up whether or not to raise the rent is just one of many business decision you need to make as a property investor. And like all of those other considerations, your choice should be based on sound evidence and research.

Shannon Molloy is the deputy editor of Australian Property Investor magazine,