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How to know when to raise the rent

How to know when to raise the rent

If you own an investment property, the rent you charge is the income you derive from that property. If you don’t raise the rent every now and then, your income will fall behind in real terms due to inflation. But if you raise it too often, or by too large a margin, you run the risk of losing your tenants.

We’ve put together some tips to help you decide when to raise the rent on your investment property, by how much, and the best way of doing so.

Look at the rental market

Just like housing prices, rental markets ebb and flow. Vacancy rates reflect the supply and demand of the area, and are affected by seasonal demand and demographic shift.

If vacancy rates are below 3%, it’s considered a tight market and landlords can be more choosy. If vacancy rates drop below 1%, rents are likely to rise as tenants don’t feel confident in shopping around for a better bargain.

Look at the vacancy rate in your area, and also see how many properties like yours are for rent. If there are hundreds of options for tenants to choose from, it might be better to keep your rent where it is. But if demand is outstripping supply, raising the rent is a safer proposition.

Your property manager can advise you on market conditions, but it’s worth keeping an eye on listings yourself as well to gauge the lie of the land.

Check the law

Tenancy law varies between States and Territories, so always check the Residential Tenancies Act in your jurisdiction before proceeding. Whether you can raise the rent will also depend on the type of lease your tenant is under.

In Queensland, Victoria, Western Australia and the Northern Territory, the rent on a periodic lease can be increased every six months. In NSW, there is no limit on how often, or by how much, rent can be raised on a periodic lease. In every other State, you can only raise the rent once every 12 months.

For fixed term agreements of less than two years, rent can only be increased if there is a clause in the lease allowing for it. Generally, rental increases would be negotiated after a fixed term comes to an end and a new one begins.

In every State, you must give your tenant 60 days notice before increasing the rent. That allows your tenant time to negotiate or find a new place if the new rent is too high.

If in doubt about the law, chat to your property manager. They are experts in the relevant legislation and can advise you on your rights and obligations.

Do the maths

If you’re charging $500 a week, and raise the rent by $20, it will take you six months to recoup the loss of a single week-long vacancy. If there’s a risk that your tenant will leave for cheaper pastures, you’re likely to incur more costs by raising the rent than you would if you retained the tenants.

Bear in mind also that if you’ve had the same tenant for a while, it’s likely that your rental property is looking a little tired. If they leave, will you need to effect cosmetic repairs that aren’t an issue at the moment? Perhaps you’ll be obliged to repaint or replace carpets? It’s important to factor in those potential costs before you decide to take the risk.

However, many investors are so worried about upsetting their tenants that they never raise the rent. It may seem like you’re just passing up a few dollars in profit, but before you know it, it’s been several years and your rental income has fallen far behind market norms.

A good tenant is certainly worth keeping. However, the relationship goes both ways. If you treat your tenants with respect, respond promptly to maintenance issues and give them some autonomy over their surroundings, they’ll be motivated to stay. A modest rental increase is preferable to the hassle of moving house, finding the money for a new deposit and risking a worse living situation for themselves and their family.

It’s better for you and your tenants to impose regular small increases than to suddenly ask for a huge jump in rent after several years of nothing. Consider a 5% increase every year, which keeps you just ahead of the Consumer Price Index without overwhelming your tenants.

At the end of the day, remember that your rental property is an investment and you’re entitled to make an income from it. Be reasonable and confident, and you can enjoy a mutually beneficial relationship with your tenants for years to come.

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