The aim of owning investment property is surely to gain the best possible return on that investment – without doubt. But perhaps there are times when a rent increase may not be the best option.
Certainly in most instances when properties become available for rent after a 12 month tenancy, our aim is to negotiate a suitable rent increase. But with that negotiation, we will always consider the rental market at the time, the vacancy rate for that particular area, plus the tenant. By that I mean the quality of the tenant and their future intentions, which will be clarified later in this article.
- Let’s consider the rental market, which is normally driven by supply and demand, which in turn are governed by the time of the year. There is a very definite rental cycle in every year and each cycle has varying degrees of demand. For example, November and December are absolutely the worst months of the year to have a property vacant. People are dealing with the end of school or University year; transfers will be coming out, e.g. Police, teachers, public servants, corporate level; the approaching holiday season; and possibly vacations. Whatever the reason, most tenants just don’t want to look for other property at this time of the year and as a consequence, there is very little demand or enquiry. During this period a rent increase may not be possible as tenants will have a choice of properties on the market and those available properties may actually be priced lower than what a tenant is renting currently. Paradoxically, this lack of demand will always change in the New Year, when the ‘silly season’ is over. Parents are now thinking of the new school year and most of the transfers are out. This new situation creates a scramble for rental property and as a result is certainly the best time of year for a rent increase. It’s also the best time of the year to set a rental price on a brand new or available property.
- Consideration of the current vacancy rate must always be considered when a rent increase is due and there are periods in any year when there are more properties than normal currently available for rent. In these situations, e.g. a lot of properties in a new estate or new apartment blocks being released in the city, there will be increased competition for tenants, which can result in lower rents. Tenants know when there is a lot of competition and will sometimes choose to move into another property, if a rent increase was too high and they can be approved for another property of similar standard, but at a lower price.
- The tenant’s future intentions and the quality of the tenant should always be part of any consideration to increase rhw rent. By this I mean, if a tenant has an excellent record and they intend living in a property for a few more years, would it be advisable to increase the rent at the first tenancy renewal? If tenants believe the increase is far too much – and this does happen – they may consider moving to a cheaper property. The owner could then have a vacancy period of perhaps 2-3 weeks, plus a letting fee and advertising, plus tenants moving out and other tenants moving in. These costs and possible impact on the property, could far outweigh the amount of rent increase in a 12 month period. For example, if a property has been let at $300.00 per week and the owner wanted an increase of $10 per week, which isn’t really a big increase, the 12 month benefit would be $520 to the owner. But if the tenant moved out, the cost to the owner would be $300 as the letting fee, an advertising cost, plus let’s say a 2 week vacancy period. Total cost to the owner could be close to $1,000, which is certainly more than the increase over a 12 month period.
Sometimes it’s just better to leave an increase for a further 12 months and then look at the rental market, vacancy period, plus the intentions of the quality tenant in place. The longer tenants remain in a property, the longer they will continue to stay there and that’s a great outcome for any investment property owner. So, while we will always try to increase any rental return for all our property owners, it’s necessary to consider the situation logically, and then decide if it’s the best option – or not.
If you would like to have a discussion on the timing of rental increases for your property, please feel free to contact us at email@example.com