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Friday, May 29 2015

Every investor likes the idea of being able to regularly increase rent but the reality is rental grwoth like price growth does not move up in a straight line. There may be periods where you can incraese rent regularly, periods where you need to keep rent the same and even times where you need to take a hair cut.

To be honest I find many investors often can't see the wood for the trees. They get very focused on the dollar value of the rent without looking at the bigger picture.

There are a range of factors that should be considered at each rent review. 

The inflation rate and cost of living
Inflation has been very low over the past 12 months and borrowing costs are at all-time lows, so the current ecoomic conditions do not necessarily warrant rent increases.   

Vacancies can quickly offset rental increases
If you increase rent on your property by, for example, $20 per week, that will add an extra $1,040 gross to your annual cash flow. However, if the property rents at $500 a week and is vacant for two weeks then you have lost this advantage within a very short vacancy period. If your property is vacant for longer then you are well behind.

The same rule applies in a tougher market. Sometimes you might have to drop the rent to meet the market. Again using our example is you dropped the rent by $20 a week then you would be given up $1,040 per annum but the drop in your cashflow will be stretched over the next 12 months. 

If instead you dug your heals in for $500 and the propery was vacant for 3 weeks you have already lost $1,500 in cash straight up. And if you do finally get a tenant at $500 it is going to take you 75 weeks to recover that loss.

As I keep saying to clients just get a tenant in and get it rented, there will opportunity down the track to increase rents when the cycle turns.

Research the competition
The best advice when considering increasing rent on your investment property is to discuss the current market with your managing agent and also research the competition. Ensure you compare like with like. What are similar properties renting for in the same area?

What is the current vacancy rate for the area. If it is low you will probably have scope for an increase. If it is high you might just have to take what you can get.

The time your property is avilable for rent may also be at the wrong time of year. Each market will generall have peaks and troughs throughout a year in terms of number of people looking to rent. 

The rent you are proposing needs to be in line with the competition. In some cases you may have added extras that tenants will value and can justify a slightly higher rent, for example an air-conditioning unit, a sunny aspect and great view, or an upgraded kitchen or bathroom.

Its' important to take on board your managers advice. Remember the higher your rent the more thay earn as well so they are going to be looking for increases where possible but you are not going to get $50 more than everything else in the street jsut because that's what you want.

Posted by: Greg Carroll AT 10:47 pm   |  Permalink   |  Email