The simplest and easiest way to improve a rentals financial performance is to increase the rent.
You obviously don’t want to rush into ‘just increasing the rent’, but rental properties are businesses, and need to be run as such. Any business or rental property needs to constantly review and try to increase its revenue.
With any financial decision it is wise to review the cost vs the benefit. So if you increase the rent by $30 per week, then the financial benefit should be $1,560 per year. The cost is more difficult to work out.
- You could lose some rent if the tenant moves out, and if the property is difficult to rent, then this could amount to a reasonable amount
- The current tenant might do the gardens, and look after the property well, whereas the new tenant might not, resulting in higher repair costs
A lot of landlords can’t be bothered for maybe $1,560 per year, but I believe rent always needs reviewing and $1,560 might be 10% of the rental income on a standard $300 per week property.
If you are sitting on the fence and wondering can I actually do this, a great start is to gain information and knowledge.
1) When did you last raise the rent?
- If the rent has been the same for the last few years, then you need to seriously review this as your property is likely to be substantially under rented.
2) Do you know what the market rental is for your property?
- Get 1 or 2 property managers to give you an appraisal, or else check out statistics available in property investors magazines. This will allow you to compare your rent with what it should be.
Clever Trick – A clever trick I have seen some property managers use, is to send a 6 month letter to each tenant, advising that their rent has been reviewed and this time has remained the same. After getting 2-3 letters with no change, the tenant is expecting sooner or later for a change, so if you then give them a small increase they are probably already conditioned for it.
Also using a property manager costs you money, but often they can obtain a higher rental which pays for their fees! Property managers are also more likely to be up to date with current market rates.
Overall I would suggest small increases more frequently, rather than getting further and further behind and catching up with one big increase. I think a big increase is likely to scare your tenant away, whereas $5-$10 increase maybe every year would be more acceptable.
Are you still looking for a reason to increase rents? Over the last few years there have been major changes for rental properties and here are a few of the changes that affect rental profitability:
- GST has increased from 12.5% to 15%. This will increase insurance, rates,
repairs and some other costs
- Insurance has jumped up, and will increase further due to Christchurch
earthquakes
- Rates always seem to be increasing
- Building depreciation has stopped from 1/4/11, reducing possible tax refunds
- Credit crunch and financial depression which have resulted in no capital gains
since 2007
- Possible capital gains tax
In my opinion rents have not increased sufficiently over the last few years to make up for the increased costs and changes to the rental environment.