Many of you would have received a brief email survey in November. It was designed to enable us to get candid feedback on our service; what we do well and what people thought we could do better. Thank you for your responses this information has been invaluable and we intend to evolve our processes to include as many recommendations as possible.
Some clients commented on our approach to lease expiries’, rent reviews and the certainty of ongoing tenancy. We do have strategies in place to ensure that we have low tenancy turnover and that rents are reviewed regularly but it was apparent that many owners are unaware of this approach or understand why we do things the way we do. So with that in mind we thought it best to explain.
Tenancy Turnover
Tenancy turnover is a measure of how long a tenant stays in a property before they move out. A low turnover of tenants is important to our clients because the longer a tenant stays (assuming they are a good tenant) the less vacancy a client has, the less fees they pay in having the property re-leased and the less wear and tear the property has with tenants moving in and out.
Tenants moving out of properties cost owners money. Clients can find that improvements they were planning to do perhaps in a year or two’s
time must now be done sooner if the property is to attract a new tenant.
Our figures show that when properties turnover they lose an average of about 10 days rent due to vacancy. They require painting and carpeting more frequently, earn less income over the course of a year and pay more in leasing fees and advertising. You can see turnover is expensive and is the highest avoidable cost in property investment.
It surprises me that very few agents are concerned about this. We’ve worked hard researching how long we can maintain good tenants in our properties, which tenants are more likely to stay longer and what cause tenants to move on and our results form the basis of our tenancy strategies. Here are a few of our findings and how they are incorporated into our property management.
How we compare
Our tenants stay in our properties for an average of three and a half years or longer before they move out. The results in the industry vary depending on the region, property condition and agency practice but information we have been able to obtain indicates that most agencies report average tenant turnover of about one and a half years, with some are as low as nine to ten months.
The cost of turnover
Here are some of the costs associated with a two bedroom unit renting for $350 per week coming vacant.
Letting fee $385 (1 Week + GST)
Advertising $ 50
Lease fees $ 15
Vacancy $500 (10 days rent)
Increased maintenance $600*
Therefore, Total cost of re-leasing = $1,550
In our experience a property will generally need to be painted every three tenancies and carpeted every four tenancies. The changeover of a tenancy is when the most wear and tear happens and when the unsightliness is most obvious.
A property that turns over every 18 months will need internal painting each 4.5 years and carpeting each 6 years. A property with a tenancy that turns over each 3 years will need to be painted each 9 years and carpeted each 12 years. The higher turnover property costs double to maintain. The current cost of painting a two bedroom unit is around $2,500 and carpeting is $3,000.
Each 12 years the higher turnover property will cost $6,250 in painting and $6,000 in carpet. That’s $1,200 a year. The lower turn over property would cost half that.
To put that in perspective, that’s a loss of about one month’s rent. It would be cheaper to pay the year’s council and water rates TWICE. Even if we disregard the maintenance component, you are still likely to loose $950 every new tenancy. (Based on the above figures)
Avoiding the problem
Having identified the problem, how do you avoid it? Well as we indicated, we’ve been managing this aspect of property management very deliberately and doing a lot of research and testing. I’m not going to go into all the aspects of our system because this gives us the edge over our competitors, but I will share some aspects that we would like you to keep in mind when we are looking for new tenants and managing them while they are leasing from us.
Selection of tenants
While most agents will look for someone who will look after your property and pay rent on time, very few appreciate that there is a behaviour trait that’s just as important; stability. People who are stable tend not to move around and they have a strong tendency to honour their obligations and put roots down as they say. We look for these traits in the details they provide us in their application, in the interview questions asked by property managers when reviewing their applications and in our third party checks. Stability is also another reason why we use direct debit as our rent payment system. We discovered that people who are comfortable with us deducting money out of their bank accounts are approaching their tenancy and their relationship with us from a position of trust. The higher the trust level the longer the relationship lasts.
Expired leases
It will seem counterintuitive but requiring tenants to sign new leases once the fixed term of the lease has expired increases turnover rather than reducing it. In fact, a large agent I know who’s one of the biggest property management businesses in the country requires all tenants to sign new leases once their fixed term expires. They have an average tenancy of just over 9 months. I’ve talked to him about it and he’s looked at how we operate. He’s now looking at testing our system of not requiring renewed leases to see how it affects his tenancy period.
I can’t really explain why asking tenants to commit to a new lease brings forward their decision to move on. I do know from psychology that there is a stage in decision making where people recognise that a situation isn’t perfect but that they can live with it for the time being. Providing ‘living with it’ doesn’t require a commitment, they’ll quite happily stay until they absolutely have to do something. From our experience it is asking this group to commit to staying that pushes them from ‘living with it’ to the next stage of the decision which is ‘I now will have to do something’.
If a tenant is happy they’ll stay regardless of whether a new lease is signed; if they are looking at moving then they will not sign a new lease and they’ll just do something about it sooner and if they are at the ‘have a problem but can live with it for now’ stage, you’ll trigger a move by bringing it up.
As such our recommendation to all our clients is not to pursue the re-signing of leases unless it’s really necessary. If you want us to advise you when your tenant’s lease expires let us know and we’ll put a reminder in our system to call you. If you are happy with our approach, we’ll continue unless you tell us differently.
Rent Reviews
On the other hand, rent reviews only seem to cause tenants to move if they are at the stage of wanting to be somewhere else or if the increase is above market value.
We systematically review rents on each of our properties on a six monthly basis. If market rents have increased we’ll recommend an increase and failing hearing from you to the contrary, put that increase in place. If the market hasn’t risen or the timing is not appropriate for some reason or another, we’ll defer it for three months and then review it again. In all cases letters will be sent outlining what we are doing.
Again, if this isn’t your preference please tell us.
The coming year with the rental market
How I wish I knew what this will be like, but I can say I’m extremely cautious with what to expect.
The first home buyers’ bonus has taken a lot of tenants out of the rental market. Those tenants were generally the ones with good jobs, stable income and good credit histories, otherwise the banks would not have lent to them. They are also the ones we prefer to rent your property to. You would appreciate that under these circumstances the rental market would see less quality tenants applying for property and to a fair degree that’s what we have seen happening over the last six months.
Another point I should make about these buyers is that many but not all will wait the six months out as required by the regulations of the grant. They will then rent their properties out so that they can use the negative gearing to help reduce their mortgages. We know this for certain because when we are selling property, we ask buyers what their intentions are. Many first home buyers say that they are ‘looking to occupy the property and then rent it out’.
So over the next 6 months we expect to see slack demand for rental property until the tenant volumes increase. We also expect that in the following six months will see more low and mid rent ranged property come onto the rental market for lease which will keep the market flat.
If interest rates continue to rise I believe investors will hold off buying and many first home buyers could also be forced to sell. As a result this may increase the number of tenants looking to rent. Even so, the affect of an increase in interest rates takes a little while to work through the market so I don’t expect that scenario to have much effect until the later part of the year.
If the interest rates stay where they are or even drop back a little, and this would happen only if the economy was not as strong as we hope, we would end up with more tenants, less people investing and a firming of the rental market. A weak economy helps the rental market by discouraging people to borrow. Again this ‘cause and effect’ can take a while to play out but that market alternative is certainly possible and depending on your view of the economy, maybe even probable.
With both of these scenarios may I give you a suggestion? Watch interest rates, if they continue to rise, rents will follow; if they stay where they are then rents will stay flat. As has happened in the past, if the interest rate levels we had last year had remained in place we could have expected drops in rents of 10% plus. Don’t be shocked though our low rates didn’t stay in place long enough so the effect of the drop was not as strong this time.
I suspect we will have a very interesting year!