The Best way to approach Rent Increases
One of our long-term clients asked us how we think through rent increases and the strategy we use. She referred to a newsletter I wrote many years ago and asked quite reasonably if our approach was still relevant given the nature of the rental market and the changes in law.
Our strategy
So first, I’ll explain our strategy. Our approach is to increase a tenant’s rent to just a little below market. We want tenants to stay (assuming they are tenants we want to keep). Turnover is costly, but how costly is not always clear. But first, we need to talk about the data that we have access to that we have never had before.
Realestate.com is making more and more information available to us now, and some of it is really granular and gives us powerful insight into our market. It’s easiest if I show you a profile for two units in Ryde.
3-bedroom | 2-bedroom | |
---|---|---|
Data based on the leasing of this many units over the last 12 months | 107 | 714 |
Median rent over the last 12 months | $850 per week | $680 per week |
Price growth over the last 12 months | 13.3% | 25.9% |
Median days on the market | 26 days | 22 days |
Numbers of renters looking for this type of property | 134 | 689 |
Number of similar properties for rent | 8 | 83 |
The cost of turnover
Let’s say you have a 3-bedroom unit, and your tenants decide to move. You can expect a vacancy period of 26 days. You would also expect to pay a let fee of 1.1 weeks rent plus advertising. This adds up to the equivalent of about 35 days loss of rent (26 days vacancy and the equivalent of 9 days rent in estimated costs).
35 days loss of income is just shy of 10% of your year’s income from this property. For this reason, we usually recommend a rent increase for an existing tenant a little below what we believe we would achieve if the property were relet. We want the tenant to compare the increase to the price of other properties on the market, so they see staying as a better deal than moving to a similar property nearby.
There is obviously a cost to a tenant of moving and a cost of time and effort in finding a property. And that’s where the property’s history comes in. Tenants see value in moving if the property hasn’t been well looked after. The cost of moving is one thing, the benefit of moving might be more than just rent.
Rent growth
You’ll notice that different property types have different growth rates for the growth figures. Much of that stems from the COVID period when one and two bedrooms suffered far more with vacancy as people moved out to rejoin their families. We are still going through some of that market catchup as demand returns to this part of the market. Forgetting COVID-19, these differences between submarkets are constantly happening, with some sections jumping ahead and then the other sections catching up.
The important thing is that we don’t use the growth percentages to calculate rent increases ‘without question’. Instead, we use them to challenge and check our estimates.
Comparisons
We primarily look at what is for rent and what has been rented. Again, our available data is far superior to what we had even a couple of years ago. We could now look up what has been leased in the last 3 or 6 months, look at the photos, see how long they advertised the property, and compare the floor plans. That data was always there, but we couldn’t do a data search to reveal it. Now we can.
Referring back to the data, there were 714 2-bedroom units leased in the last 12 months. Some had garage, so internal laundries, other were newer and other older and then there were the ones that were renovated.
If we have a property, we search for similar properties that have been leased. We are trying to focus on what has leased in the last 3 months and what was achieved by those most closely matched to yours.
Long term decisions
Rent increases can’t/shouldn’t be made in isolation from our clients’ more long-term fundamental preferences.
Some owners prefer to have long-term tenants and minimal turnover because that also reduces maintenance and minimises income fluctuations. If we have a client who prefers this approach, we probably discount the increase a bit more. We might also be more negotiable with the tenant if they are going to struggle with the size of the increase.
Similarly, if a property needs substantial renovation, that becomes the main discussion point with the client, particularly around timing. When can they afford to renovate it? What approvals from strata will they need? How long will they take? Can we arrange them prior to the tenant vacating? Avoiding work by keeping a tenant in place is costly. Dropping $30 per week for 12 months is $1,500 that you will not get back and the cost of renovations will still be there and growing.
As with most things, knowing what we want to achieve long-term helps us decide what we should do short-term, including rent reviews.
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Author: Stephen Jackson