Rent Increases vs A Long-Lasting Tenancy
While the idea behind owning an investment property is to generate an income and create equity, it’s important to take in to account the costs of many short term tenancies with rent increasing often vs one longer term tenancy with a steady rent.
Take in to account how your tenant pays, how they keep the property, the impact of maintenance requests and costs of owning the property. (E.g. land tax, mortgage interest rates).
Below is an example of a one tenant over 3 years vs 3 tenants over 3 years in the same property with the rent increasing between each of the 3 tenants.
Tenant A has lived in the property for 3 years
- The rent is $1521 per calendar month
- Rent is on time every time
- The property is kept in an immaculate condition
- The hot water system had to be replaced for $1800
- The heater had to be repaired for $180
- There was a one week’s letting fee charged to find tenant A
- There was advertising of $100 charged to find tenant A
In the same property, in the same 3 year period we have had tenant A, tenant B and tenant C.
- The rent for tenant A was $1521 per calendar month
- The rent increased for tenant B to $1564 per calendar month
- The rent increased for tenant C to $1608 per calendar month
- Rent from all 3 tenants is on time, every time
- The hot water system was still replaced
- The heater was still repaired
- Each time a new tenant moved in there was another maintenance item due to wear and tear from people tenants moving in and out. Tenant B and C reported minor maintenance items that cost another $200 each time
- In between tenant A and B there was a 2 week vacancy gap
- Tenant B didn’t keep the property in a good condition and an application had to be made against the bond. All costs were awarded and repairs were completed
- There was a 5 week vacancy gap between tenant B and C due to VCAT and the timeframe of repairs required
- There was a one week’s letting fee charged each time the property was re-leased
- There was advertising of $100 each time the property was leased
For Tenant A, the rent for the 3 years was $54,756. The landlord was charged $4216.12 in management fees, letting fee of $350, advertising of $100, combined maintenance works of $1980. Therefore the landlord received $48,109.88.
For Tenant A, B and C the rent for the 3 years was $56,316 but there were 7 weeks where the property was vacant which cost $2570. The landlord was charged $4216.12 in management fees, 3 letting fees which totalled $1080 and 3 advertising fees totalling $300. An extra $400 in maintenance in addition to the $1980 for hot water system and heater. Therefore the landlord received $45,769.88.
You can see from the above example that the landlord was around $2500 worse off by having 3 different tenants in 3 years because they wanted to keep increasing the rent. Further, the more tenants who move in and out of a property, the heavier the wear and tear the property will experience and show.
Now this isn’t a recommendation to never increase the rent on your investment properties. But it’s a call to think carefully and weigh up the benefits of slight increases that could result in your excellent tenants vacating and risking the costs of re-leasing and potential vacant periods.
That being said, it’s important to keep your property at market value to ensure you are getting a good return on your investment. It’s also important that your property manager discusses rent increases and lease reviews with tenants at the start of their tenancy and before a notice is served. This way, the tenants expect increases to market value and don’t receive a surprise notice that may get them offside.
At Savoy Real Estate we give realistic and informative rent and lease reviews to our landlord clients on a regular basis. We give justification and advice along with these reviews to ensure our clients make the right decision to receive the maximum return on their investment balanced with long term, successful tenancies. Further, our property managers ensure tenants are aware of the rent increase process at the start of their tenancy and give a courtesy call when a rent increase is to occur.
Should you require advice about rent increases, tenancy durations and the impact of multiple tenant vs a single tenant, feel free to contact Jess at Savoy Real Estate on 0417 787 985.