An investment property is a wealth creation vehicle. An investor of course wants to return the greatest revenue they can reasonably achieve while the property is in their possession, through capital growth and increases in equity to strong rental return and ideally a positive cash flow.
In conversations with landlords, we often hear that their previous agent handled the rent collection just fine, made maintenance arrangements as needed, and found new tenants when required. However, once a tenant was signed on to the property, things seemed to go into automatic pilot, set-and-forget. This at times included neglected to monitor and action a potential rent increase from time to time.
In this article, we discuss our approach to completing rent reviews and actioning increases in rent.
How We Manage Rent Reviews And Rent Increases For Investment Properties
Rent Review Frequency When Tenants Are In A Fixed Term Lease
When a tenant is in a fixed-term lease, unless agreed when the lease is signed, the rent cannot be increased within the fixed term. The first opportunity you have to adjust the rent is when the current lease expires.
With this in mind, when a property is in a fixed-term lease to a tenant, we systematically run a rent review of the property 3 months out from the lease expiry. This allows us time to monitor the market and make an assessment on whether the existing rental return should be adjusted.
Why Do We Conduct A Rent Review So Far Out From The End Of The Current Lease?
We conduct our rent reviews approximately 3 months from the expiry of the current lease, as this enables enough time to present our findings to the investor and for them to consider their options. Once the investor has decided how they would like to proceed, we then need time to discuss the tenant’s plans for the next lease period with the tenant.
Some tenants may be planning to leave to find a larger property, they may wish to move closer to work, or they may have finished building their own home. For others, even a modest rental increase may be the catalyst to find a more suitable property for their needs elsewhere.
Importantly, before any rent increase can take effect, the tenant must be given at least 60 days notice in writing. For this reason, if a rent increase is to be applied from day one of a new lease after the current lease expires, conducting a rent review 3 months out from the current lease expiry leaves just 4 weeks to discuss the review with the owner, confirm the tenant’s plans after the current lease expires, and if needed send a 60-day rent increase notice.
When Do We Conduct A Rent Review If A Tenant Is Not In A Fixed Term Lease?
If a tenant is on a periodic (rolling) arrangement, meaning they are still living in the property but their fixed-term lease has expired, we still want to regularly conduct a rent review. A lease expiry period is often a good trigger to remind a property manager to conduct a rent review, and if a tenant is no longer in a fixed-term lease this reminder will never occur!
For this reason, all periodic/rolling properties we manage are routinely reviewed every 6 or 12 months depending on the wishes of the owner from the last time the rent review was undertaken.
How Do You Know Whether The Rent Should Be Increased?
In making this assessment, we take into account the time since rent was last raised, the property’s size, condition, fixtures and fittings, overall presentation and location compared with other similar properties which have listed for rent in the area in recent months.
New cafes, restaurants, expanded schools or parkland facilities may reinvigorate interest in a previously stable area. It is also reasonable to consider an increase when there have been changes made to the property or circumstances of the lease also. For example, if:
- Air conditioning has been added
- Appliances have been improved e.g. dishwasher added, new gas oven installed
- Maintenance such as lawn mowing service has been included
- Pets are now accepted at the property
- etc.
However, there is more to consider than simply increasing the rent. If an existing tenant is looking after the home with great care and wishes to remain in the property long term, there may be value in maintaining the current rent for a further fixed term.
We have some investors choosing to knowingly achieve below market rent, but the trade-off is a well-cared-for property with a stable tenant, mutual respect and very few unknowns.
In other instances, properties have remained at a stable rent for a significant period while costs of insurances, maintenance, and rates have all increased, and for a landlord absorbing these costs ongoing is no longer an option, even with a quality tenant in place.
Ultimately, we inform our investors of the current and recent market conditions and what the data suggests is a suitable rental return. But the end decision to action an increase or maintain the current rent always lies with the informed investor, and we respect their decision.
Maintaining a balance between optimal rental return and long term stability of income requires careful management, and is an area in which we excel.
If you would like to find out more about how we can help you with your investment property and rent, please contact us to talk to one of our professional financial planners.