Property Market Value Are More Important Than Ever
Property investors should look to raise their weekly rents each year when possible, in order to keep in line with market inflation and boost cashflow.
Increasing the rent you charge by just $10 a week may not sound like much, but it translates into an extra $500 a year. If you have 10 properties in your portfolio, it adds up to a $5000 pay rise you’re giving yourself every year.
And right now, with inflation ramping up, tighter serviceability restrictions on borrowing and some lenders already beginning to hike interest rates on multi-year fixed mortgages, it’s more important than ever to get the most out of your returns.
The great thing about property is that its value and rental income both increase with time and inflation, but the money you owe on it either shrinks (for those paying down the principal), or stays the same (for those paying interest only).
It would be great to keep increasing your returns year after year and never having to look back, but it’s not always possible.
Sometimes, market conditions will favour renters and you’ll need to lower your expectations to avoid a costly vacancy period. If rents are falling or stagnant and there is a large number of vacant rental properties in the area, don’t force an increase, especially if you have good, reliable tenants. Those tenants may find a similar or better property for cheaper and walk away, leaving you needing to actually lower your rent to attract new tenants.
For these reasons, it’s important to stay up to date with local rental movements and demand. If you’re not sure, consult your property manager.
But now that we know that, let’s look at the benefits of incremental rent increases.
More unencumbered cashflow means it will be easier to borrow for your next investment.
If you have bought for below market value, the equity you accumulate can help with your next deposit, but it’s the cashflow that will service your next loan.
Creating extra cashflow will also help you avoid bad debt. If you are able to purchase things you need, such as appliances, or a car, without using a credit card or a personal loan, it will improve your credit score.
And when you go to borrow for your next investment, the bank will be happier to see the extra income flowing in without going straight into a credit card bill.
Inflation has slowed down in recent years, but already it is rising faster than the RBA anticipated. Before long it will be back to 2 to 3% per annum, or even more.
A rent rise of $10 on a $300 a week rental is just over 3% and your tenants should be able to cope with this. It’s really no worse than inflation, especially if their wages also rise slightly each year. Plus, you are likely to need that extra money to cope with rising prices elsewhere.
Raising the rent is not as easy as simply charging tenants more.
Say, they are in the middle of a lease, you can’t do anything to the rent until the term of the lease is up. You can however let them know you are planning to raise it at the end of their lease and they will have the option to sign on again, or choose not to renew, at which point you have time to market the property for a new tenant.
If there is no longer an existing lease term, you are still legally required to give tenants a notice period before upping the rent. These periods differ between states, so ask your property manager and check in for any other legal obligations or procedures you may not be aware of.
Finally, tenants can dispute a rental increase if they feel there are extenuating circumstances or they haven’t been given enough notice. So it’s not always a done deal and you may find you have to compromise.
If you’re a tenant or property owner with any questions you want answered, chat to our Blink Property team.