100% Occupancy At $170pw Or 92% Occupancy At $220pw? Which Would You Choose?

[Watermelon Man]

Hello,

I've just bought a IP with a very nice older single lady (60's age) in it paying $170 per week (been there 2 months - who I think will stay in the unit for 3+ years or longer maybe). However the market rent for this unit is probably around $210-$220 per week.

I personally think of maybe raising the rent $10-$15 in another 6-12 months time & renew it again in 1-2 years time thereafter as I think she'll stay in the place a long time & she keeps it looking immaculate. Great tenants who look after the place as it was their own are very hard to come by. What would you do? Keep the existing great tenant at a below-market rent or try your luck at 2-4 weeks vacancy each year at market rent of $210-$220 per week & have to pay extra in management fees (around $220 p.a. extra) as well as 1-2 weeks letting fees on top. Working it out quickly at $220 per week rent; 4 weeks vacancy; 2 weeks letting fees to 2 x 6mth leases = $1,544 per year loss or around $30 loss; therefore $220-$30 = $190 per week. Therefore I think if I could raise the rent from the existing tenant to around $190 per week that would the same as having to have tenants come & go all the time even though it's a higher rent. Sure I could find a tenant wanting to pay market rent at $220 per week & wants to stay long-term as well.

Like I said, I think great tenants who look after the place as it was their own are very hard to come by. Your thoughts?

 

[alexlee]

Personal choice, but remember it depends on how long you're keeping the rent low. Rents are increasing, so your rent is going to be further and further away from market rent.

Personally, I would raise the rent by smaller amounts to keep the current tenant. You can't tell me a person cannot afford an extra $10 a week, say, especially when their rent is already below market.
Alex

 

[Watermelon Man]

Personal choice, but remember it depends on how long you're keeping the rent low. Rents are increasing, so your rent is going to be further and further away from market rent.

Personally, I would raise the rent by smaller amounts to keep the current tenant. You can't tell me a person cannot afford an extra $10 a week, say, especially when their rent is already below market.
Alex

And I'll be paying $15 per 2-3 weeks for lawn maintenance as well to the courtyard. Thanks for your comments Alex.

 

[steveadl]

I'd agree with your thoughts Watermelon man, good tennant is always great for an IP. Having said that, dont' forget there are a lot more good tennants out there too.

If you keep her, explain to her that the market rent is $220 as you said, but you're only putting it up to $190. Then the next year put it up to $200/$210 (at which point the market rate may have increaed to $230/$240). I'm sure she'll appreciate you keeping it relatively cheaper for her.

Personally, I would still probably look for another tennant for the extra $40pw or so. A good PM will surely be able to find you another good tennant.

Cheers
Steve
PS New tennants would have to take care of the lawns at their own expense, or you can add that $15 to the rent for you to organise it - it's the tennants problem, not yours.

 

[Joe D]

WM

What are you, an investor or a philanthropist?

For a difference of $10-15 I would keep the long term good tenant, however, if market rent is $40-50pw higher then I would make the increase at end of the current lease.

If you don't act you will be faced with the same situation in 2-3 years, thus you are only delaying the inevitable.

 

[Dazz]

I've just bought a IP when a very nice older single lady (60's age) in it paying $170 per week....Your thoughts?

What does it cost you to hold per week ??

Add up the total mortgage cost, CR, WR, LT, Ins, Maintenance, PM fees, strata fees maybe, then divide by 52. It's probably close to 350 or 400 p.w.

You seem to be looking at the situation from a negative marketing perspective (what if the tenant leaves, what if I scare or upset the tenant, what if I get a destructive tenant).

I believe it is incumbent on all Landlord's to charge at least market rent for their property....and maintain it at that level via ratchet clauses in the Lease. If you charge less 'cos you are scared or timid or reluctant for whatever reason, other tenants and PM's will use your lower achieved rental level as a valid data point to set their perceived benchmark, thereby retarding the yield growth....that desparately needs to rise. Some call this good business.

Obviously, if you are one of these wealthy established elderly Landlord's who doesn't care what the rent is, and are happy with the bigger picture (cap.growth and no difficulties), then go with the lower paying safe option.

 

[Watermelon Man]

What does it cost you to hold per week ??

Add up the total mortgage cost, CR, WR, LT, Ins, Maintenance, PM fees, strata fees maybe, then divide by 52. It's probably close to 350 or 400 p.w.

You seem to be looking at the situation from a negative marketing perspective (what if the tenant leaves, what if I scare or upset the tenant, what if I get a destructive tenant).

I believe it is incumbent on all Landlord's to charge at least market rent for their property....and maintain it at that level via ratchet clauses in the Lease. If you charge less 'cos you are scared or timid or reluctant for whatever reason, other tenants and PM's will use your lower achieved rental level as a valid data point to set their perceived benchmark, thereby retarding the yield growth....that desparately needs to rise. Some call this good business.

Obviously, if you are one of these wealthy established elderly Landlord's who doesn't care what the rent is, and are happy with the bigger picture (cap.growth and no difficulties), then go with the lower paying safe option.

Weekly cost for IP is $320 per week factoring in rates, body corp fees, interest, PM fees, repairs, etc.

What's a ratchet clause?

And the tenant lives in the same complex as me (4 units in complex)

 

[firstmillion]

Hello,

I've just bought a IP with a very nice older single lady (60's age) in it paying $170 per week (been there 2 months - who I think will stay in the unit for 3+ years or longer maybe). However the market rent for this unit is probably around $210-$220 per week.

I personally think of maybe raising the rent $10-$15 in another 6-12 months time & renew it again in 1-2 years time thereafter as I think she'll stay in the place a long time & she keeps it looking immaculate. Great tenants who look after the place as it was their own are very hard to come by. What would you do? Keep the existing great tenant at a below-market rent or try your luck at 2-4 weeks vacancy each year at market rent of $210-$220 per week & have to pay extra in management fees (around $220 p.a. extra) as well as 1-2 weeks letting fees on top. Working it out quickly at $220 per week rent; 4 weeks vacancy; 2 weeks letting fees to 2 x 6mth leases = $1,544 per year loss or around $30 loss; therefore $220-$30 = $190 per week. Therefore I think if I could raise the rent from the existing tenant to around $190 per week that would the same as having to have tenants come & go all the time even though it's a higher rent. Sure I could find a tenant wanting to pay market rent at $220 per week & wants to stay long-term as well.

Like I said, I think great tenants who look after the place as it was their own are very hard to come by. Your thoughts?

Hi Watermelon,

I am assuming that you are self managing the property ? If not then, you anyways will have to shell out PM fees and charges. Even if you work out 92% of $220, its $202, which is a higher rent anyways.

I guess, you should go for a higher rent else the gap between the market rate and your rent will widen. The important question is, how much gap are you willing to accept to keep a "GOOD CAPTIVE TENANTS" ?

Cheers

 

[Watermelon Man]

Hi Watermelon,

I am assuming that you are self managing the property ? If not then, you anyways will have to shell out PM fees and charges. Even if you work out 92% of $220, its $202, which is a higher rent anyways.

I guess, you should go for a higher rent else the gap between the market rate and your rent will widen. The important question is, how much gap are you willing to accept to keep a "GOOD CAPTIVE TENANTS" ?

Cheers

The unit's managed by a property manager; the gap for a good tenant that I would give would be around $20 pw.

 

[lenojd]

self manage the property while you have the current tenant in there. If she is really good, you should be able to reduce your cost by eliminating the PM fees??

 

[Watermelon Man]

self manage the property while you have the current tenant in there. If she is really good, you should be able to reduce your cost by eliminating the PM fees??

I think when the 6 month lease runs out in October, I'll put up the rent to $200 per week (still $10-$20 under market) & see if she'll stay - otherwise I may be looking for another tenant; at which point I may try to get more in rent. I'll wait & see.

 

[GoAnna!]

self manage the property while you have the current tenant in there. If she is really good, you should be able to reduce your cost by eliminating the PM fees??

Are you trying to be an anonomous owner? If not then I think that you self managing in this circumstance would be a win win situation. Given you live in the block anyway I wouldn't imagine their would be much time or effort involved but it would be a good saving.

So basically the current PM let it under maket if she only moved in 2 months ago?

Experience has also taught me that established tenants tend to ask for far less in terms of repairs than new tenants. It’s something to do with just getting used to the quirks of a house I guess. I know if a tenant moved I to my house they would have a long list of requests! To replace the front of the oven that fell off years ago for one

The net money difference between old and new tenant on higher rent may work out less than you might think.

 

[Watermelon Man]

I recently increased the rent on the above unit from $170 to $195 per week - still under market rent but weighing up potential loss of rent vs keeping a very tidy & well-behaved tenant who lives in my own complex of just 4 units it was worth keeping the existing tenant.

 

[skater]

I'm glad you increased the rent. I would also inch it up each 6 months until it reaches market level.

Investing in property is a Business & as such I believe you should treat it as one. You are not a charity, so don't ever fall into the trap of being treated as one.