First Investment Property - Want to raise rent

[Dean1337]

Hi all,

I have just recently purchased my first investment property. Big thanks to all those who helped along the way. It it really appreciated.

This property has yet to reach settlement and it is currently has tenant who are paying $370 a week. They have not had a rent raised in 3 years. It would appear that the tenant looks after the place quite well.

The current PM provided me with a rent appraisal of $385-$400 but when I called her asking whether the current tenant would accept a rise in rent to $385 she claimed the tenants would likely leave. She believes she can get a new tenant in two weeks. She recommends raising it to only $380 and keep the current tenants.

A rough calculation would mean the following:

Loss of Rent = 3 x $370 (2 weeks to get new tenant + 1 weeks letting fee) = 1110
Number of weeks to regain loss with rent raise (optimistic) = $1110/($400 - $370) = 37 weeks

How much should I raise the rent and should I risk losing the current tenant?

I should also note that the current PM has only three years experience and is currently managing 170-180 properties. I think this rather a lot for some one with only three years of experience. But since I'm new to this I'm not sure. Is this a lot for a PM to handle? Since she already works with current tenant this could be a plus. What do others think? Would it be in my best interest to find another PM or stay with the current one?

I wonder what others would do in this situation?

Big Big Thanks
Dean

 

[SYD]

Is the tenant on a fixed lease or periodic?

SYD

 

[Dean1337]

Is the tenant on a fixed lease or periodic?

SYD

Thanks Syd for the quick reply.

Currently on a fixed lease but it ends one week before settlement and will become periodic.

 

[nhg]

Raise the rent.

The current tenants would probably be upset, look around and realise they were receiving a discount all this time. Then when they factor in moving costs, they will likely realise it's not worth moving.

If you just raise it $5 now, what about the next time rent increases, you will have a lower base to raise the rent from. May as well suck it up now and write it off as part of the purchasing cost to yourself.

Also for an agent to be managing that many properties, I would question wether she can handle that workload and manage your property effectively.

My dad had the same issue previously, tenants moved out, still managed to raise the rent and find equally great tenants paying $40 more so who cares.

 

[Ed Barton]

Hi all,

I have just recently purchased my first investment property. Big thanks to all those who helped along the way. It it really appreciated.

This property has yet to reach settlement and it is currently has tenant who are paying $370 a week. They have not had a rent raised in 3 years. It would appear that the tenant looks after the place quite well.

The current PM provided me with a rent appraisal of $385-$400 but when I called her asking whether the current tenant would accept a rise in rent to $385 she claimed the tenants would likely leave. She believes she can get a new tenant in two weeks. She recommends raising it to only $380 and keep the current tenants.

A rough calculation would mean the following:

Loss of Rent = 3 x $370 (2 weeks to get new tenant + 1 weeks letting fee) = 1110
Number of weeks to regain loss with rent raise (optimistic) = $1110/($400 - $370) = 37 weeks

How much should I raise the rent and should I risk losing the current tenant?

I should also note that the current PM has only three years experience and is currently managing 170-180 properties. I think this rather a lot for some one with only three years of experience. But since I'm new to this I'm not sure. Is this a lot for a PM to handle? Since she already works with current tenant this could be a plus. What do others think? Would it be in my best interest to find another PM or stay with the current one?

I wonder what others would do in this situation?

Big Big Thanks
Dean

It's always a gamble whether raising the rent will cause a tenant to leave.

Have you done some research of your own? Does the agents estimate seem reasonable? If it is then I'd put it up to $390. They are unlikely to leave over such a small increase over such a period. Especially once they look around and work out they can't get a better deal.

I think when tenants move over an increase (as long as at market) they were considering moving anyway.

 

[virgo]

Raising rents

Hiya

A quick check on realestate.com.au will help establish your fair market rent
what YOU like and what the market is saying is different.....

i bought a house once and raise the rent by $90 a week...it had not been raised by 3 years too...tenants whinged but i stood firm as i was very confident of market rent...guess what! they stayed and have been with me for 2 years now...

Footnote: and i still increase rent yearly!

 

[Dean1337]

Raise the rent.

The current tenants would probably be upset, look around and realise they were receiving a discount all this time. Then when they factor in moving costs, they will likely realise it's not worth moving.

If you just raise it $5 now, what about the next time rent increases, you will have a lower base to raise the rent from. May as well suck it up now and write it off as part of the purchasing cost to yourself.

Also for an agent to be managing that many properties, I would question wether she can handle that workload and manage your property effectively.

My dad had the same issue previously, tenants moved out, still managed to raise the rent and find equally great tenants paying $40 more so who cares.

Thanks ngh,

You have good point about having a lower base to raise form next time. I think you are right. I should at least raise the rent to market level. If I constantly worry about losing the tenant I would never raise the rent to market level.

I do admit that I am concerned about how many properties she is managing. What would you say would a be maximum number of properties a PM should manage before you consider it too many?

Have you done some research of your own? Does the agents estimate seem reasonable? If it is then I'd put it up to $390. They are unlikely to leave over such a small increase over such a period. Especially once they look around and work out they can't get a better deal.

Thanks Ed,

I have and I think it would rent for $390 without too much trouble. $400 I would say would be pushing it. When I was looking at other properties before this one, I saw a lot worse renting for $370.

A quick check on realestate.com.au will help establish your fair market rent
what YOU like and what the market is saying is different.....

There are that many to sample from so I tried onthehouse.com.au so see what other places are rented for. Some are less some are than $385.

Thank you all for such a quick reply. You have all been quite helpful.

 

[Dean1337]

This is the property I just purchased in Upper Mount Gravatt.

If anyone feels generous I would greatly appreciate their input on whether my assessment is reasonable.

In the meantime, I will call around with other PMs and get their input.

Many Many Thanks
Dean

 

[jackbak]

Seems that she lied to you by telling you the rental appraisal is $385-$400 to sweeten the deal and then after the sale telling you that you would only get $380... If that's the case I'd sack her as a matter of principal.

Also, if the tenant hasn't had a rent increase in 3 years I find it hard to believe that they would leave the property because of a $15 increase, some tenants get that every year.

 

[mattysavager]

Hi all,

I should also note that the current PM has only three years experience and is currently managing 170-180 properties. I think this rather a lot for some one with only three years of experience. But since I'm new to this I'm not sure. Is this a lot for a PM to handle? Since she already works with current tenant this could be a plus. What do others think? Would it be in my best interest to find another PM or stay with the current one?

Three years experience is actually a lot for an average property manager. The burnout rate is quite high. She would know her stuff after 3 years in a busy office.

170 properties is not necessarily too many. Our PMs look after more than that, but have full time staff for routine inspections, leasing and accounts, and a manager and assistant. So it depends how the office is set up and how much help she has.

I would definitely give the PM a chance to impress you before you cut her loose.

As for the rent increase. I would suggest a $10 increase. Anything more than that and you may risk losing the tenant. It sounds good to work out that it would cost more than $520 in removalist costs etc, but in my experience many tenants do not give much thought to that.

 

[Ed Barton]

This is the property I just purchased in Upper Mount Gravatt.

If anyone feels generous I would greatly appreciate their input on whether my assessment is reasonable.

In the meantime, I will call around with other PMs and get their input.

Many Many Thanks
Dean

It's hard to tell from online ads (esp when some of them only have an outside pic). If you're local and got time, why not head to some rental ofis tomorrow?

A quick look at properties available tells me 385-400 is about right, but there's nothing really comparable with yours. Under 400 they are all in worse condition than yours and over 400 they are larger.

 

[AXXO]

In my opinion not increasing rents to or close to market value is a big, big mistake. You have no choice, if the market says $385-$400 that's what you must charge.

I fell for that mistake myself with a rental property I owned in Melbourne. No increase for over 5 years. I was happy enough, rent paid on time, no complaints.

Then end of last year I decided to raise rent to just under market. The tenant, to say the least, was very unhappy with this, so much so that they complained to the residential tribunal.

This would have been a big headache. So I decided to sell it as I'm moving out of residential to commercial anyway.

So, that was a good lesson for me.

 

[russellpeter]

My rental appraisal of the property for your property

http://www.realestate.com.au/property-house-qld-upper+mount+gravatt-409531923 3x1x1 $380pw

http://www.realestate.com.au/property-house-qld-upper+mount+gravatt-409030559 3x1 $390pw

http://www.realestate.com.au/property-house-qld-upper+mount+gravatt-409393803 3x1x2 $415pw

http://www.realestate.com.au/property-house-qld-upper+mount+gravatt-404119868 4x2x2 $420pw

going off the above numbers and other properties I have for rent in the area I believe you could achieve a rental price for this property of $390 to $420pw

all of the above properties have not been marketed correctly and this will be affecting the numbers of people that are inspection and price achieved.

I haven’t seen the property but from the photos it looks like a clean property I good condition and you will have no issues renting this property out. Good 3 bedroom houses are hard to find below $450pw.

I would think in the current market at $400pw this property would be tenanted within a week. Or we would have a tenant ready to move in.

What fees are you paying per week? I’m guessing around 8% + other fees let’s say $5pm total management fees of around $1,759.12 including GST

So currently if you are receiving if management fees are correct of 8% and $60pa in fees

Rent PA at $370pw = $19,240pa – fees $1,759.12 including GST total to you $17,480.88pa

At $400pw =$20,800 – our fees $1373.9 = $19,426.10 pa

A difference of $1,945.22pa 5 weeks rent.

Take away the one week’s let fees and you still have 4 weeks to play with.

I would go to the tenants with a rent increase to $385pw

The $15pw that you would miss out on at the new rent of $400pw = over 52 weeks $780 just under 2 weeks rent.

So if you had to readvertise the $780 you would miss out on at $400pw would cover the let fee and one week vacant.

Does your current agent charge for a lease renewal fee? If so how much? Most agencies will take a fee half to one week’s rent is the norm.

This is not taken into account in the above numbers.

But I would think that given 1 month to advertise you could achieve above $400pw.

170 properties is not uncommon and the most I have seen is 290 for one PM + assistant.

We Max our PM at 100 to 110 properties and they do no trust accounting or marketing. Just Property Management duties. EG paperwork, leases, maintenance, arrears, opens, and owner/tenant communication.

Not saying that you cant manage more and I know people that can manage 170 easy. But 100 works for us and our Pm are happier and less likely to burn out or want to move to an easy portfolio .

Good luck and I hope the above helps.

PM me if you have any questions.

 

[geoffw]

Your PM should know the correct amount of notice. It may be up to two months.

Start a little higher, so that you've got room to move. If the tenant complains, drop it a little, and you're both happy.

 

[mattysavager]

When does the tenant's lease finish?

In QLD there is no notice required to increase rent if one lease is expiring and a new one is signed.

On a periodic lease, 2 months notice is required.

If the tenants refuse to sign the new lease at a higher rent, they can give you two week's notice - you must give them 2 months notice.

I agree with the other posters that you need to be charging market rent - however as the tenant has just been through the sales process, they might be already considering moving out. A series of smaller rent increases is always better than a large one.

If you are comfortable with the risk of not having a tenant for a few weeks - then go for it and ask for $400. If you want a safer option, with a guaranteed income, go for $385-$390. We're renting 90% of our properties before the tenants move out, but understand that it is a risk and there are no guarantees.

In either case, a good PM would brooch the subject via phone, and then gauge the tenant's response before sending them formal notice.

Matt

 

[Dean1337]

Also, if the tenant hasn't had a rent increase in 3 years I find it hard to believe that they would leave the property because of a $15 increase, some tenants get that every year.

Thanks Jackbak,

You are right. I recall getting two $15 increases in one year around 2005. One $15 increase in three years is nothing. Naturally the tenant could feel differently.

Three years experience is actually a lot for an average property manager. The burnout rate is quite high. She would know her stuff after 3 years in a busy office.

Thanks mattysavager,

I had no idea. Although thinking about it, I can imagine dealing with complaints on a daily basis would certainly stress me out. That's pretty much the reason for hiring someone else to do it.

It's hard to tell from online ads (esp when some of them only have an outside pic). If you're local and got time, why not head to some rental ofis tomorrow?

A quick look at properties available tells me 385-400 is about right, but there's nothing really comparable with yours. Under 400 they are all in worse condition than yours and over 400 they are larger.

Thanks Ed, that's a great idea. It looks like there are two I can attend today.

Thanks for looking over the properties for me. I really appreciate that and your input. It's good to know that others think the same as me and it not just me being overly optimistic.

In my opinion not increasing rents to or close to market value is a big, big mistake. You have no choice, if the market says $385-$400 that's what you must charge.

Thanks AXX0,

It seems to be common theme that raising the rent a significant amount tends to upset the tenant. So your advice on keeping the rent at market value seems to good advice to me. I do recall myself getting upset when this happen to me in my younger years. It was these $15 rent raises that got me started into real estate. I decided i wanted to be the rent raiser instead. And here I am talking about raising the rent.

Does your current agent charge for a lease renewal fee? If so how much?

Thanks for the responds Russell.

Thanking you for researching the area a bit for me. I really appreciate that.

Yes. The fee is one weeks rent. Which is why in my calculations above the lose included an extra weeks rent.

Russell you made me realise that my thinking about this is all wrong. I've been calculating how long it would take to recover the loss should the tenant leave. I should have be working out how much I would earn in say the space of year or two and compare the results. When you look at it this way, taking the risk of raising rent and losing the tenant seems more attractive.

Start a little higher, so that you've got room to move. If the tenant complains, drop it a little, and you're both happy.

Thanks Geoff, that's a great idea. That way the tenant can feel like they negotiated a better deal. I like it.

When does the tenant's lease finish?

In QLD there is no notice required to increase rent if one lease is expiring and a new one is signed.

On a periodic lease, 2 months notice is required.

It ends 14th February which is four days before settlement. I had no idea about the 2 months notice when on a periodic agreement.

Is is possible to arrange for a 12 month lease agreement when in the middle of settlement?

Thanks to everyone here for input. It has been truly awesome. This forum is extremely helpful. I have a lot think over but I feel better aware of the situation now. Once again thank you.

 

[mattysavager]

It ends 14th February which is four days before settlement. I had no idea about the 2 months notice when on a periodic agreement.

Is is possible to arrange for a 12 month lease agreement when in the middle of settlement?

The notice period of 2 months only applies to periodic tenancies if you are continuing the periodic tenancy. If the lease expires in Feb and automatically becomes periodic - then you offer the tenant a new fixed term agreement and they sign, no notice is required (as they do not have to sign if they don't agree).

If the tenant refuses to sign the new lease at the higher rate, then you would need to give them 2 months notice to leave. They could move out at any time with 2 week's notice. (Hence my earlier post about what risks you're comfortable with).

It's entirely possible to renew the lease before settlement. The contract would be well and truly 'unconditional' by that point - and if I was managing it, I would encourage the seller to renew the lease. Keeps the tenant happy, and keeps the new owner happy.

 

[Rixter]

Dean, I have 3 bedroom townhouse in UMG and get $410 per week rental return.... up the rent to the lower end of the current market rates. Click here for Quarterly Rental Figures.

You are in business mate and not a charity. If the tenant moves on well so be it.

You will get another tenant easily at the lower end of current market rates providing the property is in good order.

As previously mentioned once the tenant looks around chances are they will not move anyway once they factor in moving costs and work involved.

But just for this exercise lets play devils advocate and say the tenant moves on. If you capitalise the rental shortfall what you are losing out on from a cash flow perspective is minimal. In fact it will increase your cash flow substantially as I've illustrated below.

For example - for every $1000 loss in rent @ 6.5% capitalised, the real cost to you over a year is just $65 ($1.25 per week). Plus you will get approx 30% of that back in tax deductions, so the real cost is even less. Increasing your rent just $10 per week ($520 p/a) more then offsets it.

Its actually cheaper for you to use OPM as you are paying the interest from before tax funds than for you to use your own money from out of your back pocket which comes from after tax dollars.

I hope this provides another more business like perspective for you.

 

[Dean1337]

Sorry I haven't replied in a while. I've been quite busy with both work and ensuring everything is going smoothly with the contract.

It's entirely possible to renew the lease before settlement. The contract would be well and truly 'unconditional' by that point - and if I was managing it, I would encourage the seller to renew the lease. Keeps the tenant happy, and keeps the new owner happy.

however as the tenant has just been through the sales process, they might be already considering moving out.

Thanks Mattysavager,

The information you provided is useful to know. You also right about the tenant leaving. The tenant has handed in their notice and the place before I even got around to raising the rent. It will be vacant 4 days before settlement.

Dean, I have 3 bedroom townhouse in UMG and get $410 per week rental return.... up the rent to the lower end of the current market rates. Click here for Quarterly Rental Figures.

You are in business mate and not a charity. If the tenant moves on well so be it.

You will get another tenant easily at the lower end of current market rates providing the property is in good order.

Thank Rixter,

That link you sent it quite useful. I've booked marked for future reference.

You right in saying it is business. So that it way I should treat. Regardless the tenants have left so I'm going to see if I can get maximum rent now.

Buying investment property is so exciting. I still have lots to learn though.

 

[jatt]

You have a few options:

If you think the tenant is good, why not manage it yourself? You automatically save $30-$40 a week. And then just to put some icing on the cake increase the rent to $380 or $385.

Win-Win situation, obviously it will require a bit more work on your side. But for the average investor personally i believe its best to put in the hard yards and reap the rewards!

I normally try to increase rent each year by between $5-$15 depending on location, market rate etc.