High tenant turnover can result in more $$$

Xenia IM said:
also

agent fees are tax deductible.
vacancies are not
low rent is not.
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That is false reasoning, they are all the same - ie less income.

Perhaps it is just me, but it irks me when RE agents push this "tax deductible" line, usually when you question their fees. Put it this way, if your marginal tax rate is say 30% then sure a tax deductible fee of say $500 means you effectively pay $350. If you lose a week's rent of say $500 then it is the same as saying you have a 100% tax deduction because you can't be taxed on income not earned.

Anyway, back to topic, I think it depends on the circumstances. Yes you should compare the amortised loss of rental income over the additional vacancy period while chasing the additional rent over the amortised value of the increased rent. The problem is, assuming you are charging market rent, it is next to impossible to determine how long the vacancy period was due to the higher rent.

For existing tenants, if they are good tenants, I agree that you could moderate rent increases as incentive to keep them. However, if you let the rent erode below market rates for a considerable time, it could come back to bite you when you need to adjust it by a large amount to return to market norms.
 
I can see where Xenia is coming from. Tenants who have been in a property for an extended period of time do tend to to be on a significantly lower rent that the market would expect from a new tenant.

Last year, we tried to put the rent up on a property by $25/wk. This represented an increase of about 6% and it had been 2 years since the previous increase. It was still about $30/wk below the market for similar properties in the area. We want to get reasonable market rent, but we're happy to take a hit to keep a good tenant.

The tenant won on the basis the increase was greater than CPI. It appears that I'm not allowed to charge market rent for my property to an established tenant.

I recall one property (for sale) I inspected where the tenant was paying rent which was less than half the market value. He'd been there over 15 years. He was terrified of a new owner because he knew a massive rental increase was coming, or he'd be given notice to leave.

It's obviously easier to get market rent with a new tenant than an existing one, but landlords are happier to go with the tenant they know, avoid leasing costs, but pay for it in less than optimal rental income.

I certainly appreciate the argument that Xenia is trying to make, but I agree that it's better to keep a good tenant for a little less rent - to a point.
 
Last year, we tried to put the rent up on a property by $25/wk. This represented an increase of about 6% and it had been 2 years since the previous increase. It was still about $30/wk below the market for similar properties in the area. We want to get reasonable market rent, but we're happy to take a hit to keep a good tenant
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The exact reason why I prefer my PM's to increase the rent even if it's just by $5p/w each year to 'condition' the tenants. This was recommended to me by one PM and used it across all properties and worked well.

Obviously if market rent is higher will look to increase inline, but by not increasing at all the foot it off the pedal the tenants take all your rope when you give them a little.
 
I agree Brady, but the year before the market didn't rise, so we didn't ask for a rental increase at that time. The following year it rose by almost 10% but the tribunal felt we couldn't even go near this.

Over 15 years I've noticed that rent increases generally tend to be in the order of $5 - $20. Anything else tends to be treated (by tenants and PMs alike) as too much, or perhaps an unreasonable amount to increase the rent. For some of my properties, a $20 per week increase is less than 5%; not much in certain market cycles.

My point is that when a tenant stays in a property for years and years, the rent they pay tends to slip further and further behind the actual market. Initially it's not a problem and worthwhile for keeping a happy tenant. Eventually though the difference becomes significant.

There's active impediments, such as tenancy hearings, to getting the rent closer to market value. There comes a point where the most effective way to get the property back to market rent is to turn over the tenant (which you can't legally do very easily either, and no sane landlord would do this just for a rental increase).

I'm not arguing to turn over tenants to maximise profits, but Xenia's argument is not completely invalid either.

As a secondary observation, a lot of PMs are happy to not increase the rent because it makes their job somewhat easier by keeping the status quo; they're taking a passive approach to property management. Obviously not the ideal PM we want as a landlord, but it happens a lot. I'd take Xenia's approach to property management any day.
 
Peter_Tersteeg said:
Tenants who have been in a property for an extended period of time do tend to to be on a significantly lower rent that the market would expect from a new tenant.
Click to expand...

Quite the opposite in the case of lease renewals for commercial property - the tenant has usually committed substantial amounts of money to a fitout of the premises, so it is often a case that the Lessor is in a better position to exert pressure to achieve an above market outcome as it is more expensive for the tenant to relocate, lose goodwill of the location, undertake a new fitout/commit more funds to the fitout, and defit/make good the premises.
 
Definitely prefer long term tenants, the kind that look after the property well, maintain the yard, can attend to minor repairs themselves and offer to repaint most of the house for several weeks free rent. These kind of tenants are rare but are gold and I ensure that the rent is always slightly under market rent but not too far. These kind of tenants save you thousands in maintenance costs and wear and tear over the years, I wish I could find some more.
Other tenants in high demand properties who are only just acceptable For one reason or another the rent is always at market rent
 
Peter_Tersteeg said:
I recall one property (for sale) I inspected where the tenant was paying rent which was less than half the market value. He'd been there over 15 years. .
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That seems to be a trend.
Ancedotally I know a couple of cases.

One lady I know pays $320 a week for a 3 bedroom house when all the other comparable houses listed in the same suburb range from $430-$500. She's lived there for around 12 years and complained because the landlord only recently increased the rent up from $300.

In another case my friend self manages his own properties. He's got a 2 bedroom apartment near the beach. He only rents it out for $230 when the market value is $300. That tenant has been there for over a decade as well.

That comment about conditioning tenants with annual rent increases is a great idea, which I'm going to adopt.
 
Actually this month we took on a new property, vacant possession at settlement and we put on market for $450 per week - market price.

It was a townhouse in a group of 4 identical town houses.
The successful applicant came from the townhouse next door - they have been leasing the property since built 5 years ago. Lease is not being renewed because landlord wants to move in.

Their last increase took their lease to $400 per week from $395, still $50 below market rent.

These same tenants signed lease for our clients townhouse at $450 and were happy to pay that amount. Initially they were asking why it's $50 more and an identical floor plan and features?
They understood theirs was under rented once explained to them.
 
Very interesting thread. I would tend to agree with the general reaction that it is better to keep the current tenant at a slightly lower rent. My recent experience is that you always lose 2 weeks' rent on a changeover. 1 week for the new leasing fee and up to a week between tenants. 10 years ago I was regularly getting 1-2 days empty, but these days It seems more prudent to have a bond cleaner and a handyman through the place at least between tenants simply for reasons of having the place as pristine as possible on move-in so that you have a better chance of getting bond money for things that are borderline wear and tear at the end of the tenancy. 2 weeks' rent is 4% of the year approximately so I am quite happy to slip behind the market by up to 5%. AS LONG AS IT STAYS AT 5%.

If you have a place that has slipped to 10% below market and you can't get back to 5% for whatever reason, it may well be worthwhile to start again with a clean slate. Also, one thing that Xenia did not mention that is very important is that, if you decide to sell the place then the most recent rent you were getting will be a very key factor in what price people will decide that they want to pay.

I'm not so keen on the idea of testing the market for above-market rent. At above-market rent you tend to get below-market tenants. I'll keep my long-term good tenants in preference.
 
Xenia IM said:
Sometimes a long term tenant that has steady rent increases over years is not the best option.
Rent increases while a tenant is living in the property are usually based on a comparative market analysis of similar properties otherwise they could be challenged at a tribunal by the tenant and the price increase overruled.

When tenants leave however, rents can be tested at the higher end of the market or pushed beyond that depending on how much time is available. Ie if a tenant has communicated that they will be leaving 2 months prior, that is plenty of time to market the property and push for a higher rent with new tenants.

Overall, because the increases are steeper, a turnover of tenants can sometimes result in much higher rents achieved for the property and therefore a new precedence set for that type of property.
Agree or not?

Keep in mind that although there is a high turnover of tenants, ie once a year, the vacancy periods should still be close to ZERO if marketed effectively and early enough.
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and this is why I never use a real estate agent, and manage all my properties myself.... I hope this mind set is not indicative of all PM's.
 
Morbius said:
Very interesting thread. I would tend to agree with the general reaction that it is better to keep the current tenant at a slightly lower rent. My recent experience is that you always lose 2 weeks' rent on a changeover. 1 week for the new leasing fee and up to a week between tenants. 10 years ago I was regularly getting 1-2 days empty, but these days It seems more prudent to have a bond cleaner and a handyman through the place at least between tenants simply for reasons of having the place as pristine as possible on move-in so that you have a better chance of getting bond money for things that are borderline wear and tear at the end of the tenancy. 2 weeks' rent is 4% of the year approximately so I am quite happy to slip behind the market by up to 5%. AS LONG AS IT STAYS AT 5%.

If you have a place that has slipped to 10% below market and you can't get back to 5% for whatever reason, it may well be worthwhile to start again with a clean slate. Also, one thing that Xenia did not mention that is very important is that, if you decide to sell the place then the most recent rent you were getting will be a very key factor in what price people will decide that they want to pay.

I'm not so keen on the idea of testing the market for above-market rent. At above-market rent you tend to get below-market tenants. I'll keep my long-term good tenants in preference.
Click to expand...

I've got more than a few properties & my experience is that a tenant that is happy living where they are won't move. Based on this, I push my rents up to market all the time, and sometimes a cheeky $5 above. I've never once had a tenant leave due to the rent being unreasonably high.

When you sit there and analyse all the reasons why you are happy to leave a tenant paying up to 5% below market, just step back for a minute and look at it from the tenants point of view.

When a tenant decides to move house, they have costs and a huge inconvenience. First they need Bond money, then they've got to pack everything up, call on or their friends, or pay a mover, then unpack it all again at the new place. They need to change their address for all their mail, etc.

They also have to find a property they like, in an area they are happy to live in. They will have to pay whatever the market rates are at the time.

This is all time & money!

To me, leaving a tenant paying below market rates is just a guise from a lazy PM who doesn't want to do the work. I'm not a charity & this is my retirement income we're playing with, so like it or not, my tenants will (and do) pay market rates.
 
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