Tenants dont wish to pay rent increase!

[JCM]

I was instructed by my PM that now that the tenants have been living in the property for just on a year and with the increase in cost of living and interest rates that it would be a good idea to increase then rent.
The current rent is $370/wk and the agent suggested that I increase it by $15/wk to $385/wk.
The tenants informed her that they cannot afford to pay the extra increase.
The PM suggested that we could negotiate a lower increase but the tenants replied that they could not afford any increase and would give notice if there was any increase.
What do others suggest i do?
The PM did advise me that the current rent the tenants are paying is somewhat low and the increase would bring it up to what the average is in the area.

john

 

[Leghorn]

Increase the rent and if they move out you can always get another tenant. if you keep it below market you are losing money every week.

 

[Propertunity]

Increase the rent and if they move out you can always get another tenant. if you keep it below market you are losing money every week.

^ ^ what he said.
John, you are not a charity.

This is a try-on by your tenants. $10 a week increase is $520 per year. It will cost them $500+ for a removalist just to leave your property.

Put the rent up.

 

[kathryn d]

Increase the rent anyways.
A tenant will also need to consider the movings charges, connection charges etc.
If you give in now, you will be expected to from now on.

 

[Peterw]

Guys, you have forgotten the other option, write to your bank, and request that they do not increase your interest, and to the local council request them not to increase your rates, write to .......
I think you get my drift, and then inform the tenants that their request will be granted, when your requests are granted .....

 

[Ace in the Hole]

Hi John,

I'm not an experienced landlord, but here's my thoughts anyway.
I feel a little different to the replies so far.

If putting the rent up by $15/week will bring it to the right market rent, you are not too far below fair right right now.
Sure, the tenants may be bluffing you about moving, but maybe they really can't afford it and may consider moving into a place considerably cheaper, which will pay for their moving costs.

Also, what if you lose a week or 2 vacancy between tenants?
And also, do you pay 1 weeks letting fee to the property manager, $385?
That could be $1000 right there you may lose.
If so, personally, I'd keep the current tennants for another year or so if they have been good.
If the gap between market rent and what the tenants are currently paying increases more, that's when I would make a firm decision to increase the rent with no negotiation.

Right now I just don't think the gap between market rent and rent received is big enough to risk losing a good tenant, (are they good?)

 

[buzzlightyear]

The assumption around increasing the rent, is that the advice from your PM is a true reflection of what the market is paying. I want to know myself what the market is paying and not necessarily rely on the PM. Sure that's what they should do and I am sure many will be accurate, its just a personal preference that I can confirm what is being told to me.

 

[DEC]

Right now I just don't think the gap between market rent and rent received is big enough to risk losing a good tenant, (are they good?)

What's a good tenant? Keeping the house clean and tidy and the yard maintained while paying the rent on time is nothing special, it is their legal obligation.

 

[neK]

^ ^ what he said.
John, you are not a charity.

This is a try-on by your tenants. $10 a week increase is $520 per year. It will cost them $500+ for a removalist just to leave your property.

Put the rent up.

On the flipside, if the tenants do move out, assuming a vacancy of 2-3 weeks (the minimum notice other renters need to give their current rental for termination is 3 weeks).

Then you also need to pay the agent another letting fee (usually 1 week rent + GST) plus a further $15 on the tenancy agreement.

So ($370 x 2) + ($370 x 1.1) + $15 = $1162.

It will cost you $1,162 just to find new tenants.

So to compensate for that you would need to increase the rent by a minimum $22 to recoup it over a 1 year period before you would see any gains.

EDIT: After working that out, I noticed Ace in the Hole's post.

That said, what I did in the past was approach the tenant and explained the situation, told them I needed to increase the rent due to increased council rates and water rates, then asked them what they thought was fair.

Most of them happily increased it by $10 per week themselves

The trick is to figure out how much it will cost them to move and up it by that amount. The tenants will do the sums and realise its not worth the effort. But i think if you increased it by $10 it will be fine if its under market rates already.

What's a good tenant? Keeping the house clean and tidy and the yard maintained while paying the rent on time is nothing special, it is their legal obligation.

One who pays the rent on time, doesnt trash the property, call up requesting things be added or fixed. So unless the house is brand new, there is always a chance people will always ask for things. These unplanned expenses may be greater or may be less than increased rent. Either way, you then gotta add the other $1,162 on top of this amount.

Also, you mentioned its their legal obligation which I agree with. However not everyone adheres to it. If you got a good tenant, stick with them.

Increase the rent anyways.
A tenant will also need to consider the movings charges, connection charges etc.
If you give in now, you will be expected to from now on.

There are no connection charges (in sydney anyway) that apply to gas and electricity if you're not on contract.

The only connection charges are internet and home phone which would be less than $520 per year. Maybe foxtel too if they have it.

Yes there are removal charges, but thats if the person is paying for a removalist. If they intend on getting mates to help, it might cost a case of beers. Mind you there is the time is money factor, but not everyone thinks of it that way.

 

[Ace in the Hole]

What's a good tenant? Keeping the house clean and tidy and the yard maintained while paying the rent on time is nothing special, it is their legal obligation.

Well, to add to the points you already mentioned.
I believe a good tenant is a secured and secure tenant.

 

[lizzie]

but, if after having done your research and found that there is a low vacancy rate, and higher rents, in your area, then put the rent up.

if you don't put it up $15 this time, and then $15 again in 12 months times, and if you're already under market - before you know it, you're $50 behind the market in rent/week.

that's $2500 out of your pocket per year.

if the rental market is good, and the rent is low, i'd put it up $10 and get a reasonable tenant in - one that accepts that increased rent is part of the life of a renter and if you can't afford it, then you have to go to where you can.

 

[Rixter]

On the flipside, if the tenants do move out, assuming a vacancy of 2-3 weeks (the minimum notice other renters need to give their current rental for termination is 3 weeks).

Then you also need to pay the agent another letting fee (usually 1 week rent + GST) plus a further $15 on the tenancy agreement.

So ($370 x 2) + ($370 x 1.1) + $15 = $1162.

It will cost you $1,162 just to find new tenants.

Guys you have the option of taking a cash flow loss or a capital loss. Trap for newbies. When you have a vacancy why take the hit from your cash flow when you can cover the hit using OPM from your capital. Cost of capital hit is determined by your IR.

So if you use OPM to cover $1162 (using your example) and your IR is 7%, your actual loss is $81.34 (1162 x 7%) or $1.56 per week as opposed to $22.34 per week..

If you have just a $15 per week rent increase with the new tenants you are $13.44 p/w up in cash flow - I dont know about you but it is a no brainer.

The poor/middle class think cash flow, whilst the rich/wealthy think capital.

As propertunity states, you're not a charity. Up the rent if the market justifies it.

I hope this helps.

 

[neK]

Guys you have the option of taking a cash flow loss or a capital loss. Trap for newbies. When you have a vacancy why take the hit from your cash flow when you can cover the hit using OPM from your capital. Cost of capital hit is determined by your IR.

What do you mean by that? As in add loss of rent to your cost base?

So if you use OPM to cover $1162 (using your example) and your IR is 7%, your actual loss is $81.34 (1162 x 7%) or $1.56 per week as opposed to $22.34 per week..

If you have just a $15 per week rent increase with the new tenants you are $13.44 p/w up in cash flow - I dont know about you but it is a no brainer.

How do you get to $13.44 p/w ? I can't seem to follow your calcs.

The poor/middle class think cash flow, whilst the rich/wealthy think capital.

Are you referring to capital growth here?

Sorry about all the questions, but im interested this OPM (which I assume stands for Operating Profit Margin)?

 

[jaycee]

What do you mean by that? As in add loss of rent to your cost base?


How do you get to $13.44 p/w ? I can't seem to follow your calcs.


Are you referring to capital growth here?

Sorry about all the questions, but im interested this OPM (which I assume stands for Operating Profit Margin)?

OPM = Other People's Money. I first heard the term n that funny Danny De Vito movie I can't think of right now.

What if you used a Line of Credit to pay the investment shortfall not your own Pay As You Go salary.... This LOC would go up, meaning you used your cpaital, but not your cashflow.

 

[VCDenton]

Hi

OPM=other people money

I think Rixter is saying that the loss incurred in case when tenant moving out can be taken up by ur equity like in a LOC, the cost of using that equity every week is the loss*the interest rate/52=around ~$1 dollar and in contrast u get 15 dollar rise later on so he simply deducts that $1 from $15 suggesting u r ~$13 ahead when u use OPM

Rick can correct me as I am abit confused on what I writing while typing it out

 

[neK]

Ahh i think I get what you people are talking about now.

However I see the following flaws in this strategy from a practical point of view.

1. You're not exactly going to get a Line of Credit for an amount as small as $1,000.

2. However if you did, you would end up owing $1,162 more as you're paying Interest Only.

2a. Also having heaps little loans is quite impractical and your accountant would probably charge more because administering an additional account means more time and time = money.

3. Assuming you're $1,162 behind due to the vacancy resulting from the rent increase of $15, using Rixter's calcs, you are ahead in cash flow by $13.62, but not from a net asset point of view, considering you'll require 85.3 weeks just to break even ($1,162 / 13.62).

This is just how I look at it, however I am more than happy to corrected.

 

[jaycee]

Ahh i think I get what you people are talking about now.

However I see the following flaws in this strategy from a practical point of view.

1. You're not exactly going to get a Line of Credit for an amount as small as $1,000.

2. However if you did, you would end up owing $1,162 more as you're paying Interest Only.

2a. Also having heaps little loans is quite impractical and your accountant would probably charge more because administering an additional account means more time and time = money.

3. Assuming you're $1,162 behind due to the vacancy resulting from the rent increase of $15, using Rixter's calcs, you are ahead in cash flow by $13.62, but not from a net asset point of view, considering you'll require 85.3 weeks just to break even ($1,162 / 13.62).

This is just how I look at it, however I am more than happy to corrected.

1. LOC's are generally setup for a much larger amount, waste of time probably getting a loan of that type fo $1k... But you do not hav to USE th e full loan amount at once, or ever - sort of like a credit card limit....

So no impracticality there.

2. So you would owe $162 more than if you did not do this right ? This is the cost of doing it this way ( I did not follwo your nubmers carefull to chekck them etc) . The idea is that this saves you forking out $1k out of your weekly pay, which might be a strain..

2a Accountant, possibly.....don't really know.

3. $1000 loss you gave in the example will always be there. Rixter's post showed a way of not affecting your cashflow because of that $1000 loss.It would depend on things like how much equity you have - if you have a really low LVR etc, you might be happy to do that for a bit.. if you are really that, you might not even have the option.

All good questions by the way...

 

[neK]

Line of Credit with available funds.... silly me for not thinking of that That is better than taking out multiple small loans.

But going back to Rixter's post, suppose you suffered an income loss of $1,162 as a result of that $15 p/w rent increase. Rixter is saying using OPM you actually come out on top in terms of cash flow.

OPM = Borrowed from the bank (where else would it come from?)

Now I would say most of us here can probably cop that hit of a 2 week vacancy + letting fee, if we can't we're probably geared to the hills with not much of an exit strategy.

So realistically, would you even purposely take a capital loss, simply to avoid the cash flow loss (even though it has minimal financial impact?).

Assume for a moment you took a capital loss and drew down from the LOC, what then? The money ends up sitting an offset account offsetting the interest on your PPR?

Then what happens in event of an audit? The money was taken out of the LOC for personal use (if using the above scenario), if that LOC was used for investment purposes, you've just messed your tax accounting up.

If the LOC was not tax deductible in the first place, then taking money to out of the LOC to put into a PPR loan adds no value whatsoever.

I'm still trying to understand the benefits of this. Sounds good on paper and to me it appears to help justify the result (ie increase the rent by $15, cop 2 week vacancy+letting fee, but your real loss is only $1.56 p/w), but when you break everything back down, nothing has changed, your net position is still the same, however you're just paying interest on the amount of $1,162. Its this part I'm failing to understand. How can paying an extra $1.56 for the same net position be better?

 

[jaycee]

Thnk of the Line of Credit as somethign real s

Just another loan the bank offers you.

You can decide to use it for some expense if you want to / need to.

Of course, loans come with interest charges.

With the line of credit you do not have to pay back the money you borrow of it until/unless you hit the loan's limit. So of you decide not to, you can not pay anything off it after accumulating $1k to help for your expenses during your IP vacancy. Just leave it there, yeah it builds up interest, but if your portfolio growth and your position sustain it etc it might be worthwhile

It's sort of up to you if you think it's worthwhile or not. You may think "I'll fund it out of my pay, it'll be ok"

This is what I sort of know and understand only of course.

 

[skater]

I'm not an experienced landlord,

OK, we're all here to learn.

Sure, the tenants may be bluffing you about moving, but maybe they really can't afford it

That's life as a tenant!

Also, what if you lose a week or 2 vacancy between tenants?
And also, do you pay 1 weeks letting fee to the property manager, $385?
That could be $1000 right there you may lose.

Think of it this way. If you have one property that is losing $15pw because that is how far it is behind in market rents, you only lose $15pw, right? Big deal, that's not a lot of money. But, as Lizzie so rightly pointed out, it does not take long for that $15 to creep up to $50 or maybe even more.

If you only have one IP, then it's still not a big cashflow hit, especially if you are on a large income, but do you want to grow your portfolio? Let's say you have 10 IP's. If all 10 of them are below market rates you lose $150pw. Not looking so good now, is it? Lets say you let them all creep up to $50pw below. Wow! Now you are losing $500pw.

A couple of others stole my catch-cry, with is "You are not a charity". Simply put, there are many, many tenants out there who cry poor all the time. Don't be fooled by it. Often they have the funds, they just would prefer to not give it to you. Remember, if they can keep the rent down they have more money for the pub, or the latest toys, or whatever else it is they want to buy.

If they truely cannot afford the rent, then they cannot afford to live there. Keeping them on, at a reduced rate, only delays the inevitable. They will have to move eventually, so why not do it now so that you can get someone else in who can afford it. Who knows the next tenant could be your next long term tenant with no affordability issues. Keeping them there because you are scared of the relet fees is a seriously flawed arguement.

Now, Rixter got all complicated with his calcs but I'm going to keep it simple, cause I'm a simple kinda girl. When you go for lending to purchase your next IP, one of the things they look at is your rental income. The larger the rental income (same as your income from your job), the more serviceability you have. If you are losing $500pw in rental income, then you are affecting your serviceability in a big way.

Another thing to consider is your CG. OK, it won't affect the value of the property directly, but I have purchased several properties now that were leased for considerably lower than market rates. When you go looking to buy a property, if you don't know what the rents are for an area, many investors will, instead of doing their own homework, just rely on what the current rent is, or what the Agent tells them.

I have seen numerous properties not selling because of the low yeild. I have also purchased well below market value by successfully explaining my very low-ball offer to an Agent explaining that the purchase price was only bringing in a yeild of x%. Of course, this won't work with all Agents, and it certainly won't work in all areas, but it is something else to consider.