I have a dilemma (which I wish I had more often [thumbsup2]) and would be interested to hear others opinions on:
– The rental property is a large house with pool and big gardens in WA that requires a fair bit of on-going maintenance. It is rented for $285 per week and managed by a very good property manager. This is my highest risk rental property because of the potential for it to get trashed.
– The tenants have been there for 2 years and are very good: ‘model tenants’ and are keen to stay for another 2 years. We have a scheduled rent review in a couple of months.
– The suburb has gone berserk and the market now suggests a competitive rent for the house of $360 (based on a similar house just around the corner) and an increasing defecit between last years rent increase which was almost zero and the growing market conditions.
– The tenants have said they can’t afford $360 / week and will have to move out if we put it up that much. They want to sign another 2 year lease and I want to keep them. Hence the dilemma.
– I can do the basic maths and work out for a 2 year lease what the break even is between getting new tenants at the higher rate minus all outgoings to get them in there vs. keeping them and taking a lower rate. However this doesn’t take into account risk.
– My question is how do people quantify risk in $$ terms? [weird]For example is $20 less than the going market rate per week worth keeping really good tenants or should it be 10% of total rent, some other measure or do I just guess??Thanks.
AndrewIf It is a nice place, then good tenants may actually be better if they have less wear and tear on the place than bad tenants.
Personally, I’d take lower rent “Good” Tenants over higher paying scoundrels anyday!.
In fact my whole portfolio has a good tenant base paying cheaper prices , when last year I had lotsa a trouble squeezing extra bucks out of ratbags.!.
Raise the rent to a fair compromise, and enjoy good times.
cheers
Live, Learn and GrowLifexperience
I would beg to differ that this is a “Very Good Property Manager”, allowing a property fo fall 25% behind a true market value, is not usually a sign of a good property manager. Hence the problem of trying in one foul swoop to increase rent up to market value.
If I could get 25% below market value, I’d be a model tenant also.
Personally, I would not what your dilemma, to be so worried about my property being trashed that I was scared to maximise its popential return.
One way of reducing risk is to not accept long term leases from the start. 6 month should be enough to determine if you want to keep tenants.
I also pay a good property manager and Insurance to so that I don’t have to worry myself.If $360 is realistic, and you really want this tenant, I’d start at minimum of $325 pw and not rule out increments over the 2 year lease period.
Mal
Getting out of your comfort zone, can help you become comfortable
The tenant could be bluffing about moving out. What about a compromise, try to get half the increase now and another in 6 months, then link it to the cpi maybe?
Also, may not be much, but having extra rent per week will help your serviceability for borrowing.
Terryw
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Yep, to me it sounds like the tenants are playing you for a fool, and whilst where at it, so is the managing agent.
Sorry to be harsh, but in this situation, I would also increase the rent, probably somewhere in the middle as shwing suggested. (then another increase in 12 months – 6 is to soon) I would take ownership of this particular issue. Visit the tenants and explain the situation. Meet them half way, explain that an increase hasnt happened in some time, and that the place is of the highest quality and deserves a little more. Ask them if there is anything they are unhappy with at the same time. (if they say no, then they know there on a good deal – If they say yes, then address the issue) I would also be asking agents in the area what the demand is like for properties of your type and area, and if your current tenants did move out, if you could quickly re-tenant.
Also, what happens in two years when your tenant says, they cant afford to pay more..do you let them stay when rates are around $400
Depends on the dirt value of course, but I reckon a large house with nice pool and big garden in a decent area would be worth about 400 to 450K.
Lets have a look at your nett rental with a gross of $ 285 p.w. (gross yield of say 3.7 to 3.3%)
Total PM fees, say 13% of gross takings : $ 37 p.w.
Shire rates, say $ 1K p.a. : $ 20 p.w.
Water rates, say $ 600 p.a. : $ 12 p.w.
Land tax, say $ 1,000 p.a. : $ 20 p.w.
Insurances, say $ 300 p.a. : $ 6 p.w.
Maintenance, big you reckon, say $ 1,000 p.a. : $ 20 p.w.That leaves you in the hand a nett rental of about $ 170 p.w. (nett yield of 2.2 to 1.9% !!!!), which would service a residential debt interest only of about $ 130K. If the loan is any bigger than this, you’re headed out the back door cashflow wise. However, if you are fearful of increasing your 2% nett yield then this possibly isn’t the game for you.
One of the best methods of increasing the rents is to kick the bleating “We can’t afford the rent” residential tenants out. With them having to pay the rent out of their after tax pay packet – you’ll always get this resistance. Install new ones at the higher rate and off you go with your standard escalation clauses.
We tried that tactic up the line somewhat with our bank, bleating about not paying the interest and got nowhere with them…..for them it’s pay up or choof off. We now copy them.
We got so fed up with listening to the bleating, both from tenants and PM’s – who I thought were meant to be on our side, we simply stopped playing the game and don’t have to deal with their whinging any more. Worked great.
Thanks for the feedback.
This house used to be our POR and we paid most of the mortgage off when we were living in it so it is cash flow positive currently. That doesn’t mean we aren’t thinking about selling it. Not so sure it is a great use of capital…..
We have built into the contract 6 monthly rent reviews (even though it is a 2 year lease which I wouldn’t change), we have used the reviews and incresaed rent each time, although only slightly ($10 or so). I take your points about the property manager – they should have spotted this before (I will take this one on board).
I am still not clear how you come up with your suggested rent incresaes though. These look like ‘stabs in the dark’ or ‘about this will do’ tyoe of approaches. Does anyone have any quantitative risk vs. reward techniques / methodologies. In the industrty I work in we use very specific quantiative risk – reward methods which help determine just how much risk is worth in $$ terms.
Ramping the rent up to full market value and not taking into account the quality of tenants wouldn;t in my opinion be a sensible thing to do. No amount of insurance or good property managing can offset the crap that you still have to go through (even if you are insulated) with bad tenants.
Cheers,
If I were you, I wouldnt try to apply a scenario or theory from another industry to the property industry. Cliche’s sound great, but in fact sometimes are totally not applicable.
Maybe in this instance you cant put this issue into Dollar terms???. If you could, Im sure we could come up to tens of scenarios or calculations,.Besides every situation is different.
In regards to this sitaution, I would look at say 3-4 properties of similar faetures, size, location and quality, then average it out. In the middle wouldnt be a bad place to start. As far as putting a price on tenants, I wouldnt overthink it. Bad tenants are probably 5% of cases. This means, if the current tenants hit the road, chances are you will get new tenants with no problems. (not the other way round which seems to be the way we are looking at things) Besides if you have landlord insurance, your mind should be at ease.Definitely go with the rent increase. Even if you consider it a risk.
andrew – it should be pretty easy to find out the 10 year and 20 year average yields for your suburb – have look at this info and it may help you set a reasonable rent for the property.
Empty homes yield 0% balance is the key especially if you have a larger portfolio – is the house arond the corner for 360 empty or tenanted?
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Andrew
The Local Tenant Authority usually restrict the amount you can increase rent each time. In Vic I thought it was 5% per year, (correct me if I’m wrong?).
For me, the properties I mentioned above are located in an area with a higher yield than usual, but also with a tenant base that has a lot of ratbags, and seasonal periods of long vacancies. It is a scenario I’m happy with.
Horses for courses though, If there is high demand for rental vacancies, then you should get good tenants and a premium rental price.
Talk to your PM and even ring other R.E. Agents in town and have a chat about the rental market to get a full picture.
There is no hard and fast answer, it is relative to the market, and also to the condition and rental appeal of your property.
NOTE, Good tenants won’t leave because
of a rent increase. The cost and headache of moving usually outweighs a “reasonable” price increase.In my opinion, I think that good tenants do have a value too that should have some weight in making your decision.
Live, Learn and GrowLifexperience
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