The Landlord Business

Isn’t it funny how when things are not in our faces every single day how easily we forget about them. This time last year we were engaged in a campaign encouraging landlords to sign petitions and enter submissions against a large range of rental reforms that Daniel Andrews proposed to introduce in Victoria to ‘make renting fairer’. After discovering the statistic that 1 in 3 people in Victoria rent their homes Andrews found a niche market and these proposed changes formed a key part of his political campaign in the state election…and it worked. He had the tenants of Victoria eating out of the palm of his hand, his reforms passed the upper house in late October last year and we all know the results of the State Election.

Earlier this year the first of the changes took effect with long term leases five years or more recognised under the Residential Tenancies Act provided they were on the prescribed form and just last week two more came into effect. Agents and landlords are now permitted to provide the Consumer Affairs Handbook ‘A Guide to Renting’ electronically to tenants provided they agree to electronic communications between parties. Previously landlords and agents were required to provide a hard copy of this publication at the beginning of all tenancies. Additionally the Residential Tenancies Act was amended to reflect that rent increases could only be issued to tenants once every 12 months with 60 days written notice to the tenant. Previously, rent could be reviewed and increased every six months dependent on the terms and conditions of the tenancy agreement or where a tenant was not on a fixed term lease.

With the most recent changes regarding rent increases in mind and the current market conditions I thought there was no better time to write a piece on rents and rental increases.

Let’s face it, when you buy an investment property it’s a business decision based on facts and figures, right? Whether you make your purchase through a marketing group, a buyers advocate or you spend countless hours researching and deciding on the best purchase to make alone the main focus of your decision is based on the purchase price and the expected return on investment. If the figures stack up and the finance is approved we make a purchase and market our properties for rent at the highest possible market rent with the view that this is our starting point, as time goes on we expect that our rent will go up and our mortgage will go down and we will start to build valuable equity that will result in the ability for future purchases to start this process all over again and secure our futures and those of our kids. That’s how it’s all supposed to work, right? But what we rarely consider is the business relationship that we enter into after the purchase – with our tenant.

It has to be said that in 90% of the lease renewal obligations in our office the first thing our landlords ask when we seek permission to renew a fixed term tenancy is ‘how much can we increase the rent to?’. It does seem like a simple a valid question but surprisingly enough the answer is quite complicated. And just because the legislation offers the option for an annual increase in rent to existing tenants, does it mean that a landlord automatically has the right to increase the rent every year for their tenants?

Anyone who has ever dealt with our office knows how much we stress the importance of research when it comes to our rents, we rely so heavily on up to date comparative market analysis reports to make sure our rents are in line with current market values. Even when appraising properties that might be months away we encourage clients to come back to us for an up to date comparative market analysis closer to settlement. The rental market is one that ebbs and flows, it’s a supply and demand industry and there are so many factors that contribute to market rents. Whether you’re renewing your tenants lease, marketing the property for the first time or your tenant is vacating – the research remains the same and its essential.

So what effects the market? There are endless answers to this question – it’s effected by the economy, by the supply and demand in any given area, by the demographics, by the weather, by politics. At any given time there’s over one hundred answers to that question but ultimately the market is controlled by the Consumer- a property is only worth what a tenant is willing to pay for it. If there are 10 properties on the market between $380 and $400 per week and your property hits the market at $450 but like all the others offers 4 bedrooms, 2 bathrooms, 2 living areas and a double lock up garage, then your property is going to sit on the market longer whilst all those cheaper properties that offer exactly the same thing are leased. With today’s living expenses constantly increasing and our wages so far behind the rate of increase tenants are always going to opt for the cheaper property if it offers them the same comfort and security as the property across the road for $50 more per week. To be quite honest, tenants don’t care about fancy stainless steel appliances or upgraded fixtures and fittings, whilst these make a perfect for presentation they are things that will increase your asking price if and when it comes time to sell, but do not convert to a higher rental price at the end of the day.

Right now the rental market is incredibly slow, April was a complete write off for most with school holidays, Easter and Anzac Day there was very little movement of stock for most agencies and as we entered into Winter the pace remained slower. I’ve been chatting with other agents in our surrounding areas and they’re all experiencing the same thing- little to no attendance at opens and lower levels in enquiry. In 16 years of Property Management I actually feel as if this could be the longest slowest period I’ve ever experienced. As a result the median rents for most areas have dropped dramatically as the demand is slow and the market experiences an oversupply. Twelve months ago we were at the height of the market, sales prices were through the roof and stock was moving quickly, investors were everywhere trying to grab a bargain and we could barely keep up with the demand from tenants for properties, rents were at their peak and properties were been leased in 7 days or less. Fast forward to now and we’re seeing an average vacancy rate in Melbourne Metro of between 20-25 days and rents on average are $30-$40 lower than they were this time last year. As agents we’re marketing with ‘outside the box’ methods and doubling our availability for opens to try and stay ahead and minimise our vacancy times in a trial and error process to cater to what the market wants to be ahead of the competition. I won’t lie, it’s tough and it’s frustrating.

So back to that rent increase question – can you increase your tenants rent? Yes. According to the legislation a landlord can review and increase the rent every 12 months with 60 days written notice to the tenant.
Does this mean that you are entitled to increase the rent? No.
Does this mean that you should increase the rent? No.

At the end of the day the decision to increase the rent is a landlord’s choice. As agents we are required to act on the instructions of our landlords but it is also our duty to advise you on what we believe the right decision is when reviewing the rent for your property and consider all of the circumstances. If you have a great tenant who pays their rent on time and treats your property with respect as if it were their own home then you need to consider what might happen if you increase their rent after the end of their fixed term tenancy. If you increase and your tenant then chooses to vacate, opting to move to one of those cheaper properties that offer them the same space they currently have then chances are you are going to have a vacancy and depending on the market this could be 7 days or less or 20-25 days. If you have a property rented at $400 per week and increase the rent by just $10 per week for your current tenant and they then choose to vacate loss of rent due to vacancy could be as little as $400 in a strong and busy market or as devastating as $1400 or more in a slow and sluggish market – and for an increase in rent of $520 per year. Similarly your $400 per week property may hit a market where the median rent sits at $380 per week meaning you will loose your amazing tenant at $400 per week and end up with less rent and a loss of rent due to vacancy. Before you issue that notice it’s important to ask yourself (and your property manager) which is the best decision to make in this situation, for this property, with these tenants, in this market.

Investment properties are all about business. Just as you make a business decision to purchase a property you make a decision to enter into a business relationship with your tenant so when the lease comes up for renewal ask yourself this, if I increase the rent is this person going to want to continue to do business with me?