Wednesday 11 March 2009

Time to play the evil landlord

It's been well over a year since I last did the 'annual' rent review for our investment property. Today the latest official rental statistics were available online from the NSW Dept of Housing, and our tenants won't be happy with the news. According to 'Table 3:Weekly rent for new bonds- Greater Metropolitan Sydney -Separate houses - 3BR, Warringah Shire' for the Dec '08 quarter, the average weekly rent for the bottom quartile of new rental agreements was $571 per week. That's an increase of 16.4% compared to when I last adjusted our rent (based on the Sep '07 figures). The last rent increase for our rental property was also in double digits, so our tenants negotiated for the rent to be raised in two stages, with the full rent increase only coming into effect after a six month delay.

This review we've decided to again raise the rent for our property by less than the market average, but it's still a hefty 15.5% rise from the current $450 per week to $480 from 1 June and then to $525 from 1 Dec. I'm sure our tenants will complain about this rent hike and try to negotiate a smaller increase, but I really don't want to let the rent fall too far below prevailing market levels. Even when the full increase comes into effect in December the rent will only be 91% of the average rent for similar properties in this area as of last December, and I'm sure rents will have risen further by the time the increase comes into effect at the end of the year, given the low vacancy rates in Sydney, the slump in new home construction, and record high immigration rates with Sydney the destination of choice for the majority of immigrants to Australia.

When we first purchased the property we set the rent based on expert advice from local rental property managers, and the rent was 98% of the relevant market average. Since then our rent has slowly fallen behind the curve, as shown below. Consistently getting 10% less than market rent is the equivalent of having the property vacant for 5 or 6 weeks of the year.

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Anonymous said...

If you don't mind.. what is the gross rental return on that property? I find that residential property gross around 3~5% and after interest and expenses, it's around 1% net.

Debt Dieter said...

Wow, a $326 a month increase over 6months is a huge jump, expect to have them move out is my guess.

My landlord put the rent up $20 a week on my place in Feb, but I knew I was paying well below the market rate. I do love 12 month leases for this very reason.

Bigchrisb said...

Agree with you that its probably time to raise the rent on that one! However, disagree with your statement about 10% being equivalent to 5 or 6 weeks of vacancy as a bit simplistic. By the time you factored in advertising costs and the process and hassle of establishing a new tenant, I'd suggest that the difference is a bit smaller. I think I remember reading something from the REI about renewing rentals typically being about 8% lower than new rentals, presumably because of these transaction costs. said...

Property cost $430K in 2000, and my current estimated market value is around $700K. So gross rental return of current rent is 3.35%, and after the full rent comes into effect next December, based on current valuation, the gross rent will have increased to 3.87%.

It's a bit hard to work out net rent - our interest only payments are $1357 a month, which is about 2.33% of current valuation, leaving a net rent of about 1%. Take off another $1,200 or so for council rates and $2,000+ for land taxes and some other miscellaneous costs and the property has negligible net rent return. It's value as an investment relies on achieving some capital gains over time.

Also, two years ago a tree fell on the house, and although the insurance paid for the repair costs, we had to halve the rent for six months while the tenants were inconvenienced by having a tarp on the roof and then workmen fixing the roof and part of the living room ceiling.

And last year some structural corrosion of the steel foundation posts below the house had to be repaired, and the balcony reinforced to bring it up to modern standards. That cost us over $10,000, so net rent has been negative for the past couple of years.

At least this provided some tax deductions, although due to making salary sacrifice contributions into our superannuation our taxable income isn't very high, so the value of tax deductions is limited.

ps. DD - the tenants may choose to move out as they have been there for more than three years now, and they were saving up to buy their own house. With interest rates having dropped a lot, and house prices down a little over the past year, they may decide to buy their own home. I expect new tenants would pay about 5-10% than I'm asking of the current tenants, based on actual rental bond statistics for this region and the advertised properties for rent in this suburb. If that's the case, the extra rent should cover the costs of getting new tenants within the first year.