It can be difficult to know when to raise the rent as an investment owner and without proper guidance, you might get it wrong. Whether you've owned your investment for a long time or are looking to purchase a property and aren't sure how to broach the subject of a rent raise with the tenants, we can offer some advice.
There are two ways to increase your rental returns – raise the rent and reduce your costs. Here are our best tips for doing both.
Raising the rent
You can only raise the rent when market conditions allow and/or when you improve your property.
Ask your property manager to review weekly market rental values in your suburb at least annually to ensure your property is rented at the maximum possible rent. Most managers do this as a matter of routine close to a lease’s end date. They will show you a list of comparable rented properties and provide a recommendation.
It's important to keep in mind the location that your investment property is in. Specialising in Sydney's eastern suburbs, we can offer advice to investment buyers who are looking for a property that has high rental yield potential. Suburbs such as Randwick and North Bondi tend to be in high demand, so its worth taking a look at those comparable rentals mentioned above.
You can also raise the rent if you improve your property.
Full-scale renovations will obviously take your investment to a new level of rental value; and you will also be able to take advantage of depreciation benefits on new fittings and fixtures.
If you’re not interested in a big project, there are many low-cost ways to increase your rental returns.
Here are our ideas:
• Install an air conditioner
• Install a dishwasher
• Install built-in wardrobes in all bedrooms
• Refresh the bathroom – install a new vanity, add a modern wall mirror or cabinet, replace shower curtains with frameless glass, replace old taps, re-spray bathtubs and tiles.
• Refresh the kitchen – re-paint cupboard doors, replace old door handles with sleek modern styles, update appliances, replace a scratched and worn sink.
• Outdoor living is very popular, so upgrade your outdoor areas to create relaxing, pleasant spaces for your tenants to enjoy. Consider installing a barbecue and vertical garden on balconies; and pressure clean tiles and pavers. If your investment is a house, tidy up the garden and create an alfresco dining area – ideally with shade.
• Replace carpet with hardwood timber floors.
• Re-paint every few years for an as-new look.
• Update fixtures such as taps, light switches and doorknobs.
• Allow pets (apartment owners need to check their building’s policy first).
• Add extra storage such as built-in cupboards and bookshelves.
• Offer free broadband, Foxtel or gardening services.
• If your property doesn’t have an internal laundry, install a washer/dryer in the kitchen.
• Show tenants you care by responding to repair requests and other issues immediately. Tenants are more likely to stay and accept rent increases if you look after them.
• Good tenants can feel offended when you put the rent up. Make sure your property manager explains that the increase is solely due to market conditions or a property upgrade. Show the tenants comparable properties currently advertised or recently rented at the same price.
Reducing your costs
• Insist on a 12-month lease as a minimum timeframe. Six-month rotations will likely reduce your rental returns, even if you raise the rent each time. This is because new tenancies tend to cost at least one week’s rent in vacancy and another week’s rent in management fees.
• Shop around for the best building, contents and landlord’s insurance. Take advantage of multi-policy discounts offered by companies you are already with for other insurances, such as car and home contents.
• Use depreciation to reduce tax. Before you rent the property out, have a depreciation schedule done by a quantity surveyor. The schedule will tell you how much you can claim as a tax deduction each year.
• Take advantage of negative gearing to reduce tax. Negative gearing is when the costs of ownership (including interest on your loan) exceed the rental returns, resulting in a loss. If you are eligible for negative gearing, you can deduct the loss from your taxable income.
• Monitor interest rates and periodically ring your bank to ask for a better deal. Consider refinancing if the benefits outweigh the costs and time involved.
For more information on how to get the best out of your investment property, get in touch with Ann Paterson Real Estate.