Maximising the rent is important for investment owners but setting a high asking rent does not always translate into a better annual return. But how is that possible? Doesn’t a higher weekly rent mean a higher return? Well sometimes yes, but sometimes no.
Every property investor wants to maximise the return on their investment. But the biggest threat to a good return isn’t just charging too little rent. It is tenant turnover including periods of no rent at all.
A vacant apartment doesn’t just stop generating income. It starts costing money. Every week without a tenant is rent that can never be recovered. Then come the additional expenses. Leasing commissions, advertising, photography, and maybe cleaning and minor repairs.
Chasing every last rental dollar can quickly become an expensive exercise if it results in rental voids.
We can not ignore the reality of higher costs facing today’s investors. The list of costs is long and many have increased lately. They include
- Interest / Finance
- Landlord insurance
- Owners corporation fees
- Council and water rates
- Compliance requirements
- Rental management
- Repairs and Maintenance costs
- Land tax
Many owners are under financial pressure, and it is entirely reasonable to review the rent to help offset these increasing expenses.
The challenge is understanding the difference between increasing rent and maximising investment returns. They are not always the same thing.
Successful investors understand that residential property is a long-term investment. Their goal isn’t simply to achieve the highest short term rent. It is to generate the highest annual income, year after year. Part of this success includes having as little interruption as possible.
That starts with attracting the right tenant at the right rent.
The best tenants are also the most discerning. They pay their rent on time, look after the property, communicate openly and often remain in the property for many years. They also have a choice. When they move, they compare properties carefully, understand the market and are unlikely to pay an inflated rent.
Properties with an above market asking rent often remain vacant longer and can end up attracting applicants who have fewer options. That’s rarely the best outcome for an investor.
Setting a fair market rent is therefore a tricky balance. There is nothing wrong with asking for a “stretch” rent. But remember the Winter months are traditionally a slower leasing time and the market often plateaus or dips slightly. If the response is weak it is important to adjust quickly to meet the market and get it leased.
The Numbers Tell the Story
The impact of the higher rent vs stable tenant scenario becomes clear when you do the numbers. Here is an example.
An apartment rented at a fair market rent of $650 per week for the full 52 weeks generates:
$650/wk × 52 weeks = $33,800
Compare that with an asking rent of $670 per week, but losing four weeks while the property is vacant and a new tenant is secured.
Assuming a tenant is actually found at that rent the income is now as follows.
$670/wk × 48 weeks = $32,160 (less costs like leasing fees and advertising)
Net in year one is now $30,805
Despite charging an extra $20 per week, the investor actually earns $2,995 (8.9%) less over the year than the owner who accepted $650 per week and had mimimal to no vacancy.
This calculation is even worse if the asking rent needs to drop to $650/wk to meet the market. Or the possibility that the vacancy lasts longer than four weeks.
Obviously there is a balance and the investment must work for the owner especially given the increasing cost and their own living cost pressures.
Keeping good tenants
Once you have secured that tenant, looking after them becomes equally important.
We know the value of responding promptly to maintenance requests, keeping the property well maintained and presented. Even communicating quickly and professionally help build trust and keeps the tenant longer at a full market rent.
The same philosophy applies to rent reviews. Most good tenants understand that rents increase over time. Reasonable, well-communicated increases are generally accepted.
5 tips to maximising returns
Vacancies are inevitable but the way to maximise your annual income are as follows.
- When vacancies happen set a fair market rent
- Keep the presentation high to attract high quality renters.
- Ensure your agent responds promptly to reasonable maintenance requests.
- Review the rent in line with market changes.
- Give your tenant every reason to stay.
The reward is providing a safe well maintained home to your renter. You will then have fewer vacancies, lower turnover costs, stronger long-term returns and the one thing every investor ultimately wants. Stable, predictable income.
