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Should I increase the rent?

Rent increases – How much and when?

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Rent increases can be tricky waters for both owners and renters and for good reason.

There are 6 points to know and below we cover them all.

1. How much should or can rent be increased?
2. Do I lose money if the renter moves out?
3. When can rent be increased?
4. Does a new lease start at the same time as a rent increase?
5. Can the renter challenge the rent increase?
6. Do the same rules apply to rent decreases?

Let’s dig in.

 1. How much should or can rent be increased?

This is a key question in any market but post Covid it has been a hot topic. Apartment rents in Melbourne have been recovering rapidly post the Covid lows. Some increases have been unusually large. In almost all cases, the increase has been simply recovering the drop in rent that impacted many Melbourne apartment owners through Covid.

During Covid rents dropped by up to 30% for some apartments. Because there is no restriction on how often or how much rents can fall, owners had no choice but accept the drop or have an empty apartment. When covid ended rents recovered sharply and rent increase of up to 30% were then issued. In some cases this was a $100 per week increase.

While you may expect all owners want more rent this is not always the case. Some property investors have a more altruistic view and don’t want to make the rent burden too great. The catch with this of course is if the return on the investment is not sufficient the investor may sell to an owner occupier which removes that property from the rental pool making life a bit harder for renters.

Rent increases are initiated by the owner or their agent. Legally there is no cap or maximum increase. Practically though, the rent should not be increased beyond what is a reasonable market rent. In normal markets, rent increases reflect the normal inflation or cost of housing increase over time. Sometime markets swing dramatically and huge dips and surges.

2. Do I lose money if the renter moves out?

If a tenant decides to move out rather than pay the increase, the owner will incur additional cost and a few weeks of no rent. But if the market justifies that increase, then an owner should ensure they are getting it.

So, what is the right amount to increase? At what point does an owner say, “I’m happy to keep a good tenant paying a fair rent even if it is a bit under market”, versus “I need to get the full market rent for my apartment”.

Here are the numbers…

Firstly, remember a decision today on rent (be it at or below market) can continue for some years. Subsequent reviews might follow a similar pattern, so any comparison is for more than just one year. Secondly, we need to estimate how long the rental void (period of no rent) will be.

Using a few assumptions about the leasing cost, likely period of vacancy (2-3 weeks of no rent) and a time horizon, (2-3 years) the cost vs gain equilibrium line is at about a 5% to 8% increase.

For example – If the rent is currently at $500 per week and the market increase is less than 5% -8% ($25 – $40/wk) then an owner risks being worse off in the short term if the tenant moves out. However, if the rent increase is in line with market the renter is more likely to stay because they are not going to get a better deal anywhere else.

In a normal market, small regular increases are more acceptable and tend not to dislocate tenants. They move in and out based on life circumstances rather than small rent increases.

Some owners view leasing costs and fees as a capital cost. They don’t amortise them over the rental term. This approach means any lift in market rent should be captured regardless of how small it is. After all, the leasing and marking costs are tax deductable.

The most important part of this process is knowing what the market rent is. If an existing tenant decides not to pay the issued increase, then it is important to be confident a new tenant will. Otherwise, an owner could issue an increase that forces a current tenant out, only to be renting it again at a similar rate and incurring avoidable costs.

Owners will argue they need to recover their increased costs. Especially higher interest rates. In part this is true but cost does not equal value. The rental market doesn’t move on owners cost. It moves to the beat of its own drum. Just because an owner’s cost have gone up doesn’t mean the rent does as well. Although over time the two have to align. Otherwise investment owners exit the market.

Your property manager will be able to review the market and advise the owner on how much they recommend to increase the rent by. In rapidly increasing markets the market evidence needs to be very recent.

3. When can rent be increased?

In Victoria the rent can only be increased once every 12 months and not within a fixed term lease. It doesn’t matter how much the rent is increased each time. There can only be one increase each 12 months.

4. Does a new lease start at the same time as a rent increase?

Not necessarily. A rent increase is separate from a new lease. Some owners and renters prefer a lease to provide more certainly but its not a condition or part of a rent increase. Often a new lease is part of the agreement for a new lease but it is not required.

Remember the rent can not be increased during a fixed term lease.

5. Can a renter challenge a rent increase?

Yes… The best and first step should be to contact the agent and have a discussion about it to see if there is any middle ground.

If the renter is not happy with this outcome, they can go to Consumer Affairs Victoria. This process is called a “rent assessment or a rent increase investigation”. There is a process to challenge the rent increase which is set out in this link, but the quick summary is as follows.

Step 1: Ask us for an assessment within 30 days of receiving the notice of increase.
Step 2. Property inspection by consumer affairs
Step 3: Apply to VCAT if there is still no agreement.

6. Do the same rules apply to rent decreases?

No… the rules specifically apply to rent increases however during a fixed term lease the renter needs to continue paying their full rent without adjustment.

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