Pros And Cons Of Increasing The Rent
To increase the rent or not to increase the rent – that is the question. At least, that is the query on the lips of most landlords in any steady or rising rental market. Whether you should hike the weekly rent is not a straightforward decision and landlords should be speaking closely with their property manager to ensure this process goes smoothly.
Before making a choice, it’s worthwhile weighing up the pros and cons of both decisions so you are informed about the potential outcomes.
Why you should considering increasing the rent
Increasing the rent quite simply puts more dollars into your pocket as a landlord. A rental increase of $5 a week is an extra $260 a year for you to use. Most of the time, extra cash comes in handy and assists with your weekly cash flow.
You may want to consider asking for a rental increase in the following situations:
- The market rent has risen
If your property is in a sky rocketing rental market it only makes sense to increase the rent to keep up with those local forces. Your tenant will have to accept an increase if everywhere else has increased at the same rate. If you do not increase the rent, particularly between tenancies, you may quickly be behind the market and will need to increase the rent several times to catch up.
- You have renovated the home
If you have spent a considerable amount on the home and brought it up to a better standard, then it makes sense you may expect an increase in the rent. If this can be justified with comparable rentals, then it makes sense to push for a rent increase that truly reflects the quality of your home.
- Your tenant is requesting additional amenities
If your current tenant is asking for new amenities, commonly installations such as air conditioning or fly screens, you may be able to negotiate a situation where you install these improvements and also ask for an increase in the rent.
In all the above situations, it is justifiable to ask for a rent increase. Keeping up with market rent will also assist you when you come to sell a property, as the next landlord will be interested to know what it is currently rented out for. If this is substantially below what they had thought they could achieve, there may be additional questions about the home.
Why increasing the rent can be a bad thing
While investors may be regularly watching the market and readying themselves to increase the rent, tenants may not be expecting the change. Any increases will negatively impact the amount of cash they have each week, so rent hikes should be approached with due caution.
Here are some of the risks of hiking the rent, especially outside circumstances that justify it:
- You could lose a good tenant
Tenants may move on over the smallest of rent increases, so a hike that’s not materially useful to you is not always the best idea. For some, it’s merely about the principle of facing higher rent. The costs and fees associated with re-letting may not justify the extra $260 you were anticipating each year. If your tenant has looked after your home well and you would like to keep them in the premises, be sure to consider the likelihood of them leaving before sending them notice.
- Your home may be uncompetitive
If you hike outside of what the market is asking, you may find your home sitting vacant for longer. A week without rent is likely more damaging than the potential plus side of an extra $5 a week. In some circumstances, a vacancy period will always be expected, yet do not allow yourself to ask more than can be justified.
- Some rent increases can be deemed “unfair”
If you increase the rent substantially when a tenant is currently in the property, you may face them taking you to tribunal. If the tribunal considers the rate hike unfair as it is excessive, you will not only end up possibly spending more money to defend your case, but your tenant will be disgruntled.
- Negative gearing benefits may be affected
Whenever your financial situation will change, you should speak to your accountant about the overall implications. A small hike may not sound significant, but it can have an impact on your tax return, particularly if you are negatively geared.
A week without rent is likely more damaging than the potential plus side of an extra $5 a week.
If you do decide to increase the rent, speak to your property manager and ask them to explain the decision to your tenant. Open communication will ensure the best outcome for landlord and renter. Ensure you follow the tenancy laws, particularly regarding notice periods and when you can and cannot change the weekly rent.