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Increasing The Rent Has A Big Payoff

Increasing The Rent Has A Big Payoff
1 min read

Increasing The Rent Has A Big Payoff

There are obvious benefits as investors in making sure we keep increasing the rents on our properties in line with market forces, says property investment consultant Uwe Jacobs.

There are obvious benefits as investors in making sure we keep increasing the rents on our properties in line with market forces. Putting the rent up at the end of a lease or change of tenant is something we should be diligently trying to achieve in consultation with our rental agents.

Yes, it is tempting to waive an increase in rent, if you have a great long-term tenant. You may be afraid they will leave if the rent goes up.

However, we are in the business of investing and it is not smart thinking to forgo any opportunity to increase the rent.

Some of the consequences of NOT increasing the rent are – less cashflow, lower income, reduced borrowing capacity, less buffer if interest rates go up, not keeping pace with inflation…etc.

On this topic, I want to briefly cover another consequence of not putting the rent up - that is the effect not doing so has on the VALUE of your PROPERTY.

Remember when we consider purchasing our investment properties, the rental yield is a critical element in calculating affordability, cashflow and the VALUE of the PROPERTY.

For example, a property in a suitable area (and of course in good condition, etc), has a tenant that is paying rent of $250 per week in an area that our research shows has a median rental yield of 5%. All things being equal, we can work out the value of the property to be around $260,000 to an investor.

This is worked out by multiplying the rent $250 x 52 weeks= $13,000 divided by 5% yield = $260,000.

Have a look at the table below and the impact an increase in rent can have on your property value, where rental yield remains static.

 

Rent per week Yearly rent (52 weeks) Rental Yield Property Value (based on yield only)
$250 $13,000 5% $260,000
$255 $13,260 5% $265,200
$260 $13,520 5% $270,400
$265 $13,780 5% $275,600
$270 $14,040 5% $280,800
$275 $14,300 5% $286,000

You can see by increasing the rent by just 10% (by$25) to $275 per week, in theory, we have added $26,000 to the yield value of the property.

Of course, in reality, there would be several other aspects to consider in determining a valuation, however, this example does give you some idea of how significant a rent increase can be in adding value to your property portfolio.

 

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