Top landlord strategies in a heated rental market

As rents rapidly increase, MICHAEL LAURENCE gives eight strategies for smart landlords who want to maximise their opportunities and recover their increasing costs – without scaring off quality tenants.

By Michael Laurence

Here are eight strategies for smart landlords who want to maximise their opportunities and recover their increasing costs – without scaring off quality tenants.

An anxious would-be tenant of a Melbourne house recently told the management agent Melanie Dennis that she was willing to pay $50 above the rent being asked of $400-a-week property in an attempt to gain occupancy.

Dennis, the managing director of real estate agency Domain Property Advocates, says this offer to pay an extra 12.5% a week in rent reflects the shortage of rental properties under $600 a week.

Dennis says her agency has had such experiences with increasingly regularity over the year as vacancies have continued to shrink, particularly at the cheaper-end of the rental market.

Research released last week by Australian Property Monitors shows that rents have markedly risen in all Australian capitals over the 12 months to June, including rises of 13% in Melbourne, 11% in Sydney and a blockbuster 25% in Perth. Yet rental yields remain extremely low across Australia, and landlords have been confronted with successive official and unofficial rate rises.

Dennis emphasises that despite this heated rental market, she will not recommend that a property owner necessarily accept the highest rental bidder as a tenant. Dennis says she always carefully checks references in an effort to identify quality tenants.

SmartCompany knows from previous research that some landlords have a policy in this fast-moving rental market of instructing their property managers to accept the highest bid from a quality, would-be tenant. However such bidding above the advertised rent levels could be illegal in some states.

Agents and property management specialists offer these eight strategies for astute landlords to make the most of rising rents – without losing their most-prized tenants.

ONE. Give tenants notice of pending rent rises – long before current leases expire. This could be an especially rewarding strategy for landlords when rents are soaring.

Residential landlords in NSW and Victoria, for instance, are legally required to give tenants 60 days notice of a rent rise. And landlords cannot increase rents during current leases.

But Gary Triganza, senior property manager for inner-city Sydney agency Kelly & Sons, points out that there is no reason to wait until a lease expires before giving that 60-day notice of a pending rent hike.

Melanie Dennis of Domain Property Advocates suggests that landlords begin to think seriously about possible rent rises three months before a lease’s expiry date. Landlords need to determine the exact size of the proposed rent increase by checking market rents and taking advice from agents. And landlords need to properly inform tenants of rent rises in accordance with state legislation. This all takes time.

“You will want any rent increase to lock in from the first day that the lease expires,” Dennis says.

TWO. Don’t risk losing good tenants by chasing every rental dollar. Triganza says landlords should consider keeping the rent a little below the market rate for a really good tenant – despite the fast-rising rental market. “Landlords can then go to the full market rent with the next tenant,” he says.

A decision to forgo the maximum rent obtainable might actually save landlords money in the long-term if a tenant is exceptional. “If a tenant looks after a property, it might need painting, say, every nine or 10 years instead of every, say, five years,” says Triganza.

Dennis also believes it can be a smart move to keep the rent slightly below market level to help keep a good tenant. As she emphasises, charging a tenant, perhaps, $10 a week below market amounts to a valuable saving of $520 a year for that person – perhaps enough to keep the tenant in your property.

She says keeping an existing tenant saves the landlord having to try to find another quality occupant, rental income is not lost in the changeover between tenants, and the property is not damaged with heavy furniture being moved in and out as tenants change.

THREE. Don’t try to charge above-market rents. Excessive rents could scare off tenants, leaving landlords carrying the cost of vacant properties, warns Triganza.

And Dennis adds: “Every week that a property with a market rent of $350 a week, for example, sits vacant, the landlord is losing $350 a week.” That’s the reality with vacant properties. She says there may be a reason why some people are willing to pay above the market; they may have been poor tenants in the past.

FOUR. Ensure your agent checks references. “Don’t take it for granted that your agent has checked the references of people who want to rent your property,” warns Dennis.

She suggests that landlords ensure that their agents have carried out the necessary reference checks. “I check a minimum of five references for each property. I won’t put a bad tenant into a property; I have to manage it.”

FIVE. Insist on a rent-rise clause in leases longer than 12 months. Dennis usually recommends such a clause for longer leases, but says it is particularly crucial when market rents are rapidly rising. Otherwise landlords could miss out on their share of rent increases.

Triganza at Kelly & Sons says landlords could consider offering new tenants, say, only six-monthly leases when market rents are quickly rising. Shorter leases could enable the landlord to participate more in rapidly increasingly market rents.

However, as Triganza explains, much depends on the profile of a landlord. Some landlords place more value on the security of a definite long-term, rental income from a longer lease than on trying to keep right up with prevailing market rents.

SIX. Try to improve quality of tenants. If you have a troublesome tenant – who is, perhaps, always late paying rent, fails to keep the property clean, and perhaps damages it from time to time – Dennis says the shortage of rental units and houses provides an opportunity to find a better quality tenant when the current leases expires.

She suggests landlords always let existing tenants know of any concerns about their conduct, and then, if necessary, give them notice to leave.

However, she recommends that landlords always do their best to make their relationship with tenants as good as possible by renting properties in sound condition – even in a rising rental market. A tenant is more likely to look after a property that is properly maintained.

Indeed, Dennis points out that a well-maintained property should bring a higher rent than a neglected one. “Keep the property up to scratch, but I am not suggesting major renovations such as extensions,” she says.

SEVEN. Regularly review rents. Lynette Kimball, property manager of Fitzpatricks Real Estate in the regional NSW city of Wagga Wagga, recommends that landlords conduct rent reviews every six months and generally aim to keep rents at market level.

EIGHT. Be aware of how below-market rents can affect capital values. Kimball, who chairs the property management chapter of the Real Estate Institute of NSW, warns of the dangers of keeping rents “significantly” below market level for perhaps four or five years in an attempt to keep good tenants. This can damage the resale value of certain types of rental properties, she says.

Kimball has had experience where prices gained on the sale of blocks of rental units had been less than otherwise because the landlords had not been able to show a record of satisfactory rents. The landlords had failed to keep rents up to market level. “Consider not just today but the capital growth in the future,” she advises.