Rental prices have been receiving a lot of media coverage, with historically low vacancy rates driving competition between prospective renters and delivering strong rental yields for investors.
Nevertheless, increasing your tenant’s rent can be a nuanced and sensitive matter, especially when you value the relationship you have with them.
In this blog, we provide guidance on balancing rental returns with fairness towards your tenants, with the ultimate goal of helping you achieve positive outcomes for all concerned.
Considerations when raising rental prices
1. Market conditions
One of the most common reasons that rental prices increase is a tight rental market. This is currently the case across Australia, with Perth having the tightest market of all. In this situation, demand for rentals exceeds supply, driving up prices as a result.
Increasing rental prices in this situation makes good business sense. For one, failing to do so while other similar properties increase their rents sends a signal that your property is of lesser value. This can benchmark expectations of your property going forward, making future increases harder to justify. Second, neglecting to raise rents will see you lose out on the income-generating potential of your investment.
All that said, There are situations where an increase may not be the best approach despite market pressure. For example, you may have a particularly great tenant who you’re pretty sure will leave if their rent goes up. This may take on even more importance if you have previously had trouble finding reliable tenants. Ultimately, compromise is key and discussing rental increases with your tenant will help you reach an equitable solution.
2. Legal considerations and timing
In answering the question ‘When can a landlord raise rent?’, there are a number of legal requirements under the Residential Tenancies Act 1987 (WA) that must be taken into consideration.
For periodic tenancies, rental price increases can occur every six months, and tenants must be given at least 60 days’ written notice. This communication should outline the details of the increase, including the amount and the day on which it will come into effect.
Similarly, the rental prices associated with a fixed-term tenancy can only be increased six months after the start of the agreement or the last increase, and the agreement must specify how much the rent increase will be or have the method of calculating the rent increase shown (eg by a percentage). No less than 60 days’ written notice must still be given, and it must specify the amount and date of commencement of the new rental price.
In a situation where a tenant’s fixed-term lease concludes, and they remain in the same property under a new fixed-term lease or transition to a periodic lease, any rent increase cannot be implemented until after the initial 30 days of the new arrangement. Consequently, the rent will remain at its previous rate for the first month of the new lease.
Tenants also have the right to apply to the Magistrates Court to request a rental reduction or argue against a proposed increase. Factors the court will consider include the rental prices of comparable properties in the area, the condition of the property, and whether the rent is being increased with the implicit goal of forcing the tenant out of the property.
3. Investment strategy and returns
Your investment strategy should always guide your investment decisions. If you’re pursuing a high rental yield strategy, then generating increasing levels of rental income is going to be a core priority and increasing rent in an appropriate manner is likely the right move.
In contrast, if yours is a low rental yield strategy, rental income is going to be less important. In fact, it may even be beneficial for you to neglect opportunities for higher rental income if you intend to use negative gearing to reduce your overall taxable income.
Whatever your strategy, stick to it. It may be tempting to increase rents because the rest of the market is, but if it’s not the right decision for your specific circumstances, do not feel obliged to follow the trends of the day.
Long-term tenant relationships
‘Should I raise rent on a good tenant?’
It’s a common question and one without a definitive answer, but it will often involve the consideration and balancing of two factors:
- Your tenant’s circumstances
- Prevailing market conditions
If you value retaining a tenant with whom you have built a solid relationship and are aware that they won’t be able to afford a price increase, then it may be appropriate to hold off. Alternatively, you could start a dialogue with the tenant on what an equitable increase would be to see if a compromise that keeps both parties satisfied can be reached.
You may also find that a tenant can easily afford a rental increase and maybe even a more expensive property but has chosen to remain in your rental because it works for them and they have a good relationship with you. In these cases, communication should still be open and attentive – don’t just assume that they’re an easy win for a rental increase. Be sure to explain the increase and welcome any feedback on their behalf.
Finally, be considerate of timing. Increasing rent just before an expensive holiday like Christmas can cause a great deal of stress for tenants already feeling the financial pinch. Where possible, plan for increases to be communicated in less financially charged periods where tenants are likely to be more receptive.
Are you looking for advice on when to increase your tenant’s rent and by how much? We’re always happy to help. Contact us today with your query.
