Which rent review strategy is right for your property?
If you own an investment property in Australia then one of the things you need to carefully think about is which rent review strategy is right for your investment property? Whether you own just one investment property or you have multiple investment properties, it’s wise to know what it is you want to achieve in advance as this can help you benefit from good returns, live off the passive income as well as expand your property portfolio.
Review the rent periodically
Reviewing the rent periodically will keep your rent in line with the current market rates and ensure your property stays competitive in the local area. Having periodic rent reviews is a very important part of the process of renting out your investment property as it will affect your cash flow and your rental income each month.
Rent reviews tend to be based on identifying what rents are being paid by tenants of similar properties in the local area, whilst supply and demand also has a large part to play too. When the demand for properties is low then rents will tend to fall to help attract more tenants, whilst a high demand market will see rents rise.
Of course, market conditions can also help shape the rental reviews as well as the property conditions and how long the current tenants have been renting for.
There are four types of rent review methods that you might want to consider using. These are:
1. Fixed Percentage
Fixed Percentage is where the initial rental of the lease rises by a fixed percentage either every year or sometimes every few years. This fixed percentage increase will usually be around 3-5% per annum and gives some certainty to the landlord that rents will be increasing over time. However, you need to bear in mind whether the fixed percentage sits in line with current market conditions. You can of course change the percentage in different years, but you need to come to an agreement with the tenants first.
2. Fixed Amount
Another way to express an increase in rent over time is to set a predetermined rent which goes up during the lease years. This is similar to fixed percentage.
3. Consumer Price Index (CPI) Review
One popular way of increasing the rent is to use the CPI Review, which is considered to be the fairest method of rent review. CPI is a measure of the average change over time in the prices paid by households for a fixed basket of goods or services. If the CPI is quite low in your area this will create a low rental increase, which tends to be more favourable with tenants.
4. Market Rent Review
If you can see that rents in your property’s location are likely to increase substantially over the lease duration then you might want to consider the market rent review approach, which generally provides a better rate of return. However, in a worsening market this can actually result in a fall in rent, so it’s best to review the market for the entire lease term, not just at the time of signing. In order to keep your property in line with the current market conditions, most landlords like to see a market rental increase every three to five years.
Things to remember when changing the rent
Before you adjust the rent, you need to give your tenants written notice of the increase at least 60 days in advance of the proposed changes (NSW and VIC). On a fixed-term lease of two years or more, then the rent can be increased once in any 12-month period (NSW).
Get in touch
To learn more about the best rent review strategy for your investment property it’s best to get in touch with the team at iBuyNew as well as speak to your Property Manager.
Call the iBuyNew team today on 1300 123 463 to find out more about securing the best rental review strategy to meet your end property goals.