Tuesday, April 12, 2016

When is a good time to do a rent review?

I've been asked to answer this question.  It's a good one, and my glib answer is: Any time, and all the time!  Think about it when shopping for a new property, refinancing, insuring, renovating, or any other prompt.  Every time you think about your investment property, you should be asking yourself, "is the rent at market level?".   

If the answer is "no", then I hope you are getting above the average for your area, and if not, you are resolved to do something about it!

Section 24 of the Residential Tenancies Act (RTA) 1986 is your friend here, and it says rent can be increased by Landlords every 180 days (6 months, to save you counting your fingers and toes) so long as notice is given in writing 60 days (2 months) in advance, and the amount of increase is specified.  So while you can review it in your head every day, you can change the rent the tenant pays every six months, with two months notice.  So, four months after the last increase took effect, you can tell them it's increasing again in another two months time.  Yay.

There are a few conditions on doing rent increases.  For instance, if you have a fixed term tenancy, you need to specify in the tenancy agreement that you can increase the rent within the fixed term (periodic tenancies don't need special wording).  Otherwise, sorry, you need to wait until you write a new tenancy agreement towards the expiry of the current one.  The RTA helpfully provides a few choices of wording to put into your fixed term tenancy to allow you to do so in Schedule 1.  Provision A is the best for most situations, so copy it word for word into your tenancy agreements.

The rent increase must be in accordance with market rent.  You can't just decide to double the rent, at least, not unless everyone else has done the same (or it has been far too long since your last review)!  The onus of proof of what is market rent is on you, so make sure you keep a copy of the information you consulted when assessing it for at least 3 months after the new rent is due, as it could be challenged.  Look at advertisements for similar properties to yours, and look on databases such as Tenancy Services.  Make sure you are comparing apples with apples, and you are fairly comparing your property with others.  Remember, some areas have a significant difference in quality of most owner occupied properties to the quality of most rental properties.  If your property is in the former rather than the latter category, add a premium as it will be better than most rentals.  Here's where it pays to inspect your property regularly too so you can be sure it's current condition measures up to the competition.  It's no good having your tenants move out and being unable to get the same rent you asked them for from anyone else as it is too run down.

Doing maintenance at the property to keep it in good condition makes it easier to do rent reviews.  You don't need to specify that is the reason you are increasing the rent, tenants will accept that you have outgoings which need to be covered.  If they like living in a quality property, they will pay for it.

You can increase the rent with the consent of the tenant if you make substantial improvements to the property which amount to a material benefit to the tenant, or you vary the terms of the tenancy to the benefit of the tenant.  So for instance, you could agree to install more efficient heating if the tenant pays more rent per week.  Or you could take over the tenants lawn mowing duties.  You can also increase the rent for unforeseen expenses.  For example, after the Christchurch earthquakes, insurance costs all over the country increased drastically, especially for apartments.  This cost could have been passed onto tenants, even if the last increase was less than 180 days ago.  You may need to get a Tribunal order to do so, but check out Section 28, 28A & 28B of the RTA for more information on this.

Should you haggle with tenants over rent?  I never agree to lowering the asking rent when advertising a property.  You know, the prospective tenant who says  "I'll be a good long term tenant, knock $50 off!".  My response is along the lines of "If I market it at $50 pw less, I'm going to have a queue around the block of tenants to pick from who want to stay long term.  Why should I choose you over all of them?".  This usually ends the debate, and they either agree to pay the asking price, or they go and bother someone else.  Either way, it's a win for me.  Trust me, the ones who negotiate a longer lease for lower rent end up breaking their lease early, or causing you pain in other ways.  It's a law of the universe or something.  It isn't personal, it's just negotiation.

If it's a current tenant who negotiates when I'm increasing the rent, there are a few techniques that can help make everyone happy.  For example, when a tenant says "but I'm a good tenant, why are you increasing the rent by so much?".  My answer is "I took that into account when looking at your rent increase, so I kept it as low as I could.  Imagine how much more it would be if I didn't appreciate you so much".  Or for a tenant who always wants to haggle, put it up more than you were hoping to get, and let them negotiate you down.  If you want another $10 per week, ask for $20, then be willing to yield to your desired increase.  What's the worst case scenario?  You get more rent than you hoped to.  Gee, that's terrible.  Just be sure your rent is still within the realms of market rent.  You don't want to do an ugly rent rise on a painful tenant only to have them take you to Tribunal over it and win as it was way out of the ballpark.  If you really want a bad tenant to leave, give them notice to do so.

What happens if you change your mind, or made a mistake on the notice?  You can withdraw your notice, or correct it as long as it was a genuine mistake.  So, you transposed some numbers or got the date wrong, no drama, just send an amended document as soon as possible with the correct information on it, and a note stating why this notice is different.  See Section 24(4) of the RTA for more on this.

A little known rent increase technique is to always vary the rent on the same day of the year.  I don't recommend this.  Nor do I recommend specifying in advance of the formal notice of rent review the maximum or actual rent you will be seeking, for instance, don't say in your tenancy agreement "the maximum rent increase will be $30 per week at each six monthly review".  You don't know what the future holds (Christchurch taught us that), but I'm pretty sure you don't want the future to hold a bank foreclosure on your property because you couldn't increase the rent to what it should be.  It might seem a pretty decent increase now, but what if the tenant stays there for the next 20 years?  $30 per week might be peanuts then, not worth your paperwork, so never be specific.  If tenants are concerned about rent increases in their tenancy, assure them rent must be within market levels and if it isn't, they can apply to Tenancy Tribunal for an assessment.  I'm proud to tell tenants that in all my years as a landlord with thousands of tenancies, I've never needed to go there for a rent review matter.  That generally sorts out any residual concerns.

If you think you are not getting the rent you should be, ask us for an appraisal.  We've made property management stress free and essentially cost free for many investors, simply by taking great care of their properties for them and increasing the rents to what they should be, in many cases, keeping great tenants happy in the process.  It is an art form, and we are happy to share it with you.




1 comment:

  1. Thanks for reinforcing my thoughts on the matter. I am always making sure I am getting the current market level for my property. Yes the rent review costs a bit of money but it is always worth the investment. Renting properties is an art just like you mentioned. Keeping the rent at the right level and the tenant happy, thanks.

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