02/08/2012

In some situations, if a rental increase will result in a long vacancy period it might work in your favour to keep the rent as it is. Don’t believe us? The example below illustrates how this might be possible.

The scenario

Let’s assume a scenario where you own an average property in an existing suburb, Marsfield, NSW. The average rent in this Sydney suburb is $450 a week for a unit, which usually gets you a 2-bed, 1-bath apartment.

The vacancy rate for the suburb is 3%, which indicates an area where there is a reasonably balanced supply to demand ratio for rentals. The market is in ‘equilibrium’ so we can safely assume that at $450 for a 2-bed, 1-bath unit, we’d be able to find a tenant in a decent period of time.

We’ll forecast two weeks. This takes into account the time it would take for one tenant to move out and another to move in, as well as a buffer period.

The rent

Imagine you are currently renting the property for slightly under the market. The majority of similar properties are going for $450 a week, while you’re currently renting for $420.

You decide to up the rent to $450, but it causes the current tenant to move out. At the vacancy period we’ve assumed above, this is how the finances for the property would look:

Marsfield unit after a year

 

 

$420 rent

$450 rent

Vacancy period

0 weeks

2 weeks

Annual rental income

$21,840

$23,400 – (2 weeks x $450) = $22,500

Margin (less $20k mortgage payments)

$1,840

$2,500

Clearly, because the rental increase was mostly in line with the market and there wasn’t a long vacancy period between rent increases, after a year you’ve come away better off for having upped the rent.

Pushing your luck 

Now, say you were to try your luck. Instead of increasing the rent to $450, you decided to go above the market and charge $470. Obviously, at this rent it will be much harder to find a new tenant, because you are charging over the market. Let’s say for the sake of an example, that it now takes six weeks to find a new tenant.

After a year, here’s how your situation would compare to if you’d stayed with the market:

Marsfield unit after one year

 

 

$450 rent

$470 rent

Vacancy period

2 weeks

6 weeks

Annual rental income

$22,500

$24,440 – (6 weeks x $470) = $21,620

Margin (less $20k mortgage payments)

$2,500

$1,620

 

Clearly, after a year, you’re worse off by $880 for having pushed the rent above the market. Even after this first year, it will take you a further 44 weeks of renting at $470 for you to get this shortfall back, by which time your tenant could easily move out, resulting in another vacancy period.