Landlords: Why should you increase your rent?

Over the last few years, landlords have faced a number of challenges that impact their ability to properly maintain their rental properties and meet their financial obligations. Like any other business owner, as a property investor it’s important that you adapt to market changes and keep a close eye on your outgoings versus your income.  

In this blog, I look at the rising costs landlords are facing and why it’s not only wise, but essential, to review the rent you are charging your tenants. I also discuss the potential consequences of not doing so. 

1. Rising cost of money supply
One of the key factors driving the need for landlords to adjust their rent is the substantial increase in the cost of borrowing money. Interest rates have surged from 2.9% in 2020 to nearly 8% at time of writing, with no indication of a downward trend.

Increased interest rates are a direct cost to property investors, and most will need to pass this cost on to their tenants (just as any other business passes its increased costs on to the end user).

2. Escalating insurance costs
Landlords are grappling with a significant spike in insurance costs, up approximately 25% since 2020.  This upward trend is expected to continue, meaning property investors will need to adjust their rents to cover this escalating expense.

3. Projected rates increases
Council rates are projected to rise considerably because many local councils are running in the red due to financial challenges. Landlords should therefore be prepared for increased rates charges.

4. Interest non-deductibility
The removal of interest as a deductible expense for property investors introduced a direct cost that most property investors can no longer absorb. To maintain financial viability, many landlords may need to transfer a portion of this cost to tenants, especially with rising interest rates compounding the issue. 

Of course the new government is going to phase out the interest non-deduction rules over the next couple of years. However, in the meantime many landlords are hurting and simply don’t have the capacity to wait for the rules to be repealed without increasing the rent they charge.  

5. Surge in repair costs
The costs associated with property repairs have experienced a significant increase, fuelled by rising material and labour prices. 

Healthy Homes Standards, while commendable in their purpose, have added to the costs property investors must incur, and when combined with the high price of materials and labour, have put a significant financial burden on some landlords.

6. High short-term money costs
The interest cost for short-term loans has risen to over 9%, placing an additional financial burden on some landlords. Due to the challenges of obtaining finance from first tier lenders because of stringent credit criteria, some property investors are having to borrow money from second-tier lenders, whose interest rates are significantly higher than the main banks. 

Consequences of not adjusting rent
Many property investors don’t like the idea of increasing their rents, as they know it puts pressure on their tenants. However, failure to adjust rent in the face of these economic challenges can have negative consequences, some of which can send you backwards financially over the long term.

Financial strain on families: Surplus income that you intended to use for family purposes may need to be redirected to cover the increasing mortgage costs on your rental properties.

Dipping into savings or capital: If you experience a significant hit to cashflow, you may need to use your backup cash, savings, or capital to meet your financial obligations.

Behind the market: Throughout the country, we have noticed rents increasing the in the vicinity of 5% to 30% over the last three years.   This is due to mum and dad investors selling their rental properties because of interest non-deductibility, which has pushed tenants out of housing accommodation. Other investors have exited the market due to reasons mentioned above.  As a result, there is shortage of rental properties and demand is high.

If you don’t increase the rent on your properties, you will be behind the market. Even if you are currently making a profit, your profit will be smaller than it needs to be.   This means as an investor you will limit your growth going forward because it may restrict your ability to get finance.  

Just look at the banks – they increase their interest rate and have zero care for what consequences this will have on their clientele because it is purely a business decision. Sometimes as investors we need to put our business hats on and make the correct business decision. If our costs increase, we need to pass this on to the end user.  While most landlords genuinely care about their tenants, as investors we have to remember we are not running a charity. If the tenants can’t pay the rent, this becomes the State’s problem, and should be not passed on to investors. So, it’s important that you raise your rent to cover the increased costs you are facing.  

Bad reputation with lenders: Struggling to make your mortgage repayments can damage your reputation with lenders, which makes it harder to obtain finance in the future (even once your cashflow situation has improved). 

Credit rating impairment: Defaulting on mortgage repayments can negatively impact your credit rating, putting you at a disadvantage for future borrowing or credit applications (even if unrelated to property).

Forced sale of rental property: If you are unable to cover your outgoings, you may be forced to sell your rental property. Forced sellers don’t have the benefit of time on their hands, so you may end up selling for a loss (especially if the market is cool). We have noticed this happening with mum and dad investors; they are exiting in numbers and letting go of their future wealth, because they are not adjusting their rent to cover the additional cost.  

Conclusion
In light of the economic challenges faced by landlords, adjusting rent is not merely a financial strategy, it is a necessity that will ensure you can hold on to your rental properties and maintain them in good condition for your tenants. 

And lastly, by increasing the rent you are protecting your own assets, which means your family is secure and intergenerational wealth is created.  Selling your rental property is a short-term solution. As property investors we need to see the benefit of property investing as a long-term wealth creation strategy. 

If you need help working out how to manage your property investments from a financial point of view, get in touch with your GRA Client Services Manager.  Or if you are not already a GRA client, contact us to find out how we can help you (the first meeting is free for new clients). We also have property specialists on staff who can assist with strategy for your portfolio.