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There are obvious benefits to us as investors in making sure we keep increasing the rents on our properties in line with market forces. Putting the rent up at the end of a lease or change of tenant is something we should be diligently trying to achieve in consultation with our rental agents.

Yes, it is tempting to waive an increase in rent, if you have a very good long-term tenant. You may be afraid they will leave if the rent goes up.

However, we are in the business of investing and it is not smart thinking to forgo any opportunity to increase the rent.

Some of the consequences of NOT increasing the rent are – less cash flow, lower income, reduced borrowing capacity, less buffer if interest rates go up, not keeping pace with inflation…etc.

In this topic, I want to briefly cover another consequence of not putting the rent up……that is:  The VALUE of your PROPERTY.

Remember when we consider purchasing our investment properties, the rental yield is a critical element in calculating affordability, cash flow and the VALUE of the PROPERTY.

For example, a property in a suitable area (and of course in good condition, etc), has a tenant that is paying rent of $250 per week in an area that our research shows have a median rental yield of 5%. All things being equal, we can work out the value of the property to be around $260,000 to an investor.

This is worked out by multiplying the rent $250 x 52 weeks= $13,000 divided by 5% yield = $260,000.

Have a look at the table below and the impact an increase in rent can have on your property value, where rental yield remains static.

In this month’s topic, I want to briefly cover another consequence of not putting the rent up……that is:  The VALUE of your PROPERTY.

Remember when we consider purchasing our investment properties, the rental yield is a critical element in calculating affordability, cash flow and the VALUE of the PROPERTY.

For example, a property in a suitable area (and of course in good condition, etc), has a tenant that is paying rent of $250 per week in an area that our research shows have a median rental yield of 5%. All things being equal, we can work out the value of the property to be around $260,000 to an investor.

This is worked out by multiplying the rent $250 x 52 weeks= $13,000 divided by 5% yield = 260,000.

Have a look at the table below and the impact an increase in rent can have on your property value, where rental yield remains static.

Rent per weekYearly rent (52 weeks)Rental YieldProperty Value (based on yield only)
$250$13,0005%$260,000
$255$13,2605%$265,200
$260$13,5205%$270,400
$265$13,7805%$275,600
$270$14,0405%$280,800
$275$14,3005%$286,000

You can see by increasing the rent by just 10% (by$25) to $275 per week, in theory we have added $26,000 to the yield value of the property.

Of course, in reality , here would be several other aspects to consider in determining a valuation, however, this example does give you some idea of how significant a rent increase can be in adding value to your property portfolio.

 

Property Friends is a specialist Property Investment Advocacy that has been operating for the last 13 years on the basis of 3 principles: Trust, Community & Progress. www.propertyfriends.com.au (03) 9758 5331

Image by Freepik

Uwe Jacobs Property Strategist

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