Rent increase

[Phi]

After 5 years of renting our home to a friend, I have engaged a PM to undertake inspections in my absence. The inspection went smoothly and the PM estimated market rent of $490-520/week (it's currently $430). The rent was slightly below market at the start of the tenancy as my friend/tenant took on my cats and I didn't have a PM so it kept costs down and was a mutually beneficial arrangement, with regular communication if any issues arose.

The situation now is quite different with increased costs due to valuation > rates increase, maintenance (painting, front fence) and the bigger gap between market and actual rent. I need to increase the rent to cover increased costs but I don't want to lose my tenant (single working mum). She is a great tenant, looks after the house and there are absolutely no concerns about rent not being paid, damage, illegal activities, undesirables etc and with family and the children's father just around the corner, she has no intention of leaving the area (as pointed out by the PM, she also wouldn't be ale to get a 3 bedroom house for the same rent she's paying now).

I realise I've not done either of us a favour by only increasing the rent $30 in 5 years and now needing to catch up, so was wondering if the more experienced forum contributors had any feedback about how to address this (besides the increase letter with 60 days notice) and a reasonable increase ($ or %).

[Anthonyacat]

This is an incredibly common story with self-managed rentals. I'm afraid there's no simple answer.

If you're on good standing with the tenant you can discuss this with them. You can make it clear that you're increasing the rent by a lot, but it will still be below market level (I personally keep rent for good tenants a little bit below 'new tenant' level - new tenants are inherently risky and pay a small premium for that fact).

There's the option to increase rent slower; a $40 increase now, and another in 6 months (by which time the market will probably have moved up again, a little).

Or there's the option to just hit her with the full market rent, see whether she swallows it (as you've said, she can't get the same elsewhere for less) and if not, get a new tenant at the market rent, and take the risk that they're awful. Most tenants aren't, but you can never tell for sure.

[Keys]

This is why we have a clause in our TA which pegs the rent to what the market is doing at the time of signing. We can then refer to it for setting rent. In your case, I suggest you chat to them and ensure they know you deeply appreciate their tenancy but the rent needs to go up. Ask them what they believe the rent should be.

You may be surprised.

[Phi]

Thanks Anthony and Keys for your feedback. I hadn't thought of asking her what she believes the rent should be, but I'm sure she's aware of the market so will have that discussion first, then if it's at the upper end will use an incremental approach so it's not too much of a shock for her. Will still keep it slightly below market in recognition of being a good long term tenant.

[Keys]

No no no!

You misunderstand.

Present the tenant with the statistics. Give them a couple of days to think about it. Then, ask them what rent they think is fair, considering all things.

[Phi]

Yes Keys that was the approach I'm going to take still factoring in her good tenancy to keep the rent slightly below market. The only thing to consider is full increase now or one now and another in 6 months.

[PTWhatAGreatForum]

I realise I've not done either of us a favour by only increasing the rent $30 in 5 years

That's 5 years of hassle free landlordery. I don't get your complaint.

[Wayne]

Business doesn't quite work that was MichaelNZ.

[PTWhatAGreatForum]

Business doesn't quite work that was MichaelNZ.

Why not? In my business I have held prices pretty stable and even reduced prices on a bunch of products over the past 3 years.

[Wayne]

Why not? In my business I have held prices pretty stable and even reduced prices on a bunch of products over the past 3 years.

Is that due to costs remaining stable?
Or due to competition?
Or out of the goodness of your heart as some sort of social gesture?

Rental property should be a business and run as such.
That doesn't mean rorting your customers!

[PTWhatAGreatForum]

Is that due to costs remaining stable?
Or due to competition?
Or out of the goodness of your heart as some sort of social gesture?

The price decreases was to make prices more consistent across the range. The original prices on those products had been set at a higher level due to non optimal sourcing. I changed supplier, reduced the buy and sell prices on those products and improved the quality.

[Wayne]

So if your costs had gone up you would have tried to absorb some of the increase (maybe due to competative pressures) until you had to increase for the sake of your business?

No different to the rental business!
Costs have gone up and people will increase the rents if they can.
At the end of the day it comes down to market forces - you can't increase your price just because you want to if others don't - they end up empty.

[PTWhatAGreatForum]

No different to the rental business!
Costs have gone up and people will increase the rents if they can.
At the end of the day it comes down to market forces - you can't increase your price just because you want to if others don't - they end up empty.

We can talk free market economics when your "business" is no longer subsidised by the welfare state and savers via artificially low interest rates.

[Wayne]

We can talk free market economics when your "business" is no longer subsidised by the welfare state and savers via artificially low interest rates.

The welfare state subsidises the rents if people don't earn enough.
So really the answer is that they should be paid more.
So the subsidy is really to the employer.
And as for the low interest rates - they are low conpared to history but it isn't our state that pays.
But maybe they are the new norm so not artificially low at all?
Sure savers miss out but you would be better to get at those that broke the system - the finance industry (banks et al).

Best not to think about that.
By the way none of my tenants get a rent subsidy.

I just don't really get why some people like you think that rental owners should be subsidising their tenants - doing the govts job!

[PTWhatAGreatForum]

So the subsidy is really to the employer.
......
I just don't really get why some people like you think that rental owners should be subsidising their tenants - doing the govts job!

1. That as well but that's not the issue at hand.

2. I think your "business" should be rendered largely obsolete by affordable home ownership. The positive flow on benefits from this would be considerable in other areas as well.