What factors drive rental increases?

[SuperDad]

Hi everyone,

I'm wondering what drives rental increases within a market (e.g., Hamilton).

Why am I wondering this? Well, as a future property investor I'm noticing that, with the recent increase in house values, yields (for newly purchased properties) are (generally) down. In turn, this means that most IPs are now (pre-tax) cashflow negative.

Do rents increase (i.e., are rents increased by investors) in order to correct this. Or do investors just wear this decrease in yields? I guess most would have bought properties before the "boom" and so are not affected in the way a new investor might be.

Another way of putting my question: Is there a "rental income boom" that typically follows a property boom, and if so, is there a typical time lag between the two?

I'm looking at investing in a year or two, and am wondering whether I can expect annual rents to increase at greater than, say, inflation (assumed at 3%). What are your thoughts on the chance of this?

Looking forward to hearing your opinions,

Paul.

[whitt]

Yes you are correct rental increases usually are fed by several factors. Once all these are present a rental increase will occur.

Without sounding like an advert go to your local library and have a look for a book titled " Grow rich with the property cycle" By Kieran Trass.
This book shows all the factors which drive property prices and the rental market. One thing I did note however is rents sometimes drop slightly post boom from there peak during the boom. Then stabilise for a long term before they start increasing again.

[Lynda]

Hi there, Paul,

I'm no economist (that stuff makes my head spin), so I can only tell you how it has worked for me so far.

There are two things that make the rent increase in a general sense - less houses (supply), or more tenants (demand). In a specific sense, you can affect the rent you are getting from a particular property by providing things tenants will pay more for - add a garage, put in new carpet, paint etc...

It seems as though tenant demand is highest at the beginning of a boom. Right at the end of the last property slump, in early 2001, if I remember right, I advertised a couple of properties and found the phone ringing off the hook. I'd estimate around 100 calls before midday. I ended up with people offering me more than the advertised price, in order to secure the flat.

That hasn't happened for a while, unfortunately

Hope that helps, and good luck with your investing.

Cheers,
Lynda.

[cube]

Rents are far more reactive to supply and demand than house prices generally, so it really can depend on the weather!

Sudden changes (like the disappearance of English Language students from Auckland) can lead to big drops in demand in certain sectors which don't have a noticeable effect on other factors.

As a new investor, you need to think "where do people want to live, in what conditions" and try and find a niche that you can address. It may be near a new shopping center or place of learning, and average suburbs for average people or 'just out of town' for people who prefer the prices and lifestyle away from the madding crowd.

Good luck

cube

[SuperDad]

Thanks whitt, Linda and cube.

Cube - I'm in the process of working out my investment strategy (what I want out of PI, and what niche to occupy given this, and my timeframe). I'm finding this forum very useful in helping me with my thinking about these questions, and comments like yours are just what I need to get me thinking harder. Cheers.

Paul.

[Propoholic]

Hi SuperDad

I'm in the process of working out my investment strategy (what I want out of PI, and what niche to occupy given this, and my timeframe).

I'm just completing reading Michael Yardneys new book: 'How to Grow a Multi Million Dollar Property Portfolio in your spare time'. I would recommend this book for any new or seasoned property investor.

Michael is a director of Metropole Properties in Melbourne and has over thirty years experience in residential investment and development. The book is primarily about residential property investment and is a very good read. Why is it a very good read?...it provides plenty of experience and case studies from an author that has been in the property investment industry for a long time.

The book is available in the PropertyTalk bookstore.

[JohnL]

I found that I'm getting roughly the same rents as I was 10 years ago in South Auckland. The rents slowly dropped as the houses got 'tired' and then you can get quite a bit more again when you give it its big birthday (at a large R&M cost).

Overall, my rents don't seemed to have kept up with inflation, let alone property values.

John

[SuperDad]

Thanks Propoholic and John. Propoholic - I'll look at that book - thanks for the recommendation. John - thanks for reporting your experience.

Have others had the same experience as John (i.e., rental income increasing at a rate less than inflation)?

Paul.

[Dean@Massiveaction]

I'd agree with John up to a point. The research for Auckland generally from Hybrid shows rents increase by about half that of capital growth. So if your property has double din value rents should have increased by about 50%. Ithink in lower socio economic areas however you have a cap that is hard to brak through. In Papakura for example I have properties increasing in values but in many cases rents are stagnant or dropping slightly to maintain occupancy. That is largely influenced by the current phase of the cycle which traditionally puts downward pressure on rents anyway.

[JohnL]

In Papakura, we were getting $300 per week for two new 3 bedroom townhouses in 1995. Now we are getting $285. Maybe slightly under the market rate now but certainly nothing approaching the rate of inflation. On the other hand, we just refurbished a two bedroom unit and the same rental management company got someone into it for $260 a week, previously rented at $200 prior to refurbishing (and we were getting $200 in 1995). So going from an under-rented state to possibly a rate that will be hard to maintain over the next few years (unless the same tenant stays on).

The published stats would give a better indication over a 10 year period but my impression would be the gains are substantially less than the rate of inflation in Papakura.

John

[Paul34]

Rents

This is a very interesting post.

My own experience is that rent moves far less than most people think. In my own experience, buying in towns, I have used the same philosophy of buying under valued towns as undervalued markets. For example, south taranki has had a 30-50% jump in rent this year based on the deamnd being up but more so the rental starting from a small base. By buying into that market last year it has worked well. The same thing happened in Gisborne. I have a house there brought in 2003 and the rent was 120 (52k house) and it is now $190 and that is across the board.

Why this has happened is that investors have got into the market and are demanding higher yeilds, and the market had this room to move. This then pushes up property prices which may be sold on yeild.

I was talking to an agent in Westport, where I have 7 and it is a consistent battle to get the rents raised. I'm helped by others doing the same which means that to move no one can get a similar property and hence a new benchmark is set. This said you need to really push the property managers who are reluctant to do this.

This can only go so far. For my mind Hawera and Wanganui, which have large labour pools still have room to move. Westport possible with the mine going up. Gisbornes rents are getting up there. Pahiatua is still light given strong industry with Fonterra.

The cities just work on a larger scale. However, given debt levels in the cities peoples ability to afford to much more rent is questionable.

What would be really good is if someone had an average statistic, i.e. % income paid in rent. You could use that then to guide purchasing decesions.

[SuperDad]

Hi all.

Thanks for your input. The reason I asked the question is that I am fine tuning a property analysis spreadsheet, and I am trying to determine the "right" figure for rental inflation. I think I would be safest to assume 0% rental inflation in those calculations from now on.

I was originally working with figures closer to those suggested by Pooomba - rental inflation at 50% of captial growth (which I had at 3.5% and 7% respectively).

I have found the comments on larger markets vs smaller markets, and higher vs lower socio-economic areas helpful. Given the areas I want to invest in, hopefully I will achieve figures close to those suggested by Pooomba. Nevertheless, I'll be assuming 0% rental inflation from now on.

Paul.

[cube]

Paul34,

Whilst it is obviously good to encourage the rent to move up as far as possible, doesn't the market dictate it.

If a property manager puts a house on the market at, say $150 a week, and gets inundated with calls, won't they put the next one on at $160?

Or am I being naive, and Property Managers are more interested in getting someone in, rather than maximising the rent obtained?

cube

[Propoholic]

Paul34,

Whilst it is obviously good to encourage the rent to move up as far as possible, doesn't the market dictate it.

That's right, whenever you've overstretched the mark (as to where you think the market rent is) the phone doesnt ring, drop the advertised rent by $5 or $10 and the phone starts ringing.

Prospective tenants at a busy open home (say 20, 30 or 40 people) will often offer to pay higher rent so they can secure the property. Rent is set by the market, investors are just trying to locate that glass ceiling.

[mals69]

One of the greatest economic rules holds true too - Supply and Demand for rent increases.Wage increases across the board help big time too.