The reality behind rentals
Australia has a diverse rental market, with vacancy rates and yields differing at state, city and suburb levels.
Many areas with significant price growth have not seen the same increases in rents. This means that yields have dropped in real terms in these areas. The mining investment slowdown is affecting places such as Perth, which is also experiencing an increase in vacancy rates.
According to Domain’s September Rental Report, the yield for houses in Melbourne has dropped from 4.07% to 3.96%. In Perth, yields have dropped from 4.49% to 4.27%. The yield for houses in Sydney has dropped from 4.01% in September 2014, to 3.65% in September 2015; and in Brisbane, the yield is sitting at 4.93%, down only slightly from 4.99% over the same time last year.
This situation may have landlords wondering what their next move will be. The good news is that with interest rates at such low levels, repayments are also low and there may be less pressure to maintain yields.
If an investor owns a property in an area with high vacancy rates, it may be time to consider dropping the rent. If the local market becomes more competitive, landlords should endeavour to retain a good tenant. Rent reductions might be on the cards in some areas, but small incentives such as offering to mow lawns or installing new appliances may also be worthwhile.
Many off-the-plan properties are scheduled to come onto the market in the coming months and this may increase the level of competition between landlords. This means that owners need to decide whether imposing a rent increase on a good tenant is really the right decision for their property. If the tenant leaves, and the property stays unoccupied for many months, this will significantly hurt the landlord’s yield.
Although the market may be softening in some areas, there are other areas in which landlords may be able to increase rents at the moment. A home in a more exclusive area, which has experienced strong price growth could be an example of a property ripe for a rent increase. There is typically low supply of this kind of home in the rental market, which may enhance an investor’s ability to increase the rent. Areas with low vacancy rates may also provide opportunities for rent increases.
Many investors use inflation rates to determine rent increases, however, this should only be thought of as a guide. If the inflation rate is applied consistently at the end of each six month lease, rent could quickly become out of step with what is happening in the market.
Local market considerations will almost always dictate how much a property can be rented for. Deciding on how much to increase or decrease rent by should be based on market research and seeking advice from property managers and real estate agents. If your rent is out of touch with the local market, you’ll likely realise it very quickly.
In the end, rental rates for an investment property can be guided by keeping a close eye on key factors in the market. Extensive research will give landlords the best chance of making the right decision and protecting their investment.