- Negative gearing encourages private investors to supply the housing that governments can’t
- Most tenants know they’re onto a good thing, and will know the rent they should be paying
- Charging market value rent will help pay expenses, cover the mortgage or even start to reduce debt which will create equity and passive income
We’ve spoken to so many people over the years that have started their journey as investor landlords with a bit of a naïve attitude.
It’s distressing to see the repeated mistakes that many people make. Even worse are the people who want to invest in property but think it’s too hard, risky or time consuming and don’t get started at all!
We spend a lot of time with our clients addressing the risks involved in property investment and how we can stop these from occurring. One of the biggest is failing to increase rents regularly or at least charge market value rent.
Negative gearing
Negative gearing encourages private investors to supply the housing that governments can’t.
Now, let’s be clear upfront that as landlords we’re providing a home for someone, because the state and federal governments certainly aren’t providing enough.
This is why the negative gearing policy works. It encourages private investors to supply the housing the governments can’t and don’t want to afford. But at the end of the day we are dealing with human beings, and we need to treat them fairly. That’s just good karma.
But you also need to treat your investment property like a business. Imagine buying a business worth $600,000. You would treat it very seriously, right? And you would have the resources and systems in place to get the best results.
Unfortunately, too many people invest in a property of the same value with a totally different mindset and make emotional decisions that don’t maximise the investment potential.
Rents have increased significantly recently and many tenants across the country are still paying a very low rent. Of course, this might be because their lease is not up for renewal yet.
All landlords should regularly review their rents to ensure that they are at market rates. Working with their property management professional will help them make that assessment, particularly if that property is located interstate.
The “great tenants” scenario
There are many reasons why a landlord might choose not to increase the rent on their investment property. A favourite reason we hear a lot is that “They’re great tenants, we don’t want to lose them.”
Trust me, most tenants know they’re onto a good thing, and will know the rent they should be paying. If they vacate your property then they’ll just have to pay market rent elsewhere.
And just think that through. You’re buying an investment property to change your financial future, if you don’t charge market value rent then you’re putting yourself at a major disadvantage.
Charging market value rent will obviously help you pay your expenses, cover the mortgage or even start to reduce your debt which will create equity and passive income. That’s why you’re doing this. Why wouldn’t you want to get ahead?
What if you need to sell the property?
And then think about if you need to, or want to, sell your property. If you’re trying to sell the property to an investor because your tenants are mid-lease, you’re just going to make it more difficult for yourself because your investor buyer wants to get the best possible rent for the property.
If you’re not charging proper market value, then you’re putting off most of your buyers from the get-go.
Buyers will choose to buy a different property, perhaps the one down the road that is receiving market value rent, which will also make it easier for them to purchase because in times of reduced borrowing capacity the better yield is king. Most investors don’t think about this.
Rents don’t always increase massively of course, but a small regular review is much better than a large, infrequent change that can shock the tenant so much that they do move out.
Landlords might feel daunted by increasing the rent for the first time, however the reality is that if the increase is reasonable, there should be no problems with the tenant. Most tenants know what rent they should be paying, and your property manager can also advise you.
So, overall, try not to sweat the small stuff too much. If you are serious about property investing and truly want to create a better financial future for yourself and your family, you need to remain focused on building a portfolio and increasing your overall net worth position. This is much easier by charging market value rent.
Many people stop at one or two investment properties, when they could easily continue their investing to achieve financial independence. They also get too wrapped up in worrying about small issues that should not be stopping them from moving forward.
