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The Higher the Rent, the Lower the Income

By Emma Smith

Many landlords who lease their property often have a mindset of ‘holding out for the highest rent’, thinking the sky is the limit in a competitive rental market. Many even do this if it means losing several weeks of rental income, with an over-priced and sometimes assumed rent without substantiating evidence.

What does ‘holding out for the highest rent’ mean for the overall return on the property?
Experienced investors report that the best way to maximise the return on their investment properties is to keep the property let – in other words, it is important to minimise vacancy periods. For many, it is not always easy to make a decision to lower the rent, especially when it can have an impact on the overall income and mortgage payments. It is tempting to hold out for ‘just another week’ and before you know it, another week has passed by. Experienced investors say that doing the sums shows that ‘holding out for the highest rent’ can be counter-productive. If the property is over-priced at $450 a week, [with the rental market and feedback from tenants suggesting $420 a week] losing the $420 for two weeks vacancy is $840. Spread over a year, this will lessen the weekly return to less than the $420 that the property will eventually rent for.

When we provide feedback to landlords on the weekly rent, we first carry out extensive research comparing the property to other properties on the market at the time, known as a CMA [Comparative Market Analysis]. It is our duty of care, as a professional managing agent to work towards achieving ‘the highest’ possible rent, as well as minimising vacancy periods.

Tenants talk to relatives, friends and other people in the rental market and the tenants paying top dollar are the first to notice a downturn in the rental markets or over-priced rent, often reacting by moving out to a cheaper property when their lease expires. This then becomes a further risk of a vacancy period and lost income/rent if the landlord chooses again to go for top rent before accepting the changed circumstances. It becomes an ongoing loss of income from tenancy to tenancy.

The aim for tenanting a property is to ensure that the rent is within the market expectations to reduce lost income and high tenancy turnovers. If a vacancy period does occur, you may like to work by the rule that [provided the property is clean and presents well and is well-maintained] if a tenant is not secured by day ten of the leasing campaign, the asking rent should be reduced by five-ten percent, which has been a tried and tested system.

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