Landlords urged to consider the impact of fast-rising rents

Property investors must balance sharply-rising mortgage costs with rent demands and tenant issues. Here’s how to manage risk.

Many of Australia’s 2.2 million real estate investors are being sandwiched between their own financial pressures and those of their cash-strapped tenants.

Rapid-fire interest rate rises since May have sent costs soaring for many investors with two or more mortgages, although this is being partly offset by rising rents.

SQM Research says the national median capital city rent for a house is up 15.1 per cent in 12 months, while for a unit it has climbed 16.2 per cent. The national median asking rent for a dwelling is now $496 a week, SQM says, and the national vacancy rate is a “very tight” 1 per cent.

PropTrack data shows properties are renting faster than ever before – in July it took a record-low 19 days for a property to be leased after it was listed on realestate.com.au.

As tenants struggle with surging fuel, grocery and other costs, landlords are considering how much further financial pain may be inflicted by rising rents, and in some cases are limiting rental increases for good existing tenants to less than 5 per cent.

Landlord insurer Terri Scheer Insurance’s distribution channel manager, Sarah Barton, says many property investors rely on a steady rental income to repay their investment loans.

“While a rent review in the current environment may be warranted, increasing the rent for existing tenants always requires a careful balance,” she says.

“A tenant who is punctual with their payment and takes care of the property may be worth holding onto. The stability a good tenant provides may outweigh an increase in rental income and the costs involved to re-let the property.”

Property investor, author and university lecturer Peter Koulizos says a vacant property can be more costly to a landlord than a few extra dollars of rent each week.

Koulizos says two vacant weeks in a year equates to 4 per cent of missed income.

“How much extra do you have to charge to get that 4 per cent back?” he says.

“Generally landlords are price takers when they put their properties up for rent.”

They receive what the tenant market is willing to pay, but now tenants are outbidding each other because of the housing shortage.

Sarah Barton from Terri Scheer Insurance recommends using a property manager.

Koulizos says today’s rental property squeeze started five years ago when regulator APRA tightened the rules around investment borrowing and investment loans became more expensive.

“Almost every capital city’s vacancy rate started dropping from March 2017,” he says.

“To compound that, the property market has been so good that investors in their 50s and 60s are saying it’s time for me to cash out, and owner-occupiers are buying in.

“The poor tenants are stuck between a rock and a hard place because there are less rental properties.”

Koulizos says it is a fallacy to say that landlords automatically lift rents in line with their interest rate increases.

“Generally if they are a good tenant I would increase it just a little bit – if it’s a new tenant, go to the market,” he says.

In the current environment, landlords should also check that their insurance covers rent loss and rent default, Koulizos says.

Barton says landlord insurance provides peace of mind, and investors should check the policy wording before buying.

“Different insurers will have varying conditions and definitions for loss of rent cover,” she says.

“Not all policies include cover for loss of rent if the tenant absconds or dies, if they leave the property unable to be tenanted while repairs to damage are made, or if access to the rented property is prevented due to an insured event occurring.”

Barton says appointing a professional property manager can help a landlord reduce the risk of tenant issues, and deal with problems before they escalate.

HOW LANDLORDS CAN LOWER RISK

• Do thorough reference checks on new tenants.

• Conduct regular property inspections.

• Be balanced with rent reviews.

• Appoint a property manager.

• Have landlords insurance.

Source: Terri Scheer Insurance

Originally published as Landlords urged to consider the impact of fast-rising rents