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How to figure out how much to charge for rent.

May 19, 2021

It’s the first question every new landlord asks. How much can I charge my tenants for rent?

Charge too much and you risk your place standing empty while other landlords collect their weekly rent. Charge too little and you’ll be losing out on money — and since increases are restricted by law, those losses will only get bigger.

How to set the initial rent

Fear not. Your property manager is an expert at establishing where your property sits in the market. Alaa Samsam, Team Leader at Independent Property Group Property Management, explains.

“We have a multi-step process for identifying how a rental property compares to others and how much they can charge for rent. We start with the comparables — that means properties in the same location, with the same number of bedrooms and the same living space if possible. We’ll look at what’s currently available, because our client will be competing directly with those properties, and see what they’re asking in weekly rent. We’ll also look at what’s rented in the past few months and what their prices were.”

But wait, there’s more!

“Then, we’ll dig deeper into the data. We’ll look at how long each of those properties sat on the market before being rented out. If they achieved a high price but they were online for 4 or even 6 weeks before getting a tenant, that suggests that the price was perhaps a bit too high. It’s all about finding that balance,” explains Alaa.

Should you hold out for a higher rent?

What Alaa and his team are looking for is a price point that is as high as possible without putting people off. To understand why that’s so important, consider the following numbers.

Sam and Sue both buy investment apartments in the same complex. The rental appraisal tells them that they can ask for weekly rent of between $420 and $440.

Sam holds out for $440. At 12 months of continuous occupancy, that’s $22,880. Sue offers her place for $420. At 12 months occupancy, she’ll make $218,40, which is $1040 less.

However, if Sam’s property sits vacant for four weeks, he is down $1760 and will only make $211,20 for the year. Sue, who got a tenant in the first week, is now $720 ahead.

None of these numbers are going to break the bank, but it’s useful to keep them in mind. As the old saying goes, a tenant in the unit is worth two in the bush. Or something like that.

How to manage rental increases

The next thing to keep in mind is the annual rent increase. “A surprising number of landlords are reluctant to put up the rent every year,” says Alaa. “They feel bad about asking their tenant to pay more, or they just can’t really be bothered to create a new lease. The problem is that by the time they realise they’re behind the market rate, it’s hard to catch up.”

That’s because there is strict legislation governing rental increases in the ACT.

If your tenant is on a fixed-term lease (usually a year), you can’t increase the rent until that term is up. If they’re on a periodic lease, you can only increase the rent once in a 12 month period.

Rental increases must not be ‘excessive’. This means that they cannot be more than the ‘prescribed amount’ set under the legislation, which is 110% of the percentage increase in the rents component of the housing group of the Consumer Price Index (CPI) for Canberra.

Lost? Us too. Let’s make it simpler.

If the CPI increase is 5%, you can only increase rent to a maximum of 5.5%. “Since the CPI reflects the average increase in rent across the property market, that’s usually a reasonable limit,” explains Alaa. “But if you set your initial rent significantly below market, this means it’s hard to catch up.”

Should you always accept the highest price?

The Canberra rental market is always tight. In 2021, it’s tighter than ever at a mere 0.7%.

In an environment as competitive as this, it’s not unusual for people to offer above the asking rent to secure their property. But should you put a lot of weight on this strategy?

“It really depends on the property,” says Alaa. “If it’s a house, there tends to be a lot of competition because there is less stock. People who need the extra space will jump at them as soon as they’re listed, so you’re more likely to get offers above the asking price. Apartments, less so, although even there we’re seeing people offering $10 or $20 above asking in some cases.”

While the extra cash is nice, Alaa says it shouldn’t be the primary consideration. “Tenant selection is more important,” he explains. “We’d encourage our landlords to look at how strong the tenant application is as a whole. If they’ve got great references, a strong renting history, and secure employment, that’s probably more important than a few extra dollars in rent. If you end up with a tenant who mistreats the place, causes damage, or doesn’t pay rent, that can cost you in repairs or insurance claims. Having the security of a good tenant is very valuable.”

For a no-obligation rental appraisal on your investment property, get in touch and one of our property managers will be in touch.