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The #1 rent review fallacy

1st August 2012
If you keep your rent at the market rate, you’ll always attract a good tenant pool and you’ll meet your long-term investment goals.

If you keep your rent at the market rate, you’ll always attract a good tenant pool and you’ll meet your long-term investment goals.

“If I keep my rent under the market value, I am more likely to secure a good tenant and they will stay for longer.”

This has to be the most over-worked and untrue statement used when property owners and property managers are defending their current rent level. (You can find out here what the cost is of not charging market rent).

Why is this statement untrue?

Property investment is a business. Do other businesses and professions operate under the mantra, “If we keep our product price and fees under market, we are more likely to secure a good customer and they will stay with us for longer”?

Of course they don’t.

So why is residential property investment any different? It isn’t! This mantra that’s been adopted by so many property managers and property owners is plainly wrong!

The statement is also untrue because good tenants aren’t miserly. No, a good tenant will be attracted to a property that’s clean, presentable, in a good location, and advertised at market rent. A qualified tenant is one who has been looking for properties for a number of weeks and knows the market price for what they want – and they have the means to service that rent payment.

When the property is marketed properly, the property will indeed attain market rent. The A1 tenant won’t have any qualms about paying that, if the property meets their needs.

What sort of needs does an A1 tenant have?

An A1 tenant will want to live in an attractive property. A place they feel at ‘home’ in, with quality décor and fittings, and that’s well-maintained. And good tenants know that that costs money, and they’ll gladly pay good money to rent a home they’ll enjoy living in for quite some time.

How long will a good tenant paying full market rent stay for?

A tenant who’s paying full market rent will easily stay for two to five years and longer, based on our own experiences.

That means zero weeks’ vacancy for a number of years, and no marketing fees during that time. Plus long-term tenants tend to cause less wear and tear than short-term tenants.

In short: having tenants stay AND pay full market rent for all this time is a very attractive prospect indeed.

But will a tenant paying less rent stay longer?

By charging below market rent, you are introducing the property to prospective tenants who wouldn’t normally consider the area because of budget constraints: i.e. they cannot afford the area under normal circumstances.

But because your property may be discounted, they may want to apply for it even though it is at the ceiling of their budget. Even though they can afford it now, they may not be suitable tenants on a financial basis as they will be priced out of the area by the time your next rent review comes around.

At every rent review, you’ll then be faced with assertions that, “We can’t afford to pay any more”. Do you really want to have that battle on your hands every six months? Or end up financing the tenant’s lifestyle?

Market rent is set by tenants

Remember, market rent is set by tenants. For a particular suburb, the rent is established by the tenants that rent in that area. These tenants set the market rent in response to demand for rental properties, or the lack of it.

A market rent update is issued each month by the Department of Building and Housing (DBH) showing market rent statistics (lower quartile, median, upper quartile etc.) for the whole of New Zealand. This monthly release is based on bonds received by DBH over the previous six months.

So if you’re ever tempted to charge below market rent, consider what’s more important to you: your tenants’ lifestyle, or your own property investment goals?

Don’t be tempted to use the #1 fallacy in property management… make this one your mantra instead:

“If I keep my rent at the market value, I will always attract a good tenant pool for the property and will be meeting my long-term investment goals.”

That approach will serve you far better!




Next step:

Discover which marketing techniques you need to employ to find that A1 tenant who’ll happily pay full market rent.



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