The costs of setting your rent too high

Wednesday, 22nd Aug 2018

Setting the rate for your rental property is an important decision that can have both immediate and long-term implications on the performance of your investment portfolio. Whilst setting a higher rental rate could see investors increasing their rental income, being too ambitious with your asking price could also be a deterrent to prospective tenants, and potentially have a detrimental impact on your cash-flow and long-term rental yields. In the case study below, we look at how setting rental rates too high could negatively impact your investment goals.

Rental cashflow comparison

In the example above, investor A asked for the market rental rate ($500) as recommended by their property manager. As a result, their property leased almost immediately.

Investor B initially asked for $550 per week in rent for an identical property. As a result of this ambitious rental rate, the asset remained vacant for a period of eight weeks before the investor reduced the rent in alignment with market demand. So, how has this impacted the investors’ costs?

Short-term costs

By the end of week eight, investor A accumulated $4000 in rental returns which they were able to contribute towards their ongoing mortgage repayments.The ambitious rental rate set by investor B resulted in an eight-week vacancy period due to reduced demand from tenants, meaning the investor accumulated $0 in rental returns over the initial two month period. As a result, they had to use $4,400 of their savings to fund their mortgage repayments, and also spent an additional $300 in advertising fees for the property.

Long-term costs

At the end of the one-year lease, the consistent market rental rate set by investor A resulted in a net return of $26,000. After dropping their rental price, investor B generated a net return of $22,000, leading to a comparable loss of $4000 due to the lack of rental income received during the additional eight week vacancy period.

How much rent should you charge?

In the right circumstances, increasing your rental rates can be a viable strategy for maximising your property income. However, when setting your rent, you also need to be realistic about the rates you can expect to achieve. If you are too ambitious with your asking price, you may be faced with lengthy vacancy periods, and will likely need to compromise on rental price further down the line to attract more tenants. This could not only put you under significant financial pressure in the short-term due to ongoing expenses such as mortgage repayments, but could have a significant impact on your long-term rental returns.

If you’re re-leasing your property or looking to increase your rental returns, your property management team will be able to advise you on the right rental strategy to ensure your property performs at its best in current market conditions. By assessing the local market and monitoring trends in demand and supply, they will be able offer advice on rental rates, value-add opportunities and long-term strategy to help you maximise the success of your portfolio whilst ensuring your property remains aligned with market demand.

Momentum Wealth is a Perth property investment consultancy dedicated to helping investors accelerate their wealth through property. We offer a premium, advice driven service to help clients in the strategic planning, financing, acquisition and management of their investment properties.