Economics of a rent review

In another thread I mentioned that I had renewed a lease to an existing tenant for a 4.8% increase and that the new rent was below the current market rent for that apartment.


To explain why, as a landlord, I am happy to roll over leases to existing tenants at below market rent, here is what has happened with another property with a lease expiring at the end of May.


The existing tenant is moving out at the end of the month (nothing to do with rent levels). I advertised through an agent on Thursday last week and accpeted an offer on Sunday evening (signing the provisional and getting the cheque this morning). The new rent is 12.8% higher than the old rent.


Which looks good for me doesn't it?


No. There will be a gap between tenancies, stamp duty, agent's commission and the apartment needs repainting and some other minor touch up work as well as having the aircon units serviced. After adding up the costs* and the vacancy, my break even is 22 months. That is, the tenant has to be there for 22 months before the higher rental makes up for the vacancy factor and costs. And this is before taxes and ignores the fact that the costs are front end loaded while the revenues are effectively in arrears.


If I had had any choice in the matter, I would have elected to keep the old tenant at the existing rental level and been better off in doing so.


Of course, the deal that I have done is still better than various other scenarios that could have eventuated (such as a longer vacancy or no increase at all) and I am not complaining as I will still have someone else paying off my mortgage for me. The point of the post is to illustrate why, as landlords, continued occupancy may be better than trying to always get the full market rent at all times.


* slightly provisional - I am trying to get a better quote for the work but even if I succeed it will only lower the break even point by a month or less

Excellent and informative use case. The classic example of the power balance in favour of the tenant renewing a lease. Those of you renewing leases, you can absolutely demand below market rates for the very reasons quoted above, and that the landlord should calculate the value of the tenancy as a whole rather than a monthly figure.

I'm not sure if I would go that far. I will accept a slightly below market rent to keep a good tenant. If a tenant is being a pain in the neck, I would be happy to see them go. Also, bear in mind that there is a cost to the tenant in moving as well - moving expenses, time to find a new place, agency commission for the new lease and maybe a few other things.


Then there are landlords who want the top dollar and who do not pay agents anything because they advertise their own properties directly.

Yeah -

And the tenant that moved had EXTRA expenses too (commission, moving expense, hassle)


So both sides "take a hit" (of sorts) when they cannot agree on a Rent renewal

Commission is not solely paid by the tenant, its a shared expense and therefore is cancelled out, whether or not it is renewed (smaller commission) or if a new contract is drafted (larger commission). Its basically moving expense/hassle vs. vacancy period. A moving van can move an entire home for less than 3k in a single afternoon.


Even 1 month vacancy will far outweigh any expense the tenant incurs moving. a 20k/ month rental means that if left vacant for 8 weeks, the landlord needs to raise the rent from 20k/ month to 24k to make the same revenues over the same 12 month period. It is therefore in the best interest of the landlord to renew the lease if the negotiated amount is greater than what is expected to be lost in finding a new tenant. Otherwise the landlord takes on the risk of finding a new tenant in time.