How do you determine market rent?


It is important to charge market rent to achieve a sensible return on your investment property.

You can use TradeMe to see what other properties are available for rent in the area.  Look at how many there are for rent (supply) and see how many times they have been viewed by looking at the counter at the bottom of the page.  This can give you an indication of how many people are looking to rent in the area (demand).

If you are very new to renting out a property, go and visit some of the other properties for rent.  Pose as a prospective tenant and see how the tenant selection process is done.  After viewing a few properties, you’ll know what level of rent can be achieved for properties in various condition.  Keep an eye on the properties you’ve viewed on TradeMe to see how long they take to tenant.  If they are taking a long time to let, then they are probably overpriced.

The Ministry of Business, Innovation and Employment (formerly the Department of Building and Housing) publishes market rent data on their website .  This data is not as current as it could be.  The bond statistics used were lodged during March – August.  Rents in some areas have increased more than is indicated by this data.

The NZ Property Investor magazine comes out monthly and has up-to-date market rent information.  This is a good magazine for new investors and I’d highly recommend buying it.  Even better, join your local property investors association  you’ll get the magazine subscription as part of your membership.

Once you have determined the market rent for the area, you then need to determine what your particular property can command.  Sometimes age and condition make a big difference, but if demand is high enough, the difference might not be that great.  For example, if there are not enough three bedroom houses to go around, then even if yours is a bit dated you could still get a similar rental to a more modern three bedroom house.  You are really only competing with the other properties that are for rent at the same time as yours.  Remember that only one set of tenants is going to be able to rent each property.  There will be tenants available for your property.  You need to get a feel for how many other properties are available and how quickly they are being let.

The same valuation principles apply as if you were determining market value for sale.  Market rent is the price at which the landlord is willing to let the property and the tenant is willing to pay for the property.  Market rent is determined by supply and demand.

If your property is vacant and you are re-letting, or letting it for the first time, this is the time to test the waters and extract maximum market rent.  It is harder to increase your rents to maximum once you have a good long-term tenant in place.

If you are renewing a tenancy (at fixed term time) or reviewing the rent on a periodic tenancy, it is possibly worthwhile discounting your rent a little if you have a good low management tenant in place.  If you can keep them in your property by giving a small discount on market rent (say $10 per week) then that will be cheaper than potentially having a vacancy and associated letting costs.  Property managers will always increase rent to market rent because many of them stand to gain a letting fee by having a tenant changeover.  This is not necessarily the best option for your annual cash flow.  If you can keep your tenant for $520 a year in discount, this is cheaper than having a vacant property for 3 weeks as well as the advertising costs associated with re-letting. 

Whilst getting a good rental for your property is important, it is even more important that you get a good tenant!  There are only ever two reasons why a property is not attracting a good tenant:

  1. There is something wrong with the property
  2. You have priced the property too high

Something else to consider is that the only tenants who will sign up for a property that is overpriced are those who have no intention of making the rent payments anyway.  They don’t care what you are asking, because they will just stay there until you can evict them!

Be fair and reasonable in your pricing, be careful in your tenant selection, and enjoy your investing.

 

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