In today’s episode we launch into the rising rent market scorching the country. With the market changing rapidly, it’s understandable to be concerned that you’re not getting the rent you could be. Loo explains his thoughts on how to approach the tender topic, outlying the pros and cons behind rising the rent.

Timestamps:
00:24 | COVID Woes
03:06 | No Baulking in Beenleigh
05:20 | Know Your Property’s Worth
08:02 | Waiting It Out
09:23 | A Fair Game
10:52 | Much of a Muchness
15:54 | Timing is Everything
18:20 | Get Dressed Up For the Occasion

Resources and Links:

[00:04:51] And I think as landlords it's not about being greedy. It's not about if something is worth $380 a week, we should be charging $430 a week or anything like that. It's really important for investors, whether you own 1, 10, or 100 properties, to just keep a really strong eye on the market, especially when it's rising rapidly, and you're not selling yourself short. 

This is Property Investory where we talk to successful property investors to find out more about their stories, mindset and strategies.

 

I’m Tyrone Shum and in this episode of Invest Like A Pro we’re chatting with founder and director of House Finder, Simon Loo. He shares his thoughts on the supercharged rental market causing havoc for tenants and investors alike, and details the importance of balancing the scales to get the rent you deserve while not falling into the greed trap.

Tyrone Shum:   

Over the last 12 months, COVID has continued to sear its impact into markets around Australia. Loo is all too familiar with its effects, especially in the Brisbane market, where he has been concentrating heavily. Not only has the boom affected his clients— investors and first home buyers alike— but it has had ramifications for his personal portfolio as well.

Simon Loo:   

[00:00:24] One of the points that I make to a lot of buyers, investors, new buyers, and also buyers that already have properties is when there's a market that's rising, whether from a purchase price or from a rental perspective, it's really important to keep a very strong understanding on what's happening today. You have to keep your finger on the pulse. And if you don't, it can cost you quite a lot of money. And what's happened recently in Brisbane, as we all know, not only are the prices going up, but the rents have been going up as well due to a significant shortage of rental properties. Not only in Brisbane, but also in the outer parts of Brisbane as well. 

Tyrone Shum:   

[00:01:20] Just wondering, is it because there's not enough supply of properties at the moment being built? Or is it just because a lot of owner occupiers are just buying these properties up? And therefore less investment properties are available for renters?

Simon Loo:   

[00:01:32] The reason is actually because there's a lot of interstate migration into Brisbane at the moment. 

Tyrone Shum:   

[00:01:38] Ah, since the borders opened back up.

Simon Loo:   

[00:01:41] Borders or no borders, I think for a lot of people the stresses of living in Sydney, or maybe Melbourne, in terms of financial [aspects] are forcing them to move. Not forcing them, but they're looking at greener pastures. 

 

[00:01:59] And I actually know quite a few personal friends that have already made the move into these areas. The complaint has always been either they can't buy a house— even if they have the money to find a suitable house— because property is selling so fast. Or they can't find a suitable rental property as well. 

  

[00:02:25] So it's simply a case of supply and demand. There's obviously a lot of demand, a lot of people wanting houses to live in, whether it's from rental or to buy in. And there's so many properties out there, suitable houses, that is, that's for rent. And that's causing obviously rents to increase in all parts of Brissie. 

  

[00:02:44] And as some of you may know, I own quite a few properties in Brisbane. And I would say for the past five years or so, until about 12 months ago, the rents have been relatively stagnant. Maybe an increase of $10 or $20 or $30 here and there. But, you know, it hasn't really done very much. 

  

[00:03:06] But to give you one example, I've got a property out in Beenleigh, which is about 30 kilometres south of Brisbane. Really standard house, it's such an older house, it's not the best house in the world by far. I've had a tenant in there paying consistent rents which was in the very, very low, three hundreds, it's actually $300 a week, for a number of years. And for a number of years, about $300 to $320 a week was probably the market rent. 

 

[00:03:44] Now what happened is over the past 12 months since they renewed their lease late last year to now, I actually just increased their rent to $380 a week. So that's an increase of $80 a week or percentage wise... I don't know, I'm really bad at math! I'll have to work it out.

Tyrone Shum:   

[00:04:04] Well, that's about 25% increase.

Simon Loo:   

[00:04:06] 25% increase in rent. And the tenants didn't baulk. They just took it. Because they can see, logging onto realestate.com.au that if they were to move out and to move into something similar, they'd be paying that anyway. 

Tyrone Shum:   

[00:04:21] Yes. And plus there's moving costs as well, and the headache of actually having to pack.

Simon Loo:   

[00:04:26] Moving costs, packing, obviously the bond and everything, I'm sure that— look, to be fair, they've been in there for several years— there's a bit of wear and tear with the property. Yard work and all that kind of stuff, which they may have to do if they were to move out. But since they're resettled, they're comfortable, they know that that's what the market is at the moment. They have to pay it. 

  

[00:04:51] And I think as landlords it's not about being greedy. It's not about if something is worth $380 a week, we should be charging $430 a week or anything like that. It's really important for investors, whether you own 1, 10, or 100 properties, to just keep a really strong eye on the market, especially when it's rising rapidly, and you're not selling yourself short. Because one of the worst things is if you're getting $300 a week in rent on an investment property, and you can get $380, that's a significant difference.

Tyrone Shum:   

[00:05:20] That's a 25% decrease of your income. So if you could actually increase that, just simply by making sure that you bring your market rent up to scratch and you aren't paying any additional cost to do that.

Simon Loo:   

[00:05:32] 100%. It's something that you need to look at almost on a monthly basis. I think it's just obviously for your own good, really, at the end of the day. It's similar with house prices, as well. One of the things that I've noticed is that, if we're analysing a deal today, let's say we're looking at... using Beenleigh as an example. Maybe you're looking at a four bedroom, two, garage, two bathroom house, 600 square metre, again, sort of very standard house. And we can buy it today for, let's say, $450,000. 

  

[00:06:14] Now, if you look at some of the comparables that are selling immediately today, as in properties that are literally under contract but haven't even settled yet— you might realise that some of those houses with similar specs are actually selling for $500,000. So at $450,000, that's actually a pretty good deal. 

  

[00:06:33] But if you compare that $450,000 house to properties that have sold, or similar properties that have sold in Beenleigh from even just six months ago, three months ago, even— they may have been selling for $450,000, or maybe even slightly less. You might be thinking, 'It's not such a great deal.' And then you pass on it, you actually might be missing out on a really good opportunity. 

  

[00:06:55] So in a rising market like this, it's really important to just make sure that whatever data or comparable sales or anything that you're looking at, it needs to be current. And it needs to be so current that I would say within the past four weeks is the absolute max as to how recent you need to be looking at not only comparable sales, but comparable rentals as well. And that will give you a much more accurate indication on what the current value is, at the end of the day. So I think just keeping that in mind, making sure that you're focusing on what's happening today, rather than yesterday is super important. 

Tyrone Shum:   

[00:07:36] Totally. And so for example, if you're already in a lease with a tenant that is paying rent and so forth— and this is a topic that I think most investors go, 'How should I actually approach this to increase their rent?' Because you're looking at it going, 'Wow, the market rent's, say, from $400 to $480 now, I want to actually increase it, but they're still intendancy.' How would you go about handling a situation like this, knowing that you've also got a property manager as well?

Simon Loo:   

[00:08:02] Well, if they're in a lease, you can't do anything really, I mean, you can't up the rent. It would also be quite unethical to try and force a higher rate on someone while they're still in the lease, or even kick them out, because they're paying lower rates. So it's one of those situations where you just have to wait. Hopefully it's not a super long wait, because most leases are maximum 12 months. 

  

[00:08:32] But with that said, because we focus a lot on off market deals, as discussed in the previous episode, a lot of the properties that we buy are already rented, there's already a tenant in there. And that's one of the many reasons why a lot of landlords choose to sell off market, because there are landlords that just want a nice and quick and easy sale with investors. 

  

[00:08:54] But what that sometimes means is that the rent that the existing tenant is paying could be slightly below market rent, or in some cases, heavily below market rent. And a common situation is we buy a house, it comes with a tenant, the tenant's great, they're looking after the house well, they're paying rent on time, but they're just paying a little bit below what it's worth. And the lease might expire in six months. 

Coming up after the break, we discuss the hotly debated topic of what to do when a tenant is paying less than market rent…

[00:10:52] And you might find that it's much of a muchness. Because if you kick them out, there are costs associated with that in finding a new tenant with a vacancy. 

How to avoid tenant tensions when introducing a significant rent increase… 

[00:12:43] When the lease expired, they obviously just copped the $60 below market rent scenario for three months only. But when it came to renew, they increased the rent by close to $100 a week.

He explains why putting on a costume and playing a character can work in your favour. 

[00:18:58] I can guarantee you that anything that's listed online at the moment, in Brisbane in particular, is probably either under contract, or is being bombarded with offers. 

And that’s next. I’m Tyrone Shum and you’re listening to Property Investory.

Tyrone Shum:
Loo continues to lay out the pros and cons regarding the possibility of raising the rent, keeping both the investor and tenant’s interests at heart.

Simon Loo:   

[00:09:23] So you kind of have to look at that and say, 'Okay, is it such a bad thing that I inherited tenants that I'm going to get cash flow literally immediately, as soon as the property settles? I want to get this cash flow coming in from this property, even though it's slightly below market rent. But it means that I don't have any vacancies. It means that I'm probably not going to have to spend much money on cleaning or general maintenance of the property before I'd have to find a new tenant. Because all that costs money, right? If you have a house that rents for $400 a week, every week that it's vacant while you're finding a new tenant is going to cost you $400. So in some cases, if I inherited a tenant that, let's say, paid $350 a week, instead of the market rent, which might be $400— that $50 difference over a six month period is only...

Tyrone Shum:   

[00:10:18] It's about $1000 and something.

Simon Loo:   

[00:10:30] $1000 and something. So that that would equate to about three to four weeks of vacancy. So sometimes it's worth thinking, 'Okay, cool. Yes, I could get more rent for it, if I were to kick this tenant out. Or I could just wait until the lease ends.' 

  

[00:10:52] And you might find that it's much of a muchness. Because if you kick them out, there are costs associated with that in finding a new tenant with a vacancy. So sometimes it's not such a bad thing to have a tenant that's paying a little bit less rent on the get go. But when it comes to lease renewal, just make sure you either jack up your rent back to market rent, or if they're unwilling to, it's probably not a bad time to be finding a new tenant anyway, when the market's super hot. 

  

[00:11:23] I always tell clients: If the existing tenant doesn't want to pay market or even close to market, at the end of the day, you have to look after your best interests as a landlord, and you need to find new tenants. So don't be afraid to do that as well.

Tyrone Shum:   

[00:11:42] And you've mentioned as well, there was also not only your portfolio, you've had also rental properties, where you've just recently seen an increase in rent from $300 to $380 a week. Have you had other, I guess, examples of, say, other clients that you've worked with recently that have brought in say, new investment properties, and then looked at adjusting these rents accordingly?

Simon Loo:   

[00:12:06] Exactly what I mentioned before. There was a property we bought on the north side of Brisbane. I think it was around about the three month ago mark. They inherited a tenant, great tenant, paying rent on time, all that kind of stuff, looked after the house— but they were paying just slightly below market rent. I think to the tune of about $50 or $60, or something along those lines. Like, $60 a week, not much difference. 

  

[00:12:33] Anyway, they settled on the property, they kept going, but the lease was going to expire in three months from settlement date. 

Tyrone Shum:   

[00:12:41] Perfect. 

Simon Loo:   

[00:12:43] When the lease expired, they obviously just copped the $60 below market rent scenario for three months only. But when it came to renew, they increased the rent by close to $100 a week. Because during the time when we bought that property, the rental market in that particular suburb was going a bit crazy as well. I think when we did the comparables there were only about three or four houses for rent in entire suburb, and the vacancy rate was extremely low. 

  

[00:13:22] So it was literally going through that immediate transition of rents going up at that particular point in time. So even though when we bought the property, we projected that it was about $60 below market rent, when it actually came time three months later to increase the rent back on the existing tenants, the market rent at that point was actually $100 more. 

  

[00:13:48] So anyway, $100 more increase. The tenants were happy to pay it because again, they recognised the fact that that's what properties are worth nowadays, they weren't getting ripped off, the landlord wasn't being particularly greedy or anything like that. They just wanted obviously a fair rent based on what's happening in the market. And everyone's kind of happy as well. 

  

[00:14:08] So just by literally keeping an eye on the market and just being a bit more in tune with your role as landlords— which is to make sure you're getting a fair deal on your behalf— can make a massive difference to your cash flow. So keep an eye on it, to all investors out there. Even though your cash flow might be really good because of low interest rates and things like that, at the end of the day, you want to maximise that position as much as possible.

Tyrone Shum:   

[00:14:43] Yeah, I totally agree with you on that thing. So talking about this current market that we are in where prices of properties have been going up, rents have been going up— how do you weigh based on a decision to purchase property at this point in time on those things? So for example, some investors might want to get into the market at the best possible price, like, under market value. But then at the same time do you forego low rent to be able to try and get that property at that price? Or if you're looking more sort of a cash flow type of investor that you want more revenue coming in, do you forego the actual price point of going into the market and getting a higher rent? As an example. You know, from your experience.

Simon Loo:   

[00:15:29] From my experience, I always need both to work. I need to have good deal. Like, obviously buy properties whether they're off market or distressed, I buy properties where the numbers stack up from a value perspective. So if something is worth X amount, always try and get it for below that, or if there is some kind of very lucrative add value opportunity, I always take that into consideration as well. 

  

[00:15:54] But every single property that I buy, or we buy, needs to have good cash flow. And I think in this crazy hot market, how we analyse it is based on— like I said earlier,—what's happening today. We can't look at stuff that's happened six months ago. We can't try and think or project what's going to happen in the next six months. We kind of have to just look at, 'Okay, what's the rent today that I can get for this house? What's the value of this house today? Does the rent stack up for me if I pay a particular price for this house? And what price do I need to get this house for that would make sense from a value perspective, from an equity perspective?' 

  

[00:16:40] So it's really no different to how we would analyse a property in a slower market. But the data and the comparables that we use just need to be a lot more recent, right? Because if we look too far back, or even just slightly further back, those days are already gone. 

 

[00:16:56] A couple of caveats. This really only works at the start of a boom cycle. Because Brisbane, the boom cycle in Brisbane, is more or less about 12 months old only. This crazy sort of boom cycle that we're seeing. And in the past 12 months it's gone super, super, super rapid, right? So I would say we're starting to get to a point in Brisbane where it's starting to steady up a little bit, it's not going as crazy as, like, 20% [or] 30% growth within months. 

  

[00:17:32] So from this point moving forward, investors can revert back to looking at some of the maybe less recent comparables, but during that crazy boom phase, in the beginning it was and maybe still is really important to look at comparables that are immediate, if that makes sense.

Tyrone Shum:   

[00:17:55] It's interesting, because I think, with so many things that happened in such a short period of time, it's hard to sort of really keep on top of it. Unless you're looking at the market literally on a daily basis, like you are because you're a buyer's agent on the field. But as an investor, as you know, it's more long term, you just want to buy it, let it sit there and hopefully, the property manager does what they do. And then just collect the rent, because it's supposed to be a passive income dealing. 

  

[00:18:19] And I think this type of thing that we're talking about right now, sort of more applicable when I guess you're looking to purchase more property, or you're actively looking to get into the market again to do another purchase. But at the same time, it's sort of an ongoing maintenance thing where you look at it and review it every six months to ensure that your rents are up to spec as well, too.

Simon Loo:   

[00:18:20] Definitely. So maybe just to summarise it and make it a lot easier for listeners: The best thing you can be doing right now, whether you're looking at a rental increase or looking to buy or looking to value a property— call up the properties that are listed online, but not sold yet. Okay, so I can guarantee you that anything that's listed online at the moment, in Brisbane in particular, is probably either under contract, or is being bombarded with offers. 

  

[00:19:13] So, if a property is recently under contract, I mean, legally, agents can't tell you or disclose a price to you unless the property is unconditional. But depending on how you ask the question, agents can give you a bit of a guide as to how much that particular property is under contract for. That's always the most recent comparable that you can find. 

  

[00:19:39] So if you just do that simple exercise, it might take you, I don't know, half an hour a day or something, just to call up some of the listings in that particular area that you're looking for that haven't had a solid sticker yet. Because remember when a property has a salt sticker on realestate.com.au or domain— typically, not all the time, but typically it's about two months old. Because it goes through that... maybe not two months, maybe six weeks, because it goes through that settlement period. The contract was actually signed prior to that. 

  

[00:20:11] So sometimes when you look at even sold data, if a property comes up as sold on realestate.com.au yesterday, it was actually sold, maybe a few months prior to that. And that can already skew the data as being a little bit too old. So just pick up the phone and speak to some agents. You don't need to pretend, but pretend that you're, like, a big shot investor, you're looking to buy lots and lots of properties. And they'll tell you what they're recently selling for. 

  

[00:20:43] One of the best ways that sometimes that I do is pretend you've got a property to sell. The agents will be more than happy to tell you as much information as possible if they  feel like that they can potentially do some business with you as well. So that's a pretty important thing that I do with a lot of properties that we're buying at the moment.

Thank you to buyer’s agent Simon Loo, our guest on this special episode of Invest Like A Pro presented by House Finder. 

Also, for being a loyal listener of the podcast, I’ve asked Simon to offer a free 1 hour strategy session normally valued at $500 to help you put together an actionable property plan.

To get your free strategy session, simply visit housefinder.com.au and fill out the contact form, or call Simon directly on 0415 626 342 and quote “Property Investory”.