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Strategies for Melbourne’s surging rental market

By Jarrod McCabe and Jordan Telfer 

With Melbourne’s rental market running hot as we kick off 2024, let’s take a look at the dynamics and strategies at play, so investors can capitalise on the strong demand to optimise returns.

Unpacking the Rental Market Dynamics

The year has kicked off with remarkable activity in the rental market, characterised by huge numbers at open for inspections, leading to significant rent increases. This surge, while typical from mid-January to mid-March, has been intensified by an exceptionally low vacancy rate and lack of supply, creating a unique window for investors to seek premium rental rates.

Leveraging Market Conditions for Optimal Returns

Pursuing early-year premium rental rates: This time of year, especially following a surge in market activity, provides a unique opportunity for investors to set higher rent prices. For those with properties acquired late last year, or those with early access to their investments, adopting a bullish stance on rental pricing can be particularly fruitful. It’s a time when you can, and indeed should, aim high with your rental price expectations.

However, it’s also wise to remain flexible. Be prepared to reassess and adjust your expectations after a week if the initial asking rent proves overly ambitious. This balanced tactic being bold in your pricing strategy while ready to fine-tune as necessary ensures you don’t leave potential income on the table while still adapting to real-time market feedback.

Exploring lease renewal options: The type of lease renewal chosen can impact an investment’s profitability and future flexibility. There are two primary choices when a property manager indicates a lease is nearing its end:

  1. Continuing with a Periodic Lease: Opting for a periodic lease allows for flexibility, with the possibility of implementing rent increases in accordance with market conditions. This option might be particularly appealing if you’re considering occupying the property yourself or selling it in the near future. A periodic lease provides greater control over the property, facilitating easier preparation for sale or personal use.
  2. Securing a Fixed-Term Lease: Most investors and renters prefer the stability of a 12-month lease for the guaranteed income and occupancy it provides. However, it’s important to time it so it maximises your position. For instance, if a lease’s expiration coincides with winter, you might offer a 15-month lease instead, pushing the lease’s end into the more favourable early spring market. This timing not only benefits the owner by avoiding vacancy during slower winter months, but also offers renters added security, making your property more attractive in a competitive market. However, it’s essential to balance this with future plans for the property, especially if selling is on the horizon. Extending a lease significantly beyond a year could complicate selling efforts, as properties under a fixed-term lease might limit potential buyers who prefer immediate occupancy. 

Capitalising on property improvements: Investors should link property improvements with rent increases. For instance, installing split system air conditioning not only enhances the property’s appeal and value, but also supports higher rental rates. Such upgrades, alongside effective renter communication, can facilitate rent increases while maintaining renter contentment.

Securing rental increases the right way: The current market gives owners a considerable advantage when seeking rental increases. However, it’s vital to balance achieving market rent with sustaining healthy renter relationships. Investors should navigate carefully between maximising rental income and the potential costs of renter turnover.

The goal is to secure a 12-month lease extension while also adjusting the rent to reflect market conditions. Approaching this conversation with tact is crucial. A direct demand for higher rent can appear aggressive and may strain the owner-renter relationship. Instead, a more nuanced approach recognises the renter’s value, highlighting their timely rent payments and good stewardship of the property.

For example, rather than bluntly stating the need for a rent increase, a property manager might frame the conversation around market realities while also acknowledging the renter’s positive contributions. If the current rent is $450 per week, they could suggest that, although the market rate for the property is higher (e.g., $500 per week), in recognition of the renter’s reliability and to offer them the security of a 12-month lease, the rent could be adjusted to a slightly lower rate (e.g., $480 per week). This method not only secures the rent increase, but also reinforces the renter’s value to the owner, fostering a continued positive relationship.

Don’t let rents slip below market value; when to transition renters: In property management, it’s essential to keep rental rates market-aligned, which sometimes necessitates transitioning renters who can no longer afford market rent. While the goal is to retain and support renters, the market’s significant increases in recent times, might mean some renters are no longer the right fit for the property.

Continuously reducing rent to retain a renter can lead to falling behind market levels, making it harder to adjust rates appropriately in the future. Property owners must make tough decisions, balancing compassion for renters with the need to ensure their investment remains viable and competitive. Moving on from a renter in a respectful and professional manner is sometimes necessary for the property’s financial health.

Balancing rent increases and renter retention: While this is a time to push for rental increases, broadly it often pays to take the more conservative option. It’s worth considering the benefits of slightly below-market rents to reward reliable renters, rather than pushing for maximum increases that could lead to renter turnover. While a modest shortfall from the market rate might seem like a loss, it avoids the costs associated with finding a new renter, such as leasing fees, advertising, and potential vacancy periods. Additionally, transitioning renters might necessitate property upgrades, further increasing expenses. Thus, a strategic approach, weighing the costs of renter replacement against the benefits of steady, albeit slightly reduced, rental income, is essential for long-term property management success.

Take home message

In today’s dynamic rental market, owners have the opportunity to pursue more assertive rent adjustments, capitalising on high demand and limited supply. 

However, owners must navigate these adjustments carefully, balancing the pursuit of higher returns with the potential costs and implications of renter turnover. 

The current competitive market, particularly from mid-January to the end of March, presents a prime opportunity for owners to optimise their rental income.

Yet, as the market conditions evolve, so too should owners’ strategies, ensuring a sustainable approach to investment and renter management. Flexibility and a forward-looking perspective are key, allowing for adaptation to market shifts while maintaining strong owner-renter relationships.

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