It can be tempting for landlords to hike rents when interest rates rise but it’s wise to exercise caution with increases.

It’s tempting to squeeze as much cash as possible out of an investment property, especially when higher interest rates are pushing up your mortgage repayments. But sharply increasing rent can backfire. You could risk a landlord’s worst nightmare – a property that sits vacant for weeks on end – and also incur a personal one if your new tenant’s true character emerges after the lease has been signed.

Even in a tight market, it pays to take a softly-softly approach to rent increases, property managers say.

Paul Osborne, head of Secret Agent, a Carlton North firm offering buyers’ advocacy and property management services, says: “If you have found a fantastic first tenant and you really jack up the rent, it’s not going to be in your best interest because you might lose your tenant.”

You could end up replacing an A-grade tenant with a C or D-grader who doesn’t pay on time, Mr Osborne warns. He adds that a two-week vacancy may cost a property owner $1000 in lost rent and the owner will also have to pay new lease fees and advertising costs to find a tenant. Over a year, those costs could be the same as the extra money the landlord had hoped to generate from a rent increase.

The other side of the coin, Mr Osborne says, is that owners need to regularly increase the rent so properties remain attractive to future buyers.

“If you are selling a property that’s worth $900,000 and the rent is $450 a week, when it really should be $580 or $600 a week, that hurts you in the market,” he says.

“You have to keep increasing the rent but you have to find that fine line of moving rents just enough. You don’t want to move them to point where you keep kicking out new tenants.”

About 30 per cent of Australians rent their homes. The private rental market supplies five out of every six properties for rent, with government public housing picking up the balance. Many housing investors aspire to determine rents on a fixed yield against the value of the property. There is an expectation among these investors that if Melbourne house prices rise by about 8 per cent, as they did last year, then rents should go up by 8 per cent.

It doesn’t work out that way, though. Inner-city apartment construction and other new housing supply in Melbourne look set to ease the shortage of rental properties this year.

Other constraints on rental growth include the large pool of low-income tenants. Almost 50 per cent of renters receive Commonwealth Rent Assistance and often move out rather than pay a big rent increase. Then there’s a growing pool of “discretionary tenants” – Generation Ys who move back in with mum and dad if their living-away-from-home costs get too high.

Last year, RP Data recorded national rental price growth of only 2.9 per cent, about the same as growth in the consumer price index, to a median rent of $350 a week. Capital cities posted slightly higher rental increases of 4.2 per cent, with a median rent of $375 a week.

Interestingly, landlords are having more success with rent rises for apartments than for houses. Rents for apartments have risen faster than those for houses in capital cities, according to Australian Property Monitors. And over a five-year period, apartment rents have outperformed house rents in all cities, according to RP Data.

The managing director of Wakelin Property Advisory, Monique Sasson Wakelin, says the stronger demand for apartments is due to their relative affordability and a trend towards smaller household sizes and more people living alone.

She says owners are best placed to obtain a rental rise and find replacement tenants if they ensure leases expire in January or February. That’s the season when tens of thousands of people move interstate and start new jobs and university courses and demand for rental housing is at its peak.

Posted by Chris Tolhurst – The Age on 2nd April, 2011