How Do I Figure Out What Rent to Charge?

Here is a case study of what this author did to work out how much his "woefully under-rented" Christchurch apartment should go for.

1601614029185

Ed McKnight

Economist, property investor and host of the Property Academy Podcast
Introduction

As a property investor you don’t need to rely on your property manager to tell you what the market rent of your property should be.

You can figure out how much your rent should (or could) be all by yourself.

In this case study, you’ll see the exact research I did to figure out that my 2-bed apartment in Christchurch was woefully under-rented at only $405 per week – and that the market rent is around $460 per week.

In this article we’ll take you through the 4-step process, so you can use the same process for your investment properties.

Check The Market

Step #1 Check Out The Change In The Market Through Trade Me and Interest.co.nz

A good place to start your investigations is with the Trade Me Rental Price Index. This will give you a good indication on how the market has shifted in the past 12 months.

For example, rents in Canterbury are up 7% from September last year to September this year. And the average property in Christchurch now rents for $480 (September 2021).

The quickest way to get the latest data is to Google “Trade Me rental price index”, since it can be hard to find if you just go to Trade Me’s homepage.

One alternative is to use the median rent, as calculated by MBIE. The best place to do this is on interest.co.nz. Google “average weekly rents [insert city]” and it will tell you Christchurch City is up 10% from $450 to $495 over this same period.

So, these two searches suggest the Christchurch market has moved by 7-10% since rents were last set. That’s an increase of $30-$40 a week on my property based on the $405 rent.

Put another way, the new rent on a property would be somewhere between $435 and $445 if the original rent was reasonable.

Calculate The Desired Yield

Step #2 Calculate The Yield You Are Charging And Compare It To Other Investors In Your City

Following on from this, the next step is to get a feel for the yield your property currently earns compared with others in your city.

This is where the online calculators come in.

One issue with my property is it was under-rented from the start. That means that a $30-$40 increase (based on the increases mentioned in Step #1) may not bring the property back to market level.

This is where you want to use a calculator like this, which compares the gross yield you are currently earning compared with similar priced properties in Christchurch:

You can also find the same calculator for other cities like Auckland here. {link on website}

Because the property rents for $405 and is worth about $600,000, the gross yield is currently at 3.7%. That’s pretty low for an apartment, which is typically thought of as a higher-yielding product.

When you plug those numbers into the above calculator, it suggests that on average a $600,000 property in Christchurch yields around 4.16%. That suggests a rent of about $480 a week.

You’re probably thinking – “That’s a $75 increase in weekly rent, that’s enormous.”

I agree.

This calculator doesn’t say that the property should rent for $480 a week. It just gives us a sense of what other property investors are receiving for similarly priced properties.

This helps us to build a picture of what a reasonable rent should be.

And in this case the picture that’s being painted is that my property is severely under-rented.

So, the next step is to ask: Would an increase of this much be even reasonable?

See Currently Rented

Step #3 Use Tenancy Services To See What Properties Have Rented In The Last 6 Months

The next step in the process is to take a snoop at the tenancy services website.

Here you will find records for all of the actual tenants that have signed up in the last 6 months.

Handily, this is often broken down by property type (e.g. townhouse vs apartment) and the number of bedrooms.

But this is only provided for areas where there is enough data. So it’s more likely you’ll find granular data in larger cities than tiny towns.

For this property, Tenancy Services says the median rent for a 2-bedroom apartment in Central Christchurch is $450, and that 25% of properties rent for between $450 and $495 (the upper quartile).

Now this property was refurbished only 2 years ago, so I expect it would rent above the average, but not in the top 25% (i.e. about $495).

So, we are starting to get a bit of a rental range.

Compare With Other Properties

Step #4 Compare Your Property With Similar Ones That Are Currently Available For Rent

This is the final and the most important step out.

You’ve got to compare your property with similar ones available for rent on Trade Me and realestate.co.nz.

I’m not talking about a cursory glance. Nope. Instead you should take the same structured approach that a valuer does when looking at your property.

 

That means returning to Trade Me, and looking at a handful of similar properties. You then make an assessment of whether that property is better or worse.

This allows you to build a real-world picture of the market and target specifically where you think your property sits within that spectrum.

Here’s my property: It’s a 2-bed, 1-bath apartment with two separate carparks (i.e. they are not tandem car parks).

Here’s the exact process I used for my property.

Currently there are 12 x 2-bed apartments in Christchurch. But I only picked 5 of them to analyse for my research table.

Here, I took into consideration what was on offer, the photos, and the area, and then ranked them in terms of whether they were superior (better) or inferior (worse) to my property.

For example, 211 Peterborough Street is a brand new 2-bed, 2-bath apartment in Christchurch renting for $450. Despite the fact that it’s brand new and has an extra bathroom, I’ve labelled it inferior to mine because it has no car parks.

What’s really helpful about this method of comparison is it strips away the emotion often associated with rent increases.

This table suggests that:

  • Currently, the market in Christchurch, for 2-bed apartments, ranges somewhere between $450-$500 a week.
  • It should be somewhere higher than $450 because I believe this apartment is superior to those out there charging $450 a week.
  • But, in the same vein, my apartment is not worth $490 a week, because it’s not as nice as some others going for the same price.

So my sense is that the right rental range is somewhere between $460 – $480.

Final Rent

After All My Analysis, What Rent Did I Land On?

So what have we learnt:

Step #1 suggests a rent of $435-$445. But this assumes the original rent was right. It wasn’t.

Step #2 suggests a rent of $480 to achieve the same yield as other investors.

Step #3 suggests a range between $450-$495.

And Step #4 (the most important step) suggests a range between $460-$480.

Because Steps 2, 3 and 4 are pointing in the same direction, the right rental range appears to be $460 – $480.

For me, $460 feels right. It increases the rent to market level. And should my tenant decide to find another place to rent once their fixed term contract ends, another tenant is likely to snap it up quickly if priced at the lower end of the rental range.

It’s a big rent increase, but given that it’s currently under-rented I feel confident it’s a fair one.

Think About Your Tenants

Step #4.1 - Think About Who Your Tenants Are

So, let’s say I serve my 60 days’ notice to my tenants informing them the rent is going to be $460 in April 2022.

In all likelihood I think the tenants will decide to find somewhere else to live. They’re on a 12-month fixed term, and use the second bedroom as storage. So I wouldn’t be surprised if they decide to move on and find somewhere cheaper.

And this property is likely to appeal to a small family e.g. a couple with 1 child, or a group of professionals who would make full use of both bedrooms.

The economist in me smiles at the “allocative efficiency.”

Conclusion

Do I Really Have To Go To This Level Of Research

I get it. This process takes a bit of time. But, it should only take an hour every 12 months. And it will allow you to price your property with confidence.

This level of research will also protect you. Let’s say your tenant decides to challenge you at the Tenancy Tribunal.

In this instance, having this level of research at the ready for any adjudicator to see, will go a long way.

You could also give your research to your property manager, to convince them that your decision is fair and based on market data.

Either way, it’s a really good way to get an emotionless gauge of the market, and ultimately the answer to your question: What is the rent I should charge for my property?

1601614029185

Ed McKnight

Ed McKnight is the host of the Property Academy Podcast – NZ's #1 business podcast. He is an economist, having studied at the University of Auckland and the University of Waikato. He's a frequent writer for Informed Investor Magazine and has contributed to NewsHub, Stuff, OneRoof and Property Investor Magazine.