Renewing rental property contracts Skip to main content

Renewing rental property contracts

Every 2 years, I have to renegotiate the property lease with the tenant.  If the tenant was good, I usually extend their lease - it's pretty much a no brainer, unless they're lowballing me.
Costs to factor in when you switch tenants:
  1. Lost rental due to vacant property. It takes about 1 month (0.5 months if you're lucky) to successfully market the unit and about 2 weeks for the tenant to move in and start paying rent.  So it's about 1-1.5 months in lost rental income.
  2. Time spent passing keys to housing agents to market your place.  Do not use an exclusive agent, as it ties you down with someone with a finite network.  They will always try to sell you the idea of exclusivity (being focused, they can control the rent offers, blablabla), and it's in their interest to, not in yours.   What happens after 1 month of exclusivity and they still can't find a tenant?  You fire them, they walk away with no penalty.  It's your lost rental income. Do not use an exclusive agent.  You have to understand the market, manage the 3-4 agents yourself, and make the final decision.  No-one else should make the decision for you.  See below for the rental contract value calculation.
  3. Agents commission which is 1 month rental for a 2 year contract, or 0.5 month rental for a 1 year contract.  So another month of rent lost here.
  4. Staging costs: repainting the place, cleaning up, polishing the floor, washing the curtains.  This will cost about SGD1.5-2k.  Any new furniture that the previous tenant damaged (you may not be able to claim it back from them as it's classified under wear and tear) that you need to make the place look comfortable, and the costs begin to add up.
It's better to continue with same tenant, as long as they didn't trash/damage the place.  It potentially saves you 2-2.5 months of loss rental income, your time, and any extra furnishing/cleaning costs.
I would look at the total rental contract value like this:

Assuming the current rental contract is 4k/month, hence 96k over the 2 year period. I'd subtract 8k (2 months) from 96k, which is now 88k and divide this over 24 months to get your baseline rental figure of 3.6k for the full 2 year extension.  If they want a shorter extension, prorate the calculation accordingly. Use this figure as your walk away target (in a falling rental market) to negotiate with your tenant.  In a rising rental market, just take the market rate.

The property rental income serves as a stable base to the portfolio, a very stable hedge.  The yield is never supposed to be high in Singapore, probably around 2-3% at best after subtracting management fees, property taxes, and any touch ups to the property.

Market factors to look out for in order of importance:
  1. Supply and prices of similar and newer properties nearby, and their proximity to MRT.
  2. General expatriate workforce strength and economy health
  3. Updated demographics of the condo
It takes practice and a good understanding of the property market to execute this well.  The best way to understand a city is to understand its property market.
Labels:

Comments

Post a Comment

Popular posts from this blog

Trade wars, Hong Kong riots

Be greedy in times of fear. That's the investment mantra I live by. Recently there's been a huge spat on trade wars and the Hong Kong riots, which took a toll on the stock markets.  This was a great opportunity to load up on my existing positions as their prices have come down to more favorable levels. There no reason to explore other stocks unless a super attractive opportunity arises, like hongkongland. That counter was hit extremely hard by the riots, since they derive 50% of their revenues from HK.  Other than such events where opportunities present itself, I prefer to average up or down into my existing positions... No need to perform the due diligence again, unless fundamentals have changed. I'm enjoying the opportunities that the markets are presenting in the past few months.  Simply keep calm and aim to collect more dividends by increasing your stake when frivolous sentiment changes. Market entry is a psychological battle against yourself. Another post on this ...
Post a Comment
Read more

Purchasing life insurance

I recently re-balanced the family's insurance schemes. I remember just when i was just starting out, my cousin once told me to buy only Term + Critical illness insurance. I didn't listen and bought an investment linked plan from one of my friends (he played the friend card, which is annoying). They guarantee you 3% returns or something similar, along with coverage. I bought the Manulink Flexi plan on Nov 1 2008, and had it for 89 months (7years, 5months). Monthly premium was $206.59. Total Premium paid was $18386.51. I remember getting back only around 11k when i surrendered this policy. Basically I paid $7386.51 in total for term + critical insurance coverage for the 7+ years, about 1k per year. Looking back, i did not require such coverage as i didn't have any dependents. Lets see the figures comparing what i would've otherwise gotten, had i invested in a stable dividend stock/reit, since the premise is that this policy is not necessary. I'm looking at a t...
Post a Comment
Read more

I increased term + critical illness coverage further with Manulife

I recently increased my term and critical illness coverage by another $1M and $300k respectively. I checked around with many providers and ended up with Manulife as it's what I need, without all the bells and whistles. AIA offered total coverage for recurrent illnesses, but I figure if I get the same cancer twice, I'd probably be dead by then. So there's no need to pay a premium for that type of policy. Sometimes plain vanilla is the best. I also considered disability insurance where they pay you an amount on a monthly basis. While this sounds like a great idea, the insurers will make it difficult for you to claim this, with strange delay clauses and exclusions. It's much cleaner to receive a large lump sum payment and manage it from there. Why these figures for critical illness? I based it on annual family expenses. Most insurance agents will tell you like 5-10x of your salary, just to get you to buy a bigger policy. An agent that looks out for you will tel...
Post a Comment
Read more