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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.

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