Rent is rent of course of course
In today’s property investing environment, where there is opportunity to pick up some high income earning properties, it is a timely reminder to all to ensure you carry out your own research - to ensure that what you see is what you actually get.
The simplest and primary form of income is rent on a house. The number one rule is to ensure that you know what market rent is for that property – never buy something with a high return without first verifying that the rent is accurate. A prime example is a recently advertised Queenslander house converted to flats, where the agent is advertising that rents could be ‘close to doubled’. This would result in rent of around $600pw for a 3 bedroom flat... this is more than you can usually expect in an upmarket apartment in the same suburb, let alone in a crummy timber flat! Some quick and easy research would verify this for you.
Investors are in a good position in most cases to be able to pick up poorly managed property, so there is good opportunity to increase rents, therefore increase income and increase equity. But occasionally you will stumble across properties that already have high income. If it is a true market rent, great! But what it does mean is there is little chance for you to add value. What if it isn’t true market value? How do we know?
Let’s look at some examples.
Student or share accommodation and boarding houses is one area where the true market rent is hard to determine and stated rents can often be misleading. Firstly, if rented by the room, find out what the inclusions are. Properties rented by the room will often have high outgoings because of the inclusions. Often these are electricity, internet, gas, etc. Further, a final clean and/or carpet dry cleaning may not be required of tenants. These properties regularly have high maintenance costs as well, such as fire safety checks, etc.
Also, don’t forget the higher vacancy factor! Yes the rent will be a fair amount higher than a traditional house, but so will the vacancy factor if not managed correctly.
The same applies to motel units, which will have higher vacancy and higher management costs.
Furnished property is another area where both opportunity and losses can exist. If you are buying a fully furnished property, check more carefully the rent to ensure that it compares favourably with similar properties. The location will make a huge difference also. Furniture is a very good method of attracting tenants and increasing rents in the right locations, but there are some properties where it just isn’t required. Take a 3 bedroom house in an average, run-of-the-mill middle suburb. In this instance the only people really requiring furniture are families or couples moving house or moving interstate, and this may be a limited market. The furniture will not attract the same return as furniture in more appropriate locations. Furnished property will often have a higher vacancy factor as well, because it is far easier for a tenant to simply move on... those who have moved house before can vouch for how hard it is to continually move furniture and the desire to settle in the one spot!
Don't get lazy when it comes to furnished property!
Properties that come with rental guarantees are another area to be careful of. They may be appropriate for the right investor, but rental guarantees can lead you into a false sense of security. Why does a developer, manager or vendor need to provide a guarantee? Are vacancy factors as questionable as that?
It's all about control
Properties that come with long leases are another area that you need to research carefully. These may include display homes, affordable housing properties, resorts/motels or Defence Housing. The positive with these is they often provide a stable and known rental income. The trouble is they offer an investor less flexibility, less control (and control is the key) and the rents can be somewhat over market value, not to mention the high management fees. Good in the short term, not so good when the lease expires... a $50pw drop in rent per week could equate to a $50k drop in the value of that property. Display homes for example, will often have high rent returns and outgoings paid for by the tenant, but this is usually for a fairly short period of 1 to 3 years. If you are buying the property as your own home for when the lease runs out then it might be a good option, but buying to on-sell can be difficult as investors want control and a long lease means lack of control and a reduced number of buyers and a sensible investor will do their numbers on the true market rent, not the falsified market rent.
Blocks of flats and dual occupancy properties can be another example where you can run into a bit of trouble, especially if the flats aren’t legal. There are many illegal properties available on the market as blocks of flats. These tend to be houses that have been raised and a self contained area built in under, or properties with the granny flat rented out separately. This can be an excellent way to get the rental returns up, but it can also be a risky one, especially if they are blatantly illegal. What if there is a fire - will your insurance company payout your claim? There have been quite a few of these properties advertised recently – the question to ask yourself is does this land use fit with this block, in this street and in this suburb? Many of these properties are clearly located on small blocks in residential streets that aren’t zoned for units and the lack of comparable properties nearby will confirm this.
One last one to watch for is tenants who are relatives of the vendor. Not terribly common, but common enough to warrant mentioning. The trouble here is often there is no lease in place, and no official rent paid, or the complete opposite - a new lease with a very high rent. Either way be careful... the time to discover that they are a relative and to do something about it is before you go to contract.
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