Rental property, let’s talk about the foundation of passive income and analyzing a rental property…
Rental property, so what’s the big deal with rental property, even though you may own a rental property portfolio which produces great rents and a stable rental history?
The question is do you want fantastic tenants or do you know what your true rental yield really is? This is not a trick question because the one truth which rises above all others in maximizing return on your investment is this: “how much did you pay for the property?”
Rental property…who’s exaggerating? You’ve probably heard the saying, “you make money in real estate when you buy”. Well if you think about that statement you’ll clearly agree when buying properties you never make a cent.
As a matter of fact, you’re actually losing money hand over fist. Why? Buying rental property means there’s loan establishment fee, valuation, building and pest inspection, lenders mortgage insure (LMI), building insurance, legal fees, etc….make sense?
Rental property, let’s get a little more accurate in saying you make money in real estate when you hold for capital growth or when you add value in terms of manufactured equity via renovation, subdivision or development. Yes, you lose money when you buy, right?
So does your rental property success depends most of all on the purchase price which you’re able to negotiate with vendor or seller? As outlined above, a higher purchase price initially means a lower rental returns and vice versa. Sounds simple enough…does’t it?
OK…lets explore how to negotiate the best price in buying your rental property? You’d firstly establish a relationship with the seller and you’ll discover in many situations the main issue for the vendor or seller isn’t always the price at all…
It can be other factors like a long or short settlement, flexibility in terms, conditions of sale of another property, etc… so you won’t know these other underlying motivations and factors unless you ask, does that make sense?
Rental property, in most cases the only chance you’ll get to ask is to work with the vendor or seller directly. This usually means not using a buyer’s agent, which also means it can save you money on buyer’s agent fees.
Yes, definitely it may take extra time and effort on your part to find your rental property, assuming you’re going to hold onto the property for long term income, this exercise in terms of time and effort could be well worth it…
Rental property, as you know, the purchase price is just the beginning of the costs of a property. This is why you need to keep your wits about you and your emotions in check when deciding which income or rental property to buy. You need to know the real costs of a property, not just the price, right?
Buying a rental property combines the following main costs, which you need to know before you actually make an offer on that cash cow income property:
- Stamp duty (use a calculator because it varies for each state)
- Loan establishment fees
- Adjustment fees
- Buyer’s Agent fees
- Approvals on renos
- Actual costs of renos
- Other costs will include:
- Council rates
- Water rates
- Insurances (asset protection)
- Legal fees for trusts (asset protection)
- Maintenance fees (3% of rental income)
- Property Management fees (5% in metro areas up to 10% or more in more rural areas)
Rental property as a rule of thumb, for every $100,000 of purchase price, figure about 6% to pay for these costs. Calculate costs on 100% of the purchase price, not just the loan amount. Remember to do your own due diligence for this exercise so you’re not relying on a buyer’s agent. All the fees come out of your rental income, so accuracy is very important.
Rental property and rental income as part of the analysis. You need to view property from a business and operational basis. What does it cost to own and maintain the property? Bear in mind those costs most likely never go away or even go down.
Cost may even go up over time, except for loan balance, which should be decreasing over time. Compare all calculated costs in total with actual rental income the rental property will yield.
Rental property – you need to run your analysis from both a best and a worst-case scenario:
- What are maximum rents in the area?
- What are the minimums?
- How soon can you get renters into place?
Do not confuse or speculate property will somehow capture the top rent rate; be conservative and realistic. Only after rental income has covered all of the above expenses and there is still money left over, can the property be considered positive cash flow property.
Rental property…any other situation and you’re just fooling yourself into buying a negatively geared property.
Now, let’s talk a little bit about fluctuating property values. This is simple because if you negotiated a good price for your rental property and monthly costs are lower than rental returns it’s a positive cash flow property.
Rental property…so are you earning passive income every week? Should you be concerned about the value dropping? Rental property values go up and down over time in response to all kinds of fluctuations which affect the market.
For example lower interest rates, may result in high property prices; whilst a rise in cost of funding may could push prices downward.
If you already own positive cash flowing property, falling values wouldn’t be of concern you. Your main concern is rental prices…
Rental prices after all, affect your cash flow. Fortunately, rents in Australia have a good solid history of going up, not down and there’s no reason to think this stability in supply and demand will change any time soon.