Tag Archives: rental yield

Rental Property Portfolio

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?

rental property
Rental property…what makes a good rental property as part of your positive cashflow property portfolio?

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 properties
Rental properties as part of your positive cash flow property portfolio?

 

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.

Rental Property

How to Start Your Property Research

Start Your Property Research Now.

 

Property research made easy because there is such a wide range of information available to homebuyers and property investors, but it can be overwhelming if you don’t know where to start…

For example you are confronted by auction clearance rates, vacancy rates, pending building approvals. Not only are all these stats and figures overwhelming, it can confusing for some too. So…would you want to buy a property without proper research?

Property research whether you are purchasing your first home or starting an investment portfolio, the traditional methods of research such as websites, magazines, news reports and company announcements are always a good place to start.

However, the property research you need to do varies, depending on your end goal and/or profit targets.

If you are looking for your primary place of residence, factors such as proximity to family and friends, layout and design and overall feel have a major effect on the area and property you choose.

What if you are purchasing an investment property?

Your property research would focus less on personal preferences and more on what adds value and maximises the cash-on-cash return for your investment.

You want to consider a rental yield of 9% or higher because you are basing your research on how much this suburb has risen in value historically, and whether there is a potential uplift to add value through a renovation or the property meets requirements of tenants.

property research
Property research because searching is not the same as researching…

There are four key factors which you want to consider when starting your property investment research.

Property research for location: In particular, you want to consider the proximity of your property to public transport, schools and employment opportunities.

Areas in close proximity to the CBD in major cities have a real advantage when you consider the above factors. However, if you want to enter these areas today, you need to pay a premium and of course this depends on your financial circumstances.

Property research infrastructure: If the well-developed areas near major cities are out of your price range, you need to make special consideration for current and future infrastructure which may make an outer ring suburb more accessible in the future.

If you can ideally select these suburbs early, you would be able to snag a bargain and see significant increases in value (capital growth) as the infrastructure develops…

It’s easy to assume capital growth and decline looking at median price of a suburb alone, however it’s not accurate. There are sub markets within a city and even in a suburb, individual properties can attract different levels of demand.

Property research affordability: There are two key considerations to look at. Firstly, you need to sit down and work out how much you can afford to spend on your investment property, taking into account stamp duty, legal fees and property management fees.

Secondly, you need to consider the demographics of the area you are purchasing in and decide whether your target market (potential tenants) would be able to afford the rent you hope to achieve.

Even when median prices are falling, there are pockets of opportunity in each city which bucks the trend. The same applies in growth cites as not all suburbs perform the same way. In fact, each suburb behaves like a mini-housing market according to its own dynamics.

Finding suburbs with potential for price growth may not even be your primary goal, especially if you’re thinking of buying your first investment property and don’t know where to start?

What if you are an experienced investor motivated to avoid repeating past mistakes?

Property research because you need to avoid the persuasive high rental yield areas caused by falling prices, suburbs where prices peaked and are just about to crash. These locations have rising rental vacancies and of course leave you short on rental income.

The best property investments are found where the rent more than covers all outgoings, including your loan repayments from day one and local property market has power to provide rent increases and price growth.

Perhaps you don’t have time or resources to do due diligence and analysis to locate these hidden suburbs, so where can you find them?

Property research, there are a number of amazing resources available to property investors and homebuyers looking to enter the property market, so you don’t want to limit yourself to only researching via online resources.

An experienced team of experts can be worth their weight in gold throughout your property investment journey. If you would like more ways to ensure the success of your property research or information on how to begin you research, contact us today using the form below…

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Property Research