There are three elements involved in maximising the return on your investment property:
- rental income
- expenses
- net income divided by your purchase price (i.e. your rate of return or ROR).
Rental income
Check current rent rates
Sometimes investors aren’t up to date with current rental trends and don’t realise they’re not getting enough rent for their property.
If an agent manages your property, ask them to conduct a competitive market analysis before your current property lease expires. Rents in Perth rose 10% in 2021, so check the current rates and don’t get left behind!
Maximised rent versus stable occupancy
Once you’ve established the current rental rate, talk to your managing agent to see if your tenant will pay the increased rent amount.
If you get pushback from the tenant for a large increase, perhaps stagger the increase (e.g. 5% now and 5% in six months’ time).
Also consider the quality of your tenant. Often it’s better to have continuous rent than maximised rent on a vacant property (e.g. loss of rent plus your agent’s leasing costs).
The rental formula is:
R x O = TR
(Rent) x (Occupancy) = (Total Rent)
Sometimes you need to focus on occupancy rate as well.
Many investors lease their property via Airbnb and focus on higher rent without stopping to analyse the vacancy periods, extra cleaning and laundry costs. Often, they’d be better off with a constant tenant paying less but staying longer term and no cleaning costs.
Expenses
Standard outgoings
You will always have standard property outgoings, including:
- council rates
- water rates
- land tax
- agent management fees
- insurance
- strata company levies (if a strata).
All of these, apart from the agent management fees, are fixed and non-negotiable.
Your agent must be competitive and deliver services that not only maximise your income, but minimise your costs while maintaining the property. The best agent is not usually the cheapest!
You should find an agent who will provide services to maximise your rent, such as weekend viewings and showings or after-hours showings. They should also be very experienced – not someone who has just started in the role.
Unavoidable costs
While you own the property, items will always break down, including hot water systems, plumbing and other items. We suggest you leave a $2000–3000 buffer in your bank account to cover these costs rather than feeling constantly stressed when the bills arrive.
Avoidable or proactive costs
Sometimes you need to spend money to make money. For example, if your tenant requests a portable air conditioner or dishwasher, you could be able to cover the cost by:
- increasing the rent
- lengthening the lease term.
Net income and ROR
Calculating net cash return
Property investments often provide a return of 2% or 3% per year. You can calculate your net cash return using the equation of net income (income minus expenses) divided by the property’s purchase price.
For example, if $10,000 is the net income and $500,000 is the purchase price, then:
$10,000 / $500,000 x 100 = 2% net cash return
Of course, if the property value increases on top of this (e.g. to 5%), the total return will be 7%. However, we’ll just focus on net cash return here.
Cash returns versus capital gains
Villas and townhouses usually rent for more than the equivalent house and have fewer running costs than an older home. So, your net cash return may be higher with a unit.
These assets work well for investors who are looking for cash returns rather than capital gains.
Houses rent for less but probably increase in value more because of the high land component. (Land often increases in value.)
So, as an investor, you need to decide whether to go after cash returns or capital gains. The answer will determine the asset class you’ll buy and perhaps the area where you’ll find a property to suit your budget.
Do you have more questions about investing in property or need assistance with your purchase? Contact Alan Bourke or anyone from Bourkes on (08) 9474 2000.
