Have you ever wondered what makes the difference between an average property investment and a great one?
We have seen lots of people who have taken the leap to become property investors and who have done everything right: they have researched their target markets, inspected lots of potential investments and ultimately purchased quality assets at great prices. But their property investment journey still isn’t smooth because their investments under perform or sometimes even perform downright badly. So, why does this happen?
Typically these investors are in the first 5 years of owing their investment property and, like most of us, have borrowed to fund part of their acquisition. The reality for most investors is that the returns available on quality, capital growth assets mean that their investments are negatively geared for the first 5 years, if not longer. During this period, careful cashflow management is required to minimise the shortfall amount required to contribute from other income sources.
So, what is the difference between an average property investment and a great one? Well, assuming you have purchased a quality asset at the right price, the answer is often very little! It is often the little decisions you make, often without realising it, that makes the difference. Hearing this often a lightbulb moment for many investors – for the first time they realise that it is not their investing or their choice of investment that is the cause of their investment stress, it is the way their investment is being managed – something that is usually easily fixed by implementing the 5 simple steps outlined below!
But first, why won’t your agent tell you about these things? The answer is also simple – because these simple steps will significantly increase the cashflow from your investment and decrease the amount you pay to your agent!! Additionally, they will require your agent to spend more time and be more precise in the way that they price, market and manage your property. We bet you’re thinking ‘that’s what I thought I was paying my agent to do!!”. We agree!!
So what are the 5 simple things you can do right now to increase the cash flow from your investment?
1. Ask your tenants for 12 month leases
Agents won’t generally suggest longer leases because they charge you a reletting fee, usually equal to one to two week’s rent, to relet your property at the end of each lease. If you enter into six month leases, you are generally accepting a reduced return on your property equal to at least four to six week’s rent each year (a reletting fee of at least one week’s rent, twice per year, at the end of each six month lease and some vacancy in between each lease (even if your agent is doing a great job, a few days or a week in between tenants is often unavoidable)). If you ask for 12 month leases, you cut that vacancy period in half, at least, and you avoid the possibility that your property is vacant for longer periods in between shorter six month leases.
Another advantage of 12 month leases is that your tenants generally become more settled after a year in your property, reducing the chance of them moving on at the end of their lease – this will further reduce your losses from vacancy.
2. Mid term rent increases
One of the major arguments made by agents against 12 month leases is that the market might change and you will loose the opportunity to increase your rent. Well that is true, you will not be able to increase your rent during a 12 month lease – unless the increase is written into your tenancy agreement. So include a clause in your tenancy agreement that after six months the rent will increase by a small, fair amount. By using longer lease periods and automatic increases you will will not only reduce costly vacancies but you will lock in a rent increase over the lease term!!
3. Have happy tenants
Investors often give us perplexed looks when we mention this one – some even tell us that as long as their tenants pay the rent and look after their property, they don’t much mind whether they’re happy! But we have a different view – as investors, we have always done everything we can to keep our tenants happy – which can be as easy as responding quickly to maintenance issues or agreeing to extra picture hook to installing air-conditioning or ceiling fans – but more on that later.
The only thing better for your cashflow than a tenant who signs a 12 month lease is a tenant who signs a 12 month lease year after year, after year! Long term tenants are the very best way of eliminating costly vacancies and avoiding reletting fees on your property. And when coupled with regular mid term rent increases, long term tenants can significantly alter the performance of your property.
A word of warning – unless your agent is conducting regular rent reviews on your property, there is a risk that long term tenants can result in your rent falling behind the market – so make sure that each time you renegotiate a lease with your happy long term tenant, you know exactly what the market rent is for your property.
4. Offer your tenants extras
Often tenants will love a property but need something extra to make it really work for them – common requests are ceiling fans, air-conditioning and kitchen and bathroom makeovers. We have seen landlord’s reject these requests out of hand due to the cost and concerns about how it will affect their investment performance. However, these requests will usually represent an opportunity to increase the return on your property!
For example, we recently received a request from a tenant to move the laundry from the kitchen to the garage of a rental unit. We priced the work at $1,500 and proposed to the tenant (who was at the beginning of a 12 month lease) that we would do the work if he paid an extra $20 per week rent – which he happily agreed to do! The extra rent over the course of the 12 month lease was $1,000 and the tenant was very happy and more likely to sign up for a further lease. Additionally, the extra rent will pay for the cost of the work in 18 months and the unit will have increased in value and will continue to rent for more into future, thereby increasing our overall return on investment well into the future.
5. Price your property correctly
Do you know exactly what your property should rent for in the current market? No? Well it might surprise you to find out that your tenants do! Your current and prospective tenants have every property currently available in your market at their finger tips, thanks to the online real estate portals. Additionally, it is much easier these days to view and apply for properties, so your tenants are in the market looking at properties all the time. If your property is incorrectly priced, prospective tenants will discard it quickly in their search for value and your current tenants will move on to get a better deal. If your agent is not giving you a formal written rental appraisal every year, or perhaps more regularly in the current market, you may not know exactly what your property is worth and you may find your property vacant for much longer periods than correctly priced properties.
Is your property performing as well as it should be? Has your agent advised you to implement any of the above strategies? Do you know exactly how much your property should be renting for in the current market?
If the answer to any of these questions is ‘No’, give Real Estate Rentals a call or ask us for a quick, independent and completely free rental appraisal and get your investment working for you today!!