Pay close attention to these aspects of your purchase to guarantee long-term success.
Blogger: Tim Boyle, executive chairman, Finalytics Financial
One of the many advantages of investing in residential property is that you can choose how involved you want to be in the investment. Many investors treat it as a completely passive investment and outsource the management of the investment and finances to property managers and trusted advisers. Others have a real passion for it and it becomes almost a hobby. Once you have purchased the property, there are three aspects to managing the success of the investment: the property, the tenants and the financials.
Depending on the type and location of the property there are many things you can do to boost the capital value of the property as well as the rent you receive in the meantime. This can, but doesn't have to, include extensive renovations. Often a new paint job in some of the rooms is enough to really improve the appeal of the property. An example I saw recently was new carpets in the living area of a townhouse investment. The cost was $6,000 and yet the rent increased by $80 a week.
The carpets therefore paid for themselves within 18 months. There are so many examples of this and don’t forget the outdoor areas either. An appealing-looking property from the street is a great first impression and it doesn’t cost much to plant some nice greenery and paint the front fence.
Managing the tenants of the property is the main ongoing task of owning an investment property. Most investors outsource this to a property manager who handles all the liaison including finding and screening new tenants, negotiating the rent, looking after complaints, collecting the rent, and ensuring the place is kept in good order. For this they charge a fee based on the rent amount, usually five to eight per cent of the rent. They will also charge for advertising and often other charges when a lease expires and new tenants are required. For these reasons several of my clients choose to do this themselves and therefore earn a higher effective return on their property.
Even if you employ a property manager you should not assume it is an appoint-and-forget arrangement. Of course some managers will be better than others, and unfortunately there are many who are lazy. A common example I see is that they do not do enough research of what rent your property could be achieving in the current market. They tend to focus on just having it occupied. I strongly recommend doing your own research of the area once to twice a year and especially when a lease is coming up for review.
I had a client who, after doing her own research, had the property manager increase the rent by $55 a week after they recommended the lease just be rolled over with the same tenants at the same amount. It turned out the existing tenants stayed on as they recognised what the market value in the area was.
Many people just assume a mortgage is a 30-year term and that it’s a matter of paying it off over that time. The fact is mortgages can easily be renegotiated and refinanced with the same lender or moved to a new one. Market conditions, product features, and competition change so much. In addition to this, your own financial situation does as well. You should review your mortgage every six months, or better still if you have a mortgage broker make sure they are doing it for you. So many things can affect the rate you are paying and these have large impacts on the financial performance of your property. Recently I was able to save a client 1.3 per cent on a $525,000 mortgage just by getting the property revalued and negotiating with another lender. This saved her over $6,500 a year on her mortgage repayments!
Another simple tip is to get your ATO classification changed to include a property investor. This allows you to effectively deduct your negative gearing and other expenses during the year rather than claim a refund when you file your tax return at the end of the year. It is simple to do and can really help with month to month cash flow. Speak to your accountant about this.
If you’re willing to have a more active role in managing your property investment, there is a lot that can be done to give your returns a great boost. The more proactive you decide to be the better off your returns will be in the long run.