With rental yields falling across many of Australia's capital cities, it pays to get creative.
Blogger: Peter Tersteeg, managing director, Sage Lending Solutions
The combination of low interest rates and high demand has pushed property prices to an all-time high. Many industry experts are predicting property prices will flatten for an extended period of time. A glance at the weekend newspapers will tell you that there’s a lot of pressure from multiple sources to eliminate or at least restrict negative gearing in an effort to reduce escalating housing prices. With future growth and tax benefits in doubt, many investors are looking to maximise rental yields either in their current portfolio or via future purchases. Here’s some ideas on how to maximise rental returns in your portfolio.
Manage your leases to be most effective
Just like the sales market, the rental market has favourable times of the year when tenants are on the move. If your property is near a university, the period of time between university offers and the start of the academic year is a prime rental period. Keep in mind that it’s not just students looking for accommodation in late January to February, lecturers are as well. There are numerous other occupations that are transitionary at this time of year as well. Time leases to be renewed when demand is at its peak.
In terms of pure return on improvement dollar, nothing beats a coat of paint or two. Some friendly colours, replacing the worn carpet and perhaps improving the lighting can cost only a few thousand dollars. A fresh bright property can bring a premium rent and pay back the cost of improvement many times over.
There’s success to be had in buying an extremely rundown house (dare I say fire damaged?) and fixing it up. In some locations these types of properties can be picked up for a bargain and a lot of the work can be performed quickly and cheaply. Buyer beware however, the numbers on a lot of renovations simply don’t stack up. This is definitely a case where you make your money when you buy. You need to do very careful and detailed costings up front and be super organised to ensure your time and money are used to their best effect.
Get more than one rental income
Two rents are better than one, three is better still! Additional dwellings on the property via a second or even third house if the block allows you to utilise the land available to its maximum potential. If your property has a large land component look at ways it might be developed to get more rental income on the same block of land. Not only can this increase your rental income but it adds to the capital value as well. The catch is you need the land in the first place.
If you can’t get two or three leases, settle for an extra two thirds.
If the block doesn’t allow for a second house, it may be possible to build a granny flat. These have been very popular in recent years and there are specialist companies who build them very cost-effectively. Perhaps an existing garage can be converted?
Rent by the room
A four-bedroom house might get $400 per week on the market. Each bedroom might rent for $150 each earning $600 per week. Depending on the nature of the arrangement there might be council regulations to meet. There can also be more frequent turnover of tenants in this situation and other challenges. It certainly does require more management than a regular lease.
Rent by the room, with more rooms
Taking the rent-by-the-room idea further, can existing space be broken up to add more rooms? Keep in mind that there’s almost certainly going to be council regulations around rooming houses or student accommodation.
Find creative ways to use other assets on the property
Can the garage or garden shed be rented separately as personal storage? Not everyone in the inner city drives a car which might leave your apartment’s car park unused by the tenant, but someone else might be willing to rent it. Others commute, or a neighbour might need more car spaces than their lease has available.
Alternate uses for the property
Why go naked when you can dress up?
Not everyone has a truck full of furniture to move in and they’re willing to pay extra for a basic furniture package. A friend threw in a flat screen TV into the lease and let the tenant keep it. The extra rent paid for the TV long before the tenant moved, and they got to depreciate the TV on their tax.
Many tenants aren’t fans of gardening, and building this service into the lease might not add a premium to the rent, but it’ll keep the property looking tidy.
When all else fails, be bold
Sometimes it can pay to be audacious. I know one investor who asks a premium (and then some) on the first weekend it’s available for rent. More often than not, she still gets a tenant and when she doesn’t she brings it down to earth the following weekend.