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Before you put your investment property up for rent, you need to know what potential tenants will be prepared to pay.
Blogger: Diane Bukowski, Managing Director, Eezirent Pty Ltd
Before you start advertising, it is very important to compare your investment property with the current market. You can get a real estate agent to do this – but be prepared for the hard sell of the agent trying to get the management listing. You can get an appraisal online – but be aware that you are providing free property and personal data that can be on sold to marketing companies. The way to avoid this is to do your own appraisal, and it really is not a difficult task.
The key thing to keep in mind is the phrase 'current market' - and in some cases this may have changed quite a lot since the property was last advertised.
Rent is the dollar cost of the product (the right to occupy the property). As such, it is subject to the forces of supply and demand. In some rental markets this means that the rent the previous tenant paid is not going to be the same price the next tenant will pay. Hopefully, demand will be in your favour causing an increase in the price. However, the opposite can just as easily occur. A fall in demand incurring a fall, or at least a stagnation, of the price.
Let’s take a look at some of the mistakes landlords make when setting the rent:
The automatic rent increase - Many landlords fall into the trap of taking the existing rent and increasing it by x% without assessing the current market. This is more likely to occur if the vacating tenant has been in the property for a long time and the landlord hasn’t kept in touch with the current market.
Pride before a fall – remember the setting of rent is driven by market forces. It is not an insult to the landlord or the property that the rent may need to decrease in order to get a tenant. Every week a landlord holds out for their desired price is a direct and expensive hit to the return on investment
Comparing apples with oranges – it is essential the landlord compares their property with others in the same location and with similar features. More on this later.
Using rent to recover expenses – setting rent is an economic equation – not a mathematical one. The monthly cost of the property investment to the landlord cannot be the basis of determining the rent. There is no point setting the rent at $450 a week because that’s the amount needed to pay the interest payment on the loan. Why? Because the buyer (the tenants) do not take that into account when making their economic decision to apply for the property. In fact - they don't care.
So, now that we have the objective state of mind in place, how do you prepare a rent appraisal? The only tool you need is free to access and it is the best source of current listings available – realestate .com.au or domain.com.au.
There are four search criteria to use as the start of the appraisal. You’ll note that price has not been included. That's because we are trying to keep an open mind. You shouldn’t have made up your mind about price at this stage. Research shows these are the most commonly used parameters used by tenants when they search the net, so enter only these into realestate .com.au:
• Number of bedrooms
• Number of bathrooms
• Number of car spaces
Now you should have a search list of roughly comparable properties. Next step is to narrow the field by excluding properties that have noticeable differences (for better or worse) to yours. These are the factors that tenants use to judge the property on the net when deciding if they are going to inquire:
• Age of the property
• Specific location - near busy road, proximity to public transport
• Street appeal - landscaping, paint work
• Outdoor entertainment facilities
By now you will have narrowed the list to properties that are quite similar to yours and you will have a ball park figure on the rent.
Next step start comparing the finer points. These are the factors that tenants like to have and will pay a little more for. A property with these features can demand a higher rent:
• Air conditioning/heating
• Age and quality of kitchen and bathroom
• Storage capacity
• Security features
Assessing these features will help you to adjust the ball park rent figure to a specific price range.
You’ve now done your appraisal.
Once advertised, the market will soon tell you how accurate your assessment is.
1. Plenty of inquiries and inspections means you are spot on with the rent.
2. If you get the inquiries, but no one is putting in an application, this means the rent is a little too dear. Consider a small rent reduction.
3. If the inquires are few and far between - the market is telling you that the rent is far too high. The only solution is a rent reduction.
So, the key to an accurate appraisal:
• Deal in the current market - not was, or what you would like to have
• Use the free tools available - realestate .com.au or domain.com.au
• Start with a broad search then narrow it to specifics
• Think like a tenant not a landlord
But most importantly, listen to the market when the property is advertised and respond to what it is saying.
About Diane Bukowski
From school teacher to website entrepreneur, Diane Bukowski is the managing director of Eezirent – an online service delivering professional tools to self-managing landlords.
After many years running an award winning real estate office, Diane took up the challenge offered by her business partner to set up a service that would level the playing field for self-managing landlords. The result is Eezirent which allows these investors to advertise their property on www.realestate.com.au, verify their applicants with the National Tenancy Database, and access the documentation and knowledge needed to efficiently manage a lease.
Diane’s blogs aim to provide practical advice to the self-managing landlord.
An appraisal is an act of assessing the value of a property, determined by its features and the value of surrounding properties, to secure a mortgage loan.
Rent refers to the payment made by a tenant periodically to a landlord for the use and occupancy of a property.