What is a rental appraisal?
Find out what a free rental appraisal can do for your investmentREAD MORE
Australia’s rental landscape has changed significantly in the last 20 years. These days, more people are choosing to rent for longer as household demographics transition to one or two residents and the property market’s accessibility to first-time buyers is questionable.
Add to this the continuing talk of a significant accommodation shortage across our major cities and we are naturally seeing a growing demand for rental premises, with little relative increase in supply.
This entire supply/demand equation is what ultimately sets the benchmark when it comes to market values – both in terms of purchase price and the rental amount that is achieved. Given we are seeing a growing wave of demand bearing down on a much slower trickle of stock, it’s easy to assume that property investors are set to enjoy some market increases.
But investors would be wise to avoid becoming too greedy and engaging in some of the questionable ‘bidding war’ activity occurring in more popular postcodes, where tenants are literally vying to get a foot in the door.
You should never undersell your property investment when it comes to establishing a fair rental value, but neither should you seek to take advantage of a market in transition. If you try to force the issue and demand too much too soon, you're likely to scare off would-be tenants and run the risk of extended vacancies.
Establishing a fair market value for your rental property involves a similar process to deciding how much your house should sell for, or how much you should pay for an investment property. In other words, it takes a sound knowledge of the local real estate scene and considered analysis.
This is where the true value of a seasoned, professional property manager comes to the fore. Just as an independent buyer’s agent can guide you in terms of true market value, or a real estate agent provides the vendor with a list of comparable sales, a property manager will know their market intimately and set a rental price accordingly.
They also have access to statistical data and market movements that are not freely available to the general public, including the capacity to identify comparable rental properties.
Importantly, a property manager brings impartiality and an understanding of your tenant market to the table. And it’s these fundamentals, rather than the warm fuzzy feeling you get from your asset, that will ensure the rental price on your property strikes that all important equilibrium; between what you need in order to sustain a sound cash flow position and what tenants are prepared to pay.
Given that you have a substantial vested interest in how much rent you want and/or need to achieve in order to make the mortgage repayments on your property, finding that balance can be challenging for investors. And if you ask more than prevailing market conditions suggest is reasonable, you risk alienating your ‘bread and butter’.
Remember, ‘top dollar’ is attained via a combination of two things – consistent tenancies and consistent returns. In other words, you’re better off having your property rented out for 52 weeks of the year at $500 per week and achieving $26,000 total rental income, than to risk 4 weeks vacancy chasing an extra $20 per week and only realising $24,960.
With the vast majority of rental properties ending up on the Internet, accompanied by lots of nice internal shots and full details of rental terms, it’s easier than ever for property investors to undertake their own market research. Sites like the realestate.com.au can be a good place to start your investigations. Keep in mind that you will only see the advertised rental amount, not what the property actually rents for.
To undertake your own rental appraisal, start by identifying at least 3 to 5 comparable properties - dwellings of a similar size, with similar features in the same vicinity, and do a general stock take of what’s available on the rental market to check out the competition.
If you can only find one or two comparables, you might be able to bump up your asking price slightly. On the other hand, if there’s an abundance of stock that resembles your offering to the tenant market it might be wise to undercut the competition slightly because a slightly reduced rent is better than an empty investment property.
Ultimately, though, the advice you receive from your property manager at the outset, along with ongoing guidance through annual rent reviews, will always hold more weight over empirical data, because they live and breathe your tenant market, not just the numbers.
A property manager can provide advice as to any cosmetic improvements you could make to your property in order to gain a higher rental price too. So although it might come at a small (tax deductible) cost, there’s no denying that consulting the experts could mean the difference between struggling to make your monthly interest repayments and maximising your rental income and investment cash flow.
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