Onthehouse.com.au Investor Article for your perusal and information courtesy of
Property investments can make you money in two ways:
- Through generating an annual cash return from the investment (rental income less holding and operating costs).
- Through the capital appreciation you receive when the property is sold and a capital profit is made.
- Most property investors make their money at the time of sale, many years down the track. As a lot of properties are negatively geared, investors are required to pay the gap in any shortfalls in property expenses until the property is sold, making the property cash flow negative. Even on an after-tax basis, this can be a burden for the average investor.
A trap many investors fall into is that they predominantly look at the end position and forget to focus attention on the here and now. That is, they put all their eggs in one basket (focusing on capital gains) and don’t look at ways to reduce their negative gearing burden – or for the luck investor, further improve their positive gearing position.
There are two key strategies investors can adopt to help generate superior ongoing cash returns:
- Improve Your Property’s Rental Yield
- Minimise Ongoing Holding and Operating Cost – first strategy
Improve Your Property’s Rental Yield
Maximising rental yield is about getting the best long-term rent possible in relation to the property’s type, location and the demographics of potential tenants. With this in mind, here are five top tips to help get the best rental returns:
- 1. Little Things Make a Big Difference
Attracting and retaining the right tenants starts with making a good first impression. This means ensuring that the property is neat and tidy, well presented and that everything is in working order. To do this, you may need to bring in professional cleaners and undertake a maintenance check. Fix any defects before prospective tenants arrive – this will help ensure you get top dollar.
Additionally, you could offer something that renters might not be able to get elsewhere to add value to the property that is of little cost for you to provide. This could include offering internet or cable TV with no additional charge, or something as simple as free garden maintenance. These ‘free extras’ can always be factored into the rent so you’re not out of pocket, and the tenant doesn’t have to worry about entering into additional property-specific contracts or organising maintenance agreements.
- 2. Offer a Furnished Property
Without going overboard, furnishing the property can pay dividends. This is especially the case for tenants who don’t want the hassle of buying and lugging around their own furniture.
A furnished property would typically include tables and chairs, a lounge suite, dishwasher and a microwave, and maybe even outdoor items such as a BBQ and an outdoor setting. However you decide to furnish the property, it is important to keep the needs of your potential tenants in mind (e.g. single, couple and family).
This type of strategy is best suited to inner city and metropolitan locations, especially for single or couple occupancies where it is more convenient for them to rent rather than own these types of items. However, you must ensure you get a level of rent that offsets the costs of the furnishings and remember that you have an ongoing obligation to make sure that all items provided are safe and in good working order.
3. Think Big Things
There may be occasions where it makes sense to invest a little bit extra to make the property more attractive and help differentiate it from the competition.
For example, Australia is a country of extreme weather conditions. A heating and cooling system would be ideal to make the property much more habitable and enjoyable in locations where the weather gets extremely hot and/or cold.
Installing a solar power system is another option that could be attractive to tenants. This option is both environmental friendly and allows tenants to save a little extra cash, with it reducing their electricity bill when power is fed into the grid.
Again, these types of investments can be reflected in the rent and can usually be claimed as a tax deduction. They can also add value when it comes time to sell.
Renovations must be approached with caution. This is moving into more expensive territory, and this strategy looks at the current value of the property while keeping in mind the future gains possible. You want to make the property more attractive to renters and future purchasers alike.
While renovations don’t have to be expensive, they need to add immediate value to the property and be capable of recouping the initial outlay in terms of a rental premium and capital gain.
Typical value-add renovations include:
- Extra bathroom and toilet
- Extra bedroom
- Separate laundry
- Updated kitchen
- Off-street parking
- Built in cupboards and extra storage
- Improving the appearance and functionality of outdoor living areas
5. Think Long Term
Ideally, you want good tenants who will stick around for the longer term. This helps improve the investment property’s financial performance by saving money on advertising and marketing costs, reducing vacancy rates thereby increasing rental yields and helping to reduce repair and maintenance costs because they treat your property as their home and tend to take better care of it.
Therefore it is important to take your time and find the right tenants, and undertake adequate reference checks. Importantly, good tenants require some flexibility to accommodate their needs – a little bit of give and take, and a reasonable amount of investment, can result in a long-term tenant and higher financial returns.
As a final thought, whatever action you might consider to help make the property standout and generate a higher rental yield, make sure you speak to your local real estate agent and property advisor. Get confirmation that whatever you are planning will in fact make the property more attractive to renters and purchasers alike, and that you will be able to more than recoup your investment.
This article focused on generating an annual cash return for your investment properties through improved rental yield. We looked at the different ways you can add value to your investment that would in turn generate more rental income for you. Strategies included making a good first impression and focusing on the little things, furnishing the property, investing in bigger ticket items, renovation and securing longer term tenants.
Continuing on from this, let’s now turn our mind to reducing operating and holding expenses.
1. Shop Around for the Right Loan
Interest and associated borrowing fees are by far the biggest expense property investors incur. If you take out the wrong loan, you could be thousands of dollars out of pocket. This is not to mention your investment strategy could be undermined.
The present lending market is ideal for investors – low interest rates and considerable competition among lenders, especially the non-bank lenders. So there is no shortage of options when it comes to investment property loans.
When choosing your loan, ask yourself the following questions
- Is it competitive and cost effective – taking into account the interest rate and ongoing fees?
- Is it flexible – can you make accelerated or lump sum payments easily?
- Is it aligned with your investment strategy – will it support your investment time horizon? For example, you wouldn’t take out a 10 year fixed rate loan when you expect to sell the property in seven years.
- Does the borrowing structure support your tax position?
- Is an interest only or interest and principal loan the best option?
2. Carefully Select Your Property Manager
The right property manager can make a big difference to the success of your investment. Attracting and retaining the right tenants, rent collection, overseeing ongoing repairs and maintenance work, and carrying out regular inspections are some of the key responsibilities of a property manager. This not only helps maximise your rental income, it also assists in protecting your property from damage and the effects of wear and tear.
When selecting your property manager you should do your research. Review and compare commission levels and other costs (which could significantly eat into your rental income if they are unreasonably high), and also review their track record, knowledge of the market, renter preferences and their connections with quality and competitively priced tradespeople.
3. Maximise Your Depreciation Allowance
Most investors understand the concept of depreciation but not everyone gets the maximum benefit, meaning they are not minimising their tax liability.
In general terms, properties built after 17 July 1985 are eligible for a depreciation allowance of 2.5% of the original construction cost a year, for up to 40 years. So, for a dwelling on land that cost $200,000 to build, you can claim $4,000 a year depreciation as a tax deduction.
For all properties, fixtures and fittings can be depreciated in line with the rules set by the Australian Taxation Office (ATO). Interestingly, not all allowable depreciation claims are made because owners are not always aware of what can and can’t be included, especially for older properties. This also includes major renovations of a capital nature. For this reason it’s a good idea to appoint a quantity surveyor who can inspect your property and prepare a depreciation schedule. This will normally be acceptable to the ATO.
It’s important to remember that depreciation (and other property expenses) can only be claimed for the period during which the property was rented or available for rent, so this needs careful attention. In addition, the tax treatment of repairs and maintenance and capital improvement is quite different – repairs and maintenance is an immediate deduction while capital improvement is a possible depreciable item. Your accountant or financial adviser should be able to help you maximise your allowable deductions and, in conjunction with a quantity surveyor, they should be able to identify all depreciable items.
4. Keep Up-To-Date With Maintenance
This is a case of spending money to save money. Fixing a small problem now can save you a lot of money down the track. For example, a broken or cracked roof tile is easy and cheap to replace but if it is left for a significant period of time it could turn in to major internal damage due to the effects of rain over time, as could leaking or worn plumbing. Therefore, fixing a small issue before it becomes a big problem is better for your wallet.
Additionally, failure to adequately and reasonable fix maintenance problems on a timely basis could not only breach the lease contract but it could also lead to a loss of good tenants, neither of which would be a desirable outcome.
It’s also a good idea to take adequate property and landlord
insurance to help protect you against major repair bills and damage caused by renters.
5. Adequate Tax Planning
Before buying your investment property it would be wise to seek independent tax advice to ensure the transaction is structured in the most tax efficient way. This means ensuring the purchase is made through the appropriate entity – through a trust, company or as a personal transaction, and in consideration of protecting the current CGT concession.
In addition, it’s important to ensure that all allowable property expenses are duly claimed to help reduce your tax expense. The ATO provides a useful list, which includes items such as:
- Advertising for Tenants
- Bank Charges
- Body corporate fees and charges
- Council Rates
- Electricity and Gas
- Gardening and Lawn Mowing
- Insurance (Building, Contents, Public Liability)
- Interest on Loans
- Land Tax
- Lease Document Expenses (Preparation, Registration, Stamp Duty, Legal Expenses)
- Mortgage Discharge Expenses
- Pest Control
- Property Agent Fees and Commissions
- Quantity Surveyor’s Fees
- Secretarial and Bookkeeping Fees
- Security Patrol Fees
- Servicing Costs (e.g. Servicing a Water Heater)
- Stationery and Postage
- Telephone Calls
- Travel and Car Expenses (in relation to rent collection, inspection of property and maintenance of property).
By combining strategies to increase rental yield and minimize holding and operating costs, you’ll not only go a long way to making your investment property more financially viable and less of a cash flow burden while you’re renting it out, but you could add greatly to its appeal and sale price when it comes time to sell.
Best Regards Linda & Carlos Debello “Your Local Property Management Specialist” LJ Gilland Real Estate Pty Ltd (http://www.ljgrealestate.com.au) PO BOX 19 ZILLMERE 4034 (07) 3263 6085 0400 833 800 (Mob 1) 0413 560 808 (Mob 2) 0409 995 578 (Linda)
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