A very narrow gap between gross rental yields and mortgage interest rates is a buy signal for investors.
How to lease out a rental property well and secure a rent increase
It’s moving time. We’re in the midst of the busiest few weeks of the calendar for new tenancies as workers resettle for a job switch or students shift for the start of the academic year. Residential property managers are working at capacity, preparing their clients’ rental properties for listing, managing open for inspections and evaluating prospective tenants’ applications and references.
There is every reason why a letting should be a success at this time: as well as the seasonal glut of would-be tenants, there is the backdrop of a tight national vacancy rate of just 2.5 per cent, according to SQM Research, conditions underpinned by robust population growth and home buying unaffordability. Consequently, in recent years around this time, many landlords are used to learning that their just-listed property has been snapped up in hours.
But this spike in activity is a double-edged sword. Property managers’ high seasonal workload means they can be spread thinly. Or landlords become complacent about contemporary tenant expectations and ignore adviser recommendations around maintenance and improvements. Furthermore, there are locations and property types – for example, rental properties in areas with a glut of new apartments – where circumstances are more challenging.
Misjudgements can result in the wrong tenant or sub-par rental income or even the investor’s worst nightmare – a property that remains unlet for weeks, a potentially ruinous outcome.
Contact, care and calculation are the watch words for an investor to shepherd their asset safely through a leasing process. Bear these points in mind if you are an investor:
Don’t be a stranger to your property manager between leasing episodes. Stay in regular contact with the manager across the lifetime of your relationship to ensure they are managing the property well and to obtain feedback about developing issues or recommendations for the future. This early warning system decreases the likelihood of nascent problems becoming big ones.
Do take care of the property through regular maintenance and periodic upgrading of features. This advice isn’t offered principally out of some altruistic kindness to tenants – though tenant respect is of course desirable. Ultimately, a rental property is a singularly expensive asset that is working hard for you. Short-sighted penny pinching is just not worth the risk.
And whilst enhancing the amenity of a property through the addition of an air conditioner or a new coat of paint and carpet may feel like a grudging obligation to stay competitive versus the newly built apartments down the road, consider it as an investment. Indeed, these sorts of modest improvements often have a great return. For instance, a new air conditioning unit in an apartment might cost $2,000 all up to install. Assuming this improvement was paid through mortgage borrowings at say 5 per cent, the annual cost is $100. And because it’s not uncommon for tenants to be willing to pay an extra $10 a week – or $520 a year – for an airconditioned property over a less cool counterpart, the return on investment is substantial. And that’s before considering the additional protection against an unexpected prolonged vacancy that a well-featured property delivers.
Finally, calculate the proposed rent smartly. Your property manager should provide an analysis of the going rate from late 2018 for comparable properties in the area. Given this seasonal landlord’s market, it may well be possible to add another 5 per cent or so above that rate. But don’t get greedy. Better to forgo a few dollars a week and have a broad range of applicants. It is more likely to deliver a well-matched tenant who looks after your property and, ideally, stays around for several years.