Renting
I obtained three rental estimates from local estate agents. But I invited only two of those agents back to lease my property.
As a personal preference, I always appoint only two real estate agencies when leasing any of my investment properties.
I believe there is sufficient competition between two agencies to ensure that I get the best rental result possible. It’s also easy to stay in contact with them and keep abreast of progress.
Furnished or unfurnished?
To get the highest possible rent, I decided to lease my apartment furnished. Although my furnishings were inexpensive, they complemented the apartment and greatly added to the property’s appeal. My furniture was also new, so I could depreciate it fully at tax time. To attract as many people as possible, I listed my apartment with and without furniture at both my chosen agents.
The unfurnished rental figure was much higher than the agents recommended, and the furnished rental figure was considerably lower. By doing this, whether the apartment was leased furnished or unfurnished, the rent would easily cover my loan repayments and other costs relating to the property.
Be personal
My experience as an estate agent gave me the confidence to deal with people. When agents wanted to show prospective tenants through my apartment, I conducted the inspection. This will not be feasible for all, but I believe the best way to maximise your rent is to show prospective tenants through your property personally.
No estate agent can know your property as well as you do. They will never be as enthusiastic as you, as you have more to gain. I had lived in my apartment for the past six months. I had also only recently purchased the furniture, so I could confirm that everything was new and working perfectly.
Another benefit of conducting inspections personally is that you can choose your tenant.
I found a tenant for my apartment within the first week of listing the property. I was able to negotiate a twelve-month lease with furniture. And because I agreed to buy a new washing machine for the tenant’s use, I was able to secure a higher rent than I’d advertised.
Everybody wins
Because the tenant was referred to my property by an estate agent, and to ensure I kept a good relationship with the agent, I still paid the full letting fee and management fee. After I negotiated the lease, I sent my new tenant to the agent’s office to sign the necessary documentation, and the agent carried out the normal tenant checks.
At all times I endeavour to keep dealings between the agents, tenants and myself fair and reasonable. After all, if each party believes that they have won from the transaction, future negotiations will be easier and more harmonious.
By negotiating the lease directly with the tenants, the estate agent won because I did the inspection and most of the work for them, but I still paid the full fees to the agency.
The tenants won because although the rent is high for a seventy square metre, two-bedroom apartment, it is cheap for a furnished apartment. Undoubtedly this was mainly why the tenants renewed their lease after twelve months, but I believe another contributing factor was the rapport we struck when we initially negotiated the lease.
And of course, I won. My property was positively geared, and the tenants continued to rent it beyond the initial lease period.
By getting to know the tenants, I could inspect my property on short notice when necessary and they could contact me directly if any major problems arose.
A passive income
According to my financial analysis, the rent was enough to ensure that my investment is positively geared. Even after expenses such as council rates, interest on the loan, body corporate fees, and insurance, the property made me an extra $5,000. This was before considering depreciation for tax purposes after the first twelve months.
This was my first foray into developing a property portfolio. I still use it as a model for all my investments. The apartment has been positively geared from the beginning, and the equity I have in the property enabled me to buy additional properties—exactly the result I hoped for.
I know the rent I receive will cover all expenses, and I even have some money left to enjoy life or for any unforeseen emergencies.
If any of my tenants agree to renew their lease, I do not increase the rent. Because I fix the interest rate on my investment home loans, I know that my outgoings remain the same from year to year, unaffected by inflation. I am certain how my investment will be geared at the beginning of each financial year.
By ensuring that each investment property is at least neutrally geared, I can sit back and let the investment grow in value without the stress or the need to contribute any of my own money to pay expenses.
Why do I rent?
Having secured a tenant for my apartment, I now needed to find a home to live in. I decided to rent, for a number of reasons.
Renting a home is much cheaper than buying a home and paying off a mortgage. This may appear to be a peculiar thing to say, now that I own several properties. But there are important differences between renting and buying.
As a tenant, you naturally pay rent, but you do not pay for maintenance of the property, council rates, body corporate fees, or water. For the homeowner, on the other hand, these extra expenses can amount to thousands of dollars.
Most importantly, a landlord can claim all out of pocket expenses at tax time. A homeowner receives no tax concessions.
It is still possible to find properties—and not dumps—where the rent is far less than the mortgage repayments would be.
As a general rule, cheaper homes tend to attract better rent returns than more expensive homes. When I was selling real estate in the outer suburbs of Melbourne, a three-bedroom home worth $150,000 would typically rent for about $220 per week, giving the owner a return of approximately 7.6 percent. By contrast, a home worth $400,000 would usually rent for about $400 per week, providing a return of about 5.2 percent.
This is still the case. While the figures may be higher in today’s market as a rule the more expensive the home is, the lower the rental return it will achieve, when expressed as a percentage.
Percentage returns are based on a 52-week rent and do not include expenses such as council rates or water.
More expensive homes usually receive lower rental returns because there are fewer prospective tenants who can afford higher rents. Expensive homes can often remain vacant for extended periods, waiting for the right tenant.
In my experience, though, this is not of great concern for the owners of these expensive homes. If the owner can afford to hold onto the property, even at a lower rent, the property will have grown more in value than most cheaper-priced homes, and the owner will receive a larger capital gain.
Though I did not live in a dump, I certainly could not afford a mansion. But by taking my time searching the rental market, I could find a good home at a reasonable rent.
Something to keep in mind when choosing a property to rent is that trendy suburbs attract the highest rent. If you live in a suburb next to a fashionable one, you can still have the convenience of living near cafés and restaurants, while saving substantially on your weekly rent.
Regardless of where you look, you can usually find perfectly good homes that have been listed for rent for some time. These homes can often be leased for less than the advertised amount.
Why people think otherwise
Renting does not appeal to all. Many people dream of buying the perfect home and paying it off. Although this dream is a very common one, it may not make economic sense.
The most common reasons people give for wanting to buy a home to live in are:
- Renting is too expensive
- Rent money is wasted money
- A home is a good investment
- The security of living in your own home and not being evicted
- Capital growth
- Paying off your home loan is a good form of saving
Is it really that expensive?
Renting is not necessarily expensive. Many people rent because some homes are simply too expensive to buy. Remember, tenants do not have to pay expenses relating to the property.
The money you save towards buying a home could be used to pay rent on a better home. While you may not be able to buy a million-dollar mansion, a lot of people may be able to live in one, if only they would consider renting.
The phrase “rent money is wasted money” is a common expression many of us would remember hearing from our parents. But paying interest on a mortgage to a bank is also wasted money.
Investing in a home
“A home is a good investment” is another familiar statement. This is undoubtedly true in most cases. But I wonder how many people would have bought the home they live in, had they been buying solely as an investment.
As an estate agent, I always preferred selling a home to an owner-occupier than an investor. Someone buying a home to live in is far more emotionally attached to a home than the analytical, discerning investor. Negotiating with the dreamy-eyed would-be homeowner is far easier, and they are far more likely to pay more to secure the property.
Owner-occupiers buy a home to suit their own requirements. On the other hand, I believe an investor should consider the tenants’ requirements when selecting properties.
For example, younger tenants will often rent with a friend, making rent more affordable. In such cases, each tenant’s only private area is their bedroom. For this reason, tenants often prefer large bedrooms to large living areas.
For similar reasons, I believe it is advantageous to have two bathrooms in an investment property. That way tenants do not have to clean up after themselves immediately. They can leave their clothes and personal toiletries lying around.
Another difference between the home buyer and the investor is that the home buyer will purchase wherever they can afford to. They are not necessarily looking for areas with the greatest capital growth. Home buyers are primarily looking for a property which suits their requirements and will look in areas where they can afford such a property.
In contrast, an investor’s first goal is to identify those areas that achieve maximum capital growth and to buy well-priced properties in those areas. Although homes in these areas may be more expensive, rents should also be higher.
Security
Peace of mind, in the belief that you cannot be evicted, is another reason often given for purchasing a property to live in.
Tenants’ rights have become more powerfully protected with each new draft of the Landlord and Tenant Act. Some landlords believe tenants have too many rights, but I believe the protection given to tenants is necessary and fair.
Once a tenant enters into a lease, that tenant deserves the right to enjoy their tenancy unless the agreement is breached. Current legislation states that unless there are extraordinary circumstances, a tenant cannot be evicted from the home they are renting. The only way a landlord can evict a tenant prior to the expiration of a lease is to apply for a hearing before a tribunal and apply for a reduced term of lease due to personal hardship such as bankruptcy.
Before this legislation was introduced, landlords often broke leases. This frequently happened when the landlord wanted to sell their property. A landlord could serve the tenant with a 60-day notice to vacate, enabling the property to be sold as vacant. Under the current legislation, this can no longer happen.
Legislation varies greatly from state to state and often changes. It is advisable to speak with a qualified property manager in your area.
Renting can be more secure than you think…
Increasingly, residential properties are rented for longer leases with the right of renewal. These leases are common with commercial properties. They work just like a normal lease, with a fixed term and fixed rent, but instead of the typical six-month or twelve-month lease, longer leases can run for up to five years or more.
Usually, these leases have built-in rent increases. These increases are either by a nominated percentage each year or are reviewed each year and may only increase with inflation.
The right to renew the lease is an option available exclusively to the tenant currently renting the property. It allows the tenant to renew the lease under the same terms and conditions as the old lease, to the exclusion of any other party. If the current tenant does not wish to exercise their right to renew under the same terms and conditions as the old lease, they may negotiate a new lease on new terms.
This type of lease is particularly popular with families who have children attending school. The longer lease provides stability. If desired, the child can complete their entire primary or secondary education at the same school.
It is also a popular option among businesses who frequently relocate executives and want good quality housing. Rather than searching for rental properties each time staff relocate, businesses can secure long-term leases and know that their accommodation requirements are taken care of. The advantages of such leases for security and stability are clear. Businesses have been using these leases for commercial properties for decades.
If a five-year lease does not seem long enough, consider the average length of time that people live in a home they buy. Many buyers believe they will always live there, but in fact the average length of time living in a purchased home is only seven years.
Another advantage of this type of long term, renewable lease is that although they are still relatively new, such leases are a growing trend in residential real estate. If you approach a landlord and propose such a lease, it will generally be easier to negotiate a cheaper rent.
These leases are also advantageous for the landlord because they have secured a long-term tenant. They eliminate any concerns about the investment property being vacant for extended periods. They also eliminate the cost of advertising the property each year, when a traditional twelve-month lease expires.
….and owning a home can be less secure
Many homeowners may not be aware that most mortgage agreements allow the lender to change the terms of the mortgage agreement at any time without requiring the borrower’s consent.
The lender may also waive their rights under the agreement, or at any time assign or transfer all or any part of their rights or obligations under the agreement. In fact, some mortgage agreements include a provision that allows the lender to call upon the funds provided under the mortgage agreement at any time.
If the lender calls upon the funds and the buyer is not able to repay the mortgage within the time frame requested, the lender may foreclose the loan and sell the home to retrieve their money. Although I doubt many lenders would do this due to the very bad press such behaviour would attract, their legal right to do so still shatters the illusion most homeowners have that their home is untouchable.
After reading a typical mortgage agreement, and then reading the rights protecting tenants, many readers might be surprised to find that tenants enjoy more security of tenure than the average homeowner.
Real estate for capital growth
Capital growth is another reason for buying a home. In fact, it is the only reason I buy real estate. But I doubt many people would have bought their current home if capital growth were the only consideration. Capital growth comes from investment properties too, and investment properties grow in value just as much as owner-occupied homes.
Some people believe that a home will attract greater capital growth if the mortgage is paid off faster. This is not true.
As you reduce your mortgage, equity in your property will increase accordingly—as long as the value of your property has not decreased—but this has nothing to do with capital growth.
Most home loans, whether for investment or for owner-occupancy, are repaid on the basis of principal and interest. However many sacrifices you make, and however tirelessly you devote yourself to paying off your loan quickly, your home will not grow in value any more, or any faster.
Capital growth is a fantastic reason to invest in real estate, but it does not mean you have to buy a home to live in.
To rent or not to rent
Paying off a home is often said to be a good form of saving.
Over the years, I have seen many televised debates about the merits of renting a home versus buying a home to live in. On each occasion, the side in favour of renting has won, but not without some controversy. Both sides base their hypotheses on a number of variables and on many assumptions about those variables.
For instance, the argument in favour of renting assumes that the money tenants save by renting accumulates every week without exception, and that money is put into an interest-bearing savings account, unlike homeowners paying off a mortgage.
Another argument in favour of renting assumes that repairs and maintenance, such as painting or new carpets, will be paid for by the homeowner and not by tenants.
The anti-renting argument assumes that tenants don’t own investment properties, missing out on capital growth, and that tenants are subject to rent increases.
As I’ve shown, none of these things are necessarily true.
Paying off a mortgage on a home you live in is a form of saving. But in my opinion, a better way to save is to minimise your expenses and invest any surplus income. One way of minimising your expenses is to rent a home rather than pay off a mortgage on a home you live in. This plan may not appeal to all readers, but I would prefer a savings plan that I am in control of. A mortgage is a savings plan dictated by the banks.
Renting has other advantages too. You can live in and experience different areas, and different types of homes. When a rental property gets old, you can simply pack your bags and look for something newer or newly renovated. A tenant doesn’t have to worry about maintenance and renovations, which can cost the homeowner tens of thousands of dollars.
Renting offers tenants freedom and choices that are not easily enjoyed by homeowners who are servicing a mortgage.
Summary
- To reach a bigger market when renting your property, offer both furnished and unfurnished options for tenants
- Conduct inspections with your prospective tenants personally
- Have a good relationship with your agent and tenant to ensure good business with them
- A positively geared investment guarantees stable income
- Renting is cheaper
- The law protects tenants’ rights, whereas mortgaged homes can be repossessed
- Capital growth does not mean you have to buy a home to live in
- Renting offers more choices for the tenant
