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 Costs
This article focuses on first strategy, while Part 2 in the next few days will focus on the second.
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.
Keep an eye out tomorrow for Part 2, which explores how to reduce holding and operating costs.
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