Landlords, there is such a thing as too much rent
As someone who invests in rental properties, I'm often asked, is there such a thing as "too much" rent on a property?
I hear all the landlords out there probably saying "no", but there is.
Achieving a realistic rent on your investment property all comes back to knowing your rental market and knowing your figures before you purchase your rental investment.
There are pitfalls some landlords fall into when purchasing a property and that is they do so with their heart and not their head.
They find a home and love it, it's got everything they want in a home and there lies the mistake.
They're not looking at it as a rental or business transaction, but a home they would like to live in.
It may sound harsh, but you can't be emotionally attached to a rental property.
It's a business transaction and your mindset has to be that.
So, you've found an investment property and the price is right, or is it?
While it may be right for you, is it right for the rental market and can the rent on your newly purchased home cover the mortgage repayments, rates, water, body corporate fees and general maintenance?
Knowing your rental market means knowing what rents are being achieved in an area before you decide to buy.
Surf the net and find similar properties that match your property's criteria, talk to local property managers who work in this industry every day; they rent properties out daily, so their knowledge is powerful.
In my experience, sales agents tend to inflate rental prices to try and get the sale over the line.
This is fraught with danger as you could purchase the home on false pretences thinking you can achieve a rental return stated by the sales agent.
Stick to the facts and get your advice from a property manager.
I have been in property management for 23 years and know this industry inside and out.
If I had a $1 for every time a landlord came to me who had been self-managed their property and their tenants are now defaulting in their rent and they need me to fix it, I'd be rich.
Landlords who self-manage properties generally don't have access to the tools and programs that agencies do to vet tenancy applications and to check if a tenant can afford to pay the rent. Getting it right at the start of the tenancy should make for a smooth sailing landlord and tenant relationship.
As I like to say, "start with the end in mind".
A great rule of thumb when determining if a tenant can afford the rent on your property is a simple calculation.
Calculate the weekly rent then times it by 100 and divide by the net weekly income of all tenants on the application form.
If the calculations come in about 30 per cent, then tenants can afford the property comfortably.
Having a detailed application form with financials on it is also a great way of seeing if tenants can afford the rent.
Not only do they have to pay the weekly rent, but what else do they pay?
Do they have car loans, mobile phones, personal loans or child maintenance?
You can see quickly if they are stretching the budget.
You are lending them your $500,000 home for six or 12 months.
You need to know who is living there and can they afford to pay the rent?
They wouldn't be able to walk into a bank and ask for a loan without having to provide financial details.
This isn't any different.
When the Global Financial Crisis hit back in 2008, one of the fallout effects was landlords had to either sell their investment properties or move back into them.
This caused a shortage in the rental market of available properties.
We were seeing 30 to 40 tenants showing up to open homes in an attempt to find their next home.
It created a monopoly on the rental market where landlords would be asking for more rent on their properties as supply was low, but the demand was high.
I saw rents jump, in some cases, upwards of $80 per week, and tenants were paying it.
So, is there such a thing as too much rent?
There is but it can easily be course-corrected.
It's called testing the market and when I have a landlord who is determined and fixed on a price they want for their rental, I always recommend to list it at their price for two weeks to test the market.
If there is no interest, then you know the rent is too high.
Dropping it by $5 or $10 could be all that is needed to pique interest.
Like sales, rentals have peaks and troughs too.
What you are getting today for your rental property might not mean you will get in 12 months.
This needs to be factored into your budgeting just in case there is a dip in the market.
Rental properties have a high season and a low season.
November to April is the busiest time for rentals making demand high and in turn, you can achieve a higher rent on your property.
From May to October you might find it harder to rent a property and it could sit around longer than you want.
During these times, you might need to lower rents to get a tenant into your home.
One of my policies is to not have (when possible) General Tenancy Agreements ending during the "low season".
I make sure, again where possible, that all General Tenancy Agreements expire in the "high season" so that if a tenant decides to vacate a property, you can re-let the property faster and get the higher rental return.
Tamara Wrigley is a Sunshine Coast-based media commentator, award-winning businesswoman and property mogul, who bought her first property at the age of 21. Follow her Instagram page and Wrigleys Renos renovation page.