Why a ‘rental opinion’ isn’t worth the paper it’s written on
Purchasing an investment property is a huge financial commitment that can have profound consequences for many years to come. For those doing it for the first time, it can also be a daunting experience. You need to research prospective properties, carefully consider your individual financial circumstances, secure finance from the bank and then go through the actual process of purchasing the property. Unfortunately, it’s not quite as simple as finding a property you want to buy and writing a cheque.
One of the most important considerations when purchasing an investment property is the cashflows the property is expected to generate. Determining whether to purchase a property that is positively geared (where the rent is greater than the mortgage repayments) or negatively geared (where the mortgage payments are greater than the rent) is often dependent on the investor’s personal investment preferences and other financial considerations such as tax planning.
When estimating the cashflows a property is likely to generate it’s important to take the rental opinion provided by the agent or developer with a grain of salt as they are often wildly optimistic and have no real legal standing. Too often we see investors that have purchased an investment property expecting to receive the rent indicated in the rental opinion only to find that the real market rent is 30-40% lower. When determining the likely rent its worthwhile checking what comparable properties are being advertised for on the relevant online portals and also considering how much new stock is coming online. If you are buying in an area with apartment blocks going up everywhere then it is a fair call that you are likely to receive a lower rent than would otherwise be the case due to increased competition for tenants.
The other issue to consider is how long the property is likely to be vacant for after settlement in what is known as vacancy risk. It takes approximately 32 days to find a tenant for a property in Sydney, however this varies greatly depending on the suburb. In the northern beaches it takes approximately 20 days for a tenant to be found, whilst other suburbs in greater western Sydney take nearly 60 days. When considering your expected cashflows it’s a good rule of thumb to assume that you will turnover tenants every 18 months. If your property is in an area where it takes on average 60 days for a tenant to be found, then you should assume that every 18 months you will be without rent for 60 days.
Certainty Property was founded out of the desire to build an agency that explicitly focuses on the needs of property investors. Unlike traditional property managers, when your investment property is vacant or the tenant is in arrears, we continue paying the rent instead. This means that our incentives are completely aligned with yours. It also means that with our Rent Guarantee, your cashflows have a degree of stability. Our clients aren’t worried about their property being vacant for up to 60 days because if it is, we continue paying the rent. In fact, you can find out how much extra rent you could receive with our rent calculator.
If you’re considering purchasing an investment property, we’d love to chat with you. We’ll provide you with a true rental estimate that we will stand behind with our rent guarantee. To get in touch, give us a call at 1300 577 298 or email us at firstname.lastname@example.org