The Big and Little Costs of Owning Investment Property
One of the common mistakes many property investors make is focusing on the little costs rather than the big costs. In some ways, this is human nature. We all fall victim to a number of cognitive biases. Perhaps the most common we see is investors failing to accurately account for the likelihood and costs of so called risks to their property investment income.
If you own a property for longer than 18 months, odds are at some point your property is not going to have a tenant for a period of time. This is known vacancy risk. You’re also likely to experience ‘arrears risk’, that is a tenant not paying their rent on time (or skipping out completely). Anyone who has owned a property over the last 18 months has also likely experienced ‘market risk’, which is market rents falling. Last year rents fell in Manly by 24% on average, and by 8% in Parramatta for example.
An astute investor will ask their property manager how they are going to manage these risks. Yet often when selecting a property manager, investors are mostly focused on the fees they charge. As the example below will show, relative to the costs of vacancy, arrears and market risk, fees are a remarkably small amount of the overall cost of owning a property.
To highlight the point, imagine you have a property that generates $1000 per week in rent over a 12 month period. If the property was completely tenanted, experienced no arrears, the market rent was stable and your property manager worked for free, you could expect to receive $52,000 in rental income over a given 12 months. However, the suburb the property is located in has had an influx of new apartments, and it takes an 8 weeks to find a tenant resulting in $8,000 in lost rent. There is a likelihood of arrears, so you factor this in at 5% of total rent or $2,600. Given the soft rental market in Sydney at the moment, rents have also come down by 5% or $2,600 over a year. Finally, your property manager doesn’t work for free and charges a 5% management and 1 week letting fee or $3,600.
The above scenario sounds bleak, but is likely familiar to a lot of investors that have had to find tenants over the last 18 months, particularly in suburbs where there has been a lot of new apartments coming to market. Based on the above, of the $52,000 in total possible rent, $13,200 is forgone due to vacancy, arrears and market risk. Only $3,600 is attributable to management fees. Yet counterintuitively, it is management fees that most investors focus on when selecting a property manager.
Certainty Property is the only property manager in Sydney that provides a rental guarantee. This means that if your property is vacant, we pay the rent instead. We will also pay the rent if your tenant falls behind, and keep paying an agreed market rent even if the rent we can actually get falls. If the landlord in the above mentioned example was a client of Certainty Property, they would not have forgone $13,200 in lost rent. Many investors that choose property managers solely on the basis of which has the lowest fees often don’t realise they are indirectly paying a much higher price through foregone rent.
If you would like Certainty Property to manage your investment property, please reach out to email@example.com. We are the only property manager that provides such a rental guarantee on new and existing properties and would love to discuss with you how to get more out of your investment property. We do property management differently.