Vacancy Rates Becoming A Bigger Concern To Landlords
One of the most misunderstood aspects of owning an investment property is the impact of vacancy on the expected cashflows from an investment property. Whilst many investors intuitively focus on the amount of rent weekly rent they expect to receive from their investment property, quite often they don’t consider the likelihood that their property will be vacant for an extended period of time and how they will continue to service their mortgage when they’re not receiving any rental income. Intelligent investors understand that vacancies are to be expected and plan for them accordingly.
The average vacancy rate in Sydney is volatile month-to-month but has generally been increasing over the last year. According to the May REINSW Residential Vacancy Report, the latest for which data is available, the average vacancy rate is currently 3.4%. To put that in perspective, that rate is double the vacancy rate of 1.7% in April 2017. For tenants this is great as it means they have a greater range of properties to choose from and have a stronger negotiating position in terms of rental prices. In fact, most tenants would benefit from asking their landlord for a rent reduction given recent market softness. If you’re a landlord on the other hand, it means that you can expect to find it much harder to increase the rent on your investment property and when your property is vacant it’s likely to be vacant for longer.
Many landlords also underestimate how long it is likely to take to rent out their investment properties. The average time on market for a rental property is approximately 32 days. With the average rent in Sydney being $550 per week ($525 for apartments, $600 for a house), a landlord can expect to lose approximately $2500 worth of rent. There are also vast differences between suburbs. For example, properties in around the northern beaches of Sydney typically take approximately 20 days for a tenant to be found, whereas some suburbs in Western Sydney such as Box Hill take almost two months on average for a tenant to be found. Vacancy rates also tend to increase in areas where there are a large number of new apartments coming on the market at the same time. Many proud new owners of brand-new apartments have found themselves unable to find tenants willing to pay anywhere near the rent they expected they would receive as hundreds of near identical units have flooded the market at the same time.
This brings us to the paradox of price and vacancy recovery which many landlords often don’t fully understand. Imagine you have a great tenant that has always looked after the property, has never been late with his bills and is currently paying $1,000 per week in rent. The tenant knows that the market has been relatively soft and so asks for a reduction in rent of $100 per week – a sizeable reduction. The instinct of many landlords would be to refuse, however if it takes more than five weeks to find a new tenant willing to pay the full $1,000 per week rent, they would have been better off accepting the price reduction. Even worse for landlords is losing a great tenant, spending money marketing their property, losing several weeks of rent and paying letting fees to their property manager, only to find that they have to come down to where the market is in any event. It’s for this reason that tenants are currently in such a prime position to negotiate in this relatively soft market.
This is not to suggest that all is lost for landlords. Instead they must take an objective, data driven approach to ensuring that they get the most cashflow they possibly can out of their property. This means being realistic about what a tenant is likely to pay for their property in the current market and being aware of how other nearby developments may be impacting the value of their property. In particular, landlords must understand the value of great tenants and the time and cost involved with finding another one.
Whilst many landlords use select their property manager on the basis of which has the lowest fees, this can often be costly. A property manager that charges a management fee of 5% rather than 6% but takes an extra two weeks to find a tenant will almost certainly be a much more expensive option. Understanding the difference between the big costs (vacancy, arrears) little costs (property management fees) can have a huge impact on investment returns. A great property manager should be seeking prospective tenants as soon as notice is given by the existing tenant of their intent to end the lease. Simple actions like this can go a long way to reducing the potential impact of rising vacancies on your investment returns.
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