I WAS discussing rental yields with an investor this week.
They were looking for a new investment property and wanting some advice about what they should buy.
This investor was looking for an investment with a reasonable return with a five year plus view on holding the property.
It surprised me that they were only looking at the weekly rent and eventual capital growth as the yard stick of “good investment versus bad investment’’.
I explained that there were other factors that played a significant role and could be more important than the weekly income.
Immediately we covered the top three other things to consider.
The first of course is vacancy. If you can’t rent your property or it takes a long time to rent, then your annual rental is drastically minimised. When assessing a property it is crucial you consider your competition in the market. Why would a tenant chose your property over the competition. The quality of photos and position on line become paramount to capture the attention of the available tenant.
The second was the costs. Maintenance or levies (rates or body corporate fees). There are many units in the inner city that appear to have awesome returns when you stack up a low purchase price against the high weekly rent. But if their body corporate fees are higher, and some are, it wipes out all the upside.
Similarly high maintenance costs or expenses can wipe out a large portion of the annual rent. This is acceptable if it adds capital value, but sometimes these costs just return the property to the appropriate standard.
Finally your borrowing costs can hurt your bottom line. Things like avoiding mortgage insurance where possible, or other fees and ensuring your interest rate is as low as possible. Most savvy investors will address their loans every two years. In the current market the lenders are offering extraordinary deals to get your business, this is where the use of a broker plays a key role, not only at the start, but during the life of your loan.
So when buying an investment do that small due diligence. Work out the net return. Ask your adviser to give you all the costs, get your builder to forecast the potential maintenance costs and find a broker that you can work with over the coming years.
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