While real estate investing is a great line of business to get into in order to make copious piles of money there are a few things to consider before jumping into the fray. This is particularly true if you are considering going the route of a rental property owner. There are all kinds of reasons that this is a good solid investment for most that are interested in investing in the real estate business however, it doesn’t come without a few drawbacks, not all of which are financial. It would be wise to consider these things however before you buy your first rental property.
First of all, if you own rental properties and elect to manage them yourself, which is probably wise unless your first property is a multiple rental unit, you will quickly discover that your life is no longer your own. You are literally on call 24 hours a day 7 days a week to handle problems that may arise from pipes bursting, heating going out, electric issues, noxious fumes, leaky roofs and window sills and countless other complaints that may erupt at odd hours of the day or night. Your tenants will have your phone number and expect you to always take their calls.
Second, you have to play the role of Mr. or Mrs. Mean every month when the rent is due. This is probably the least tasteful task of owning rental properties for many rental property owners and one reason that many resort to the services of a property management agency above all other reasons. You will hear all manner of sob stories in your role as landlord but you need to treat this like the business even the things about your business you don’t like such as rent collecting and, when necessary, eviction proceedings.
Third, the constant need for upkeep and repair is often daunting to rental property owners. It’s a sad truth that people do not treat rental properties with the respect that they would treat a home of their own. For this reason you almost always need to paint and replace carpeting, at the very least in between tenants. This takes works and time not to mention the fact that the time that is spent painting and replacing the flooring is time that the property is going to be empty of tenants and not bringing in any income.
Finally, there is the constant need to have the property occupied. As the owner of a rental property you will need to find new tenants when the old ones leave because every day the property is empty is a day you aren’t making money. You want to have the property filled as often as possible and you really want long term tenants whenever you can manage that. One way of course is by making sure that your tenants are treated well, not overcharged, and happy with their homes.
Owning rental property can be financially rewarding but it is a lot more work than many people give it credit for being in light of other careers within the real estate investment field that may require more work upfront. Rental properties require a long-term commitment to keeping the property in good working order and making it a profitable venture for many years to come. If you are considering this business and the above things are a deterrent for you it might be a good idea to obtain the services of a property manager.
Despite widespread rental stress, particularly in Sydney and Melbourne, many renters are prepared to sacrifice a sizeable slice of their monthly earnings to be able to live in their preferred location.
A recent rent survey by realestate.com.au and Pedestrian.TV found more than half (51.7%) of Aussie renters believed location was the most important consideration when choosing a rental property, while a third (33.1%) felt price was the most vital issue.
The majority of 18 to 39-year-old respondents were prepared to trade both the quality and style of a rental for a desirable postcode.
Michael, 28 from Richmond in Melbourne’s inner city, said he was looking for something “accessible to everything that I do in life.”
“So, something that is close enough to work, close enough to the city, close enough to my friends and easy to get to my parents’ place,” he says.
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As well as hard-earned cash, renters in more expensive states, such as NSW, Victoria and Queensland, are prepared to sacrifice personal space in order to keep rental costs down and live in their preferred location and rental property.
In NSW, 40.8% of renters live with three or more housemates, while in Victoria and Queensland it’s 35.4% and 34.8%, respectively.
Reaching out to their social network appears to be a popular method for seeking housemates – 44% moved in with friends they knew beforehand, but sadly, 39.7% lost a friendship after living together.
Much like dating, this can be a ‘make or break’ experience.
And while 20% of respondents would be happy to rent forever, the majority of young renters still dream of being able to own their own home.
However, only two in five were prepared to move back home with their parents to save money.
The average Aussie renter is predominately female, aged 25-29, with an annual income of $50,000. They mainly live in Sydney (32.8%) and Melbourne (31.1%) – with 33% living with a partner and 30.9% living alongside 3-4 housemates.
The 25-year-old, who shares a two-bedroom apartment with a housemate in Mosman on Sydney’s lower north shore, pays $600 a week in rent.
The public relations professional has been in that flat for several months, but has been renting on and off for about seven years — and has no plans to put her foot on the property ladder any time soon.
“Buying a house is not a major goal I have for my life, to be honest,” she told news.com.au.
“If I do, great — but it’s not something I’m worried or stressed about.
“I’m renting because it’s an affordable option for me at the moment, given I don’t know where I want to put my roots down just yet — or if I want to at all.”
She said there were pros and cons that came with renting.
“I’m not financially committed to anywhere long term, so there’s freedom to move around as I please,” she said.
“But cons would definitely be having housemates.
“I’d love to be able to afford a decent place on my own, but realistically that’s not really an option.”
Ms Rolfe’s situation is far from unique.
In fact, according to realestate.com.au’s 2019 Renter Report, the average young Australian renter is more likely to be female, aged between 25-29, living in Melbourne or Sydney and with an annual income of around $50,000.
And despite the legend of the “Australian dream”, it found a whopping 20 per cent of respondents would be happy to rent forever — although the majority of those happy permanent renters were based in Western Australia and Victoria.
The survey also revealed almost 40 per cent of young Aussie renters across the country were suffering from the epidemic of “rental stress” — which occurs when a household’s housing costs are more than 30 per cent of the gross household income.
But despite that grim statistic, most respondents either did not know they were in rental stress or simply did not care.
Unsurprisingly, rental stress is most widespread in Sydney where housing prices are notorious.
When it comes to choosing a rental, 51.7 per cent said location was a more important factor than price.
Competition was the toughest part of the renting process for 41 per cent of those surveyed, a pressure felt most keenly in Tasmania, Victoria and NSW.
Scraping together bond money was also a challenge, and most reported some form of rejection as part of their rental journey, with almost all renters being knocked back from at least one property and more than 30 per being rejected from more than three properties.
In more expensive states like NSW, the ACT and Tasmania, more that 40 per cent live with three or more housemates — which can lead to interesting household dynamics.
Renters will be among the biggest winners from the sluggish real estate market next year, with landlords set to struggle, according to the head of one of Sydney’s largest real estate groups.
Starr Partners chief executive Douglas Driscoll said tenants could expect a good year, with housing supply up — particularly for units.
“Apartment development has been high over the last three to five years and half these properties were snapped up by investors,” he said.
“Renters have more choice … landlords need to be ultra-realistic with the prices they set.”
Data from SQM Research showed 3.2 per cent of all rental properties in Sydney were vacant over November, a high proportion by historical standards.
SQM managing director Louis Christopher said Sydney was becoming a renters’ market. “The rise in vacancy rates across cities is expected in November as the year winds up … but we are also seeing an emerging oversupply of rental accommodation,” Mr Christopher said.
“Bargaining power (is) moving to tenants as some landlords struggle to fill their rental properties.”
Renters’ improved stand won’t be the only market shift over 2019, according to Mr Driscoll.
The Starr Patners CEO said several political and economic factors would impact housing and buyers and sellers should expect a different market to the one in 2018.
One of the biggest influences on the market would be the impending NSW and federal election, he said.
“If history teaches us anything, it is that when it comes to elections, people tend to sit on their hands,” Mr Driscoll said.
“Uncertainty about changes in policy, such as Labor’s proposal to limit negative gearing tax breaks to new investments and halve the capital gains tax, will cause an extended period of stagnation.”
First home buyers could expect a good year ahead because of the continued absence of investors in the market due to their struggles obtaining financing, according to Mr Driscoll.
The only change to this landscape would come if the NSW government removed current stamp duty concessions for first-time buyers, he said.
This included the exemption on duties for home purchases under $600,000 and discounts for those under $800,000.
Another issue for all buyers would be finance. Banks may become more prudent and low-ball buyers on valuations, limiting their borrowing capacity, Mr Driscoll said.
“We are already seeing many off-the-plan apartments that were bought 12-18 months ago now worth five to 10 per cent less than the original purchase price.
“Anyone who is struggling to secure lending should contest the valuation. It is possible to request a second opinion, or alternatively, provide extensive comparative evidence for similar sold properties.”
Mr Driscoll added that he doubted interest rates would be raised during the first half of 2019, but said it was likely they would change at some point and mortgagees should take advantage.
“It is advisable they pay down as much debt as they can while we have this advantageous environment.
“Paying an additional $150 a month on a $600,000 loan could save a homeowner more than $10,000 — and they will pay their debt down a year faster.”
And as usual, the markets re very fragmented.
Vacancy rates are up
Most capital cities experienced an increase in their vacancy rates in December with both Perth and Hobart remaining steady at 3.4% and 0.4% respectively – Hobart is still the lowest of all capital cities.Darwin currently has the highest vacancy rate of all capital cities at 4.3%, up 0.3% on November’s vacancy of 4.0%.
Perth’s rental market continues to improve with the vacancy rate remaining steady at 3.4%since November and well down from 4.6% a year ago when it was the highest of all capital cities.
Brisbane’s vacancy rate edged higher to 3.2% from 3.0% in November, but is down from 3.8% a year ago.
Melbourne’s vacancy rate also rose slightly to 2.2% from 1.9% in November and only marginally up from 2.1% a year ago.
Adelaide’s rose slightly to 1.3% from 1.2% but slightly down from 1.5% in December 2017.
The rise in vacancies continue into December due to seasonality, with Hobart continuing to face ongoing tight rental conditions however rents in Hobart have decreased over the month for both houses and units.