Many of our investor clients are buy and hold investors. This means they purchase an investment property with the plan to keep it long-term and make money off long-term tenants (in some cases investors choose to go the vacation rental route, but that involves different search and maintenance criteria.) These types of investments can be profitable over time and can also go up in value, with rental increases as well. Location and annual costs plus income are the most important factors to consider.
1. Know Your Market
It is important to evaluate rents for similar types of properties and what the identified properties can command in rent – at Sen Real Estate we can help educate you. We also recommend looking at the number of rentals in a complex (if it is not a detached home) and see if they are steady. Alternatively, you can do the following:
- Call area property managers to get their expert opinions on rental income in the area
- Check on neighbourhood rentals
- Speak with other investors who own and rent in the area
- Understand Costs: Taxes, Maintenance, Insurance and Mortgage Repayments
Speak with your accountant/financial planner about taxes and the best way to keep them at their lowest, as well as to decide how to take the title (as individuals, in your trust or other entity). Get insurance quotes and average annual maintenance costs from the current owner and pencil out all the numbers. Set aside a repair budget. KNOW what you are facing financially so you can evaluate your profit.
2. Look at monthly operating costs
Subtract that figure from the monthly rent
Multiply the result by 11.5, which assumes two weeks per year of vacancy (Numbers will, of course, vary quite a bit for 2-4 unit properties vs. a single unit property)
Have 2 Months of Payments Set Aside for Emergencies
This is just another number to include in your budget. In high non-vacancy areas, like many parts of Greater Sydney, East, North and North West Sydney – this is not as big a concern. Talk to your agent to discuss different areas and look at the current rental market in those areas.
3. Vacation Rental Properties
These types of investments utilise the same analysis above, however, the profit margin is usually higher. Similarly, purchase price tends to be higher as many of these properties are in tourist areas – close to beaches, lakes, mountains or other attractions. It is important to consider maintenance costs, as they tend to be higher with these types of properties due to the quick turnover rate of renters. The vacation rental investor will need to have cleaning crews, handymen and other service providers on standby should an issue arise. Also, it is important to decide whether you will be hiring a property manager or spearheading the rentals yourself, You would need to realise that this requires ongoing commitment.
4. Tax consequences
As with any investment, speak with your accountant or financial advisor prior to purchasing any investment property. With new tax laws and depending on your financial position/corporate status and tax brackets, you will need to understand how your purchase and sale will be taxed.