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WHAT DOES RENTAL YEILD MEAN TO AN INVESTOR?

Rental yield is a measure of how much cash (or rental income) your property generates each year, as a percentage of the property value.

The property investor dream is to secure a high rental yield property, in a location that delivers large capital gains, combined with low management and maintenance costs.

This means, rental yields are not the only consideration when purchasing an investment property, but still a very important one.

Calculation

Rental yield is calculated as a gross percentage and generally calculated before expenses are deducted. Gross rental yield is commonly used.

It is simple to calculate and allows you to easily compare properties with different values and rental returns to assist when considering different investment options.

Gross rental yield = Annual rental income (weekly rental income x 52) / property value* x 100

For example:

The property purchase price = $400,000 and weekly rent = $350

(350 x 52) / 400,000 x 100 = 4.55%

While the gross rental yield is a simple calculation, it’s important to note that it doesn’t take expenses into account. A property may have a high rental yield, but may also have high expenses, making the rental return low when these are taken into consideration.

If you do want a more precise calculation, you will need to know (or estimate) the total expenses for the property, including both purchase and transaction costs (property purchase price, stamp duty, legal fees, pest and building inspections, any startup loan fees, etc.) and annual costs such as vacancy costs (lost rent and advertising), repairs and maintenance, managing real estate agent fees, home and contents insurance, strata levies (if applicable), rates and charges etc.

Net rental yield = (Annual rental income – Annual expenses) / (Total property costs) x 100

A high yield means good cashflow for investors, which helps to improve your return on investment.

* Either purchase price or current market value

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4 OUT OF 5 ARE UNDERINSURED

An alarming 80 per cent of property owners are underinsured according to data from the Insurance Council of Australia.

While some may underinsure their property on purpose, believing that an event may never happen to save on costs; there are many home owners and investors that are unaware that they may be underinsured.

It is important to regularly review your insurance policies to ensure that you are adequately covered, and the policy terms are still the same.

When reviewing your cover consider the following:

Building cover

  • Do not include the land value in the insured amount.
  • Have you made any renovations, alterations or additions to the property? These should be factored into the sum insured.
  • What is the current replacement building cost? This is not market value, but the current cost of building the same premises again. This value needs to reflect the costs involved in restoring the property to its existing condition, considering current building standards and codes, and factoring in rising costs due to inflation, labour, etc. To get an accurate estimate of replacement costs, we recommend that you speak with a quantity surveyor or builder or there are online building replacement calculators.

Contents cover

  • Have you added to your possessions, fixtures and fittings?

Landlord cover

  • Has the way you rent out the property changed? For example: changed from short-term to fixed-term, or vice versa.
  • If the type of lease has changed, it is imperative that the type of insurance policy is changed too, as different policies suit different situations and landlords may find themselves inadequately insured for their needs.
  • Has the rent increased? If the weekly rent has increased significantly (for example, exceeds $1,500 per week), you may need to contact your insurer and discuss if this affects your policy in any way?

If disaster strikes, landlords can find themselves in financial trouble if they have failed to update their insurances. Take the time now to review your insurance cover.

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SHORT TERM AND HOLIDAY RENTAL REGULATIONS

You may have heard about the new planning regulations coming into effect for short term and holiday rentals (STHR) in NSW. The latest update is that the proposed legislation has been passed by parliament but has not yet been enacted.

 

At this time there is still not a great deal of detail available with regards to the legislation itself.

 

The information that is available to us right now indicates the following:

 

  • The NSW government will establish a single definition for what constitutes Short term or holiday rental accommodation.
  • When the host is present on-site overnight, STHL will be allowed as ‘exempt development’ all year. This means anyone renting a room in their house or part of their property, such as a granny flat on a short term basis will be allowed to continue to do so without a cap.
  • When the host is not present on-site overnight, STHL will be allowed as ‘exempt development’ with a limit of 180 days for hosts in Greater Sydney and 365 days in all other areas of NSW. This will mean that full time short term rental properties will have a 180 night cap imposed. We are currently working to find out if there is any kind of application or DA process that will allow for our owners to be exempt from this cap. If there is not, then we will be recommending to our owners that we utilize a combination of short and long term rentals throughout the year, which many of our owners already do.
  • Councils outside Greater Sydney will be able to decrease, through their local environmental plans, the 365 day threshold to no lower than 180 days per year and
  • Certain planning rules will apply to properties on bushfire prone land.
  • There will be changes made to the Strata Schemes Management Act that will give strata committees the power to decide if short term rentals will be permitted or not. We encourage all of our owners to keep an eye on their strata notifications and attend strata meetings to stay up to date and ensure that you have your say on any updates to your strata by laws.
  • The NSW government will introduce a code of conduct for STHR that hosts, agents, platforms and guests must adhere to. They will also establish a register and online database that will record any problem guests and hosts that are banned from using accommodation platforms. We think this is a great initiative that will give us an extra tool to help us ensure that we continue to get the highest quality tenants and guests for our owners.

 

For further information on what we have outlined here please visit Fair Trading Website and Planning NSW website.

 

This new policy has not yet been implemented. We will be keeping you updated as and when more information becomes available to us. Feel free to send us an email if you have any questions on how these changes will affect your property.

 

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HOW TAX DEPRECIATION CAN MAXIMISE CASH FLOW

Tax time is fast approaching and claiming depreciation expenses can put a lot of money back in your pocket.

Investment property tax depreciation allows you to claim a tax deduction for the wear and tear of the structural elements (the actual building) and the plant and equipment (fixtures and fittings) of an investment property.

By claiming depreciation as a tax deduction, you can lower your taxable income. This in turn reduces the amount of income tax you need to pay, leaving more cash in your pocket each year. You can use this increased cash flow to pay down debt, create new investments or simply enjoy more disposable income.

You can maximise investment property tax deductions by considering the following:

Engage a registered Quantity Surveyor

To maximise investment property tax deductions, you need a detailed tax depreciation schedule. A tax depreciation schedule summarises the tax deductions you can claim on your investment property each year for up to 40 years. ATO rules insist that a tax depreciation schedule be compiled by a registered Quantity Surveyor, who will inspect your property and ensure that every depreciable item is identified and evaluated.

Claim small items immediately

To offset the usually higher cost of an investment property in the early years, claim small items as soon as possible. Items under $301 dollars can be written off immediately.

Furnish your investment property

Furnishing a property can often help achieve a higher rental return. Furniture in an investment property is depreciable and you can claim a large rebate back in the first year. This option will depend on the demand for furnished properties and the potential of an increased rental return.

Claim scrapping value when upgrading or renovating

Scrapping, or residual value, is a depreciable element that many property investors overlook. You can claim a tax deduction for fixtures and fittings that are replaced during an upgrade or renovation. Have a Quantity Surveyor review your renovation plans and estimate what you will ‘lose’ when throwing out old carpets, kitchen cabinets or other fittings. This ‘scrapping’ amount can be claimed as a tax deduction.

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How to reduce the risk of vacancy

No one wants their rental property to sit vacant. Top tips to avoid rental vacancy include maintaining your property in good condition and taking a strategic approach to advertising and leasing.

Meet the market on price

“A property simply won’t appeal to tenants if it’s priced too high,” says Tegan Murphy, residential property manager at Melbourne’s Wilson Agents.

“Even reducing the rent by just $5 per week can be the difference between letting your property and having it sit vacant.”

“Five dollars per week won’t make much of a dent in the overall annual cost of owning a rental property; yet, if the property sits vacant, the cost to the landlord can be significant because each week that passes is another week in lost rental income.”

Maintain your property in reasonable condition

“Try to view your property through the eyes of a prospective tenant. Having blinds replaced or having the interior painted can make a huge difference, and this kind of improvement isn’t expensive.”

Murphy says a fresh coat of white paint is always her top recommendation to landlords because it makes any interior look bright and inviting. She also says replacing carpets is a good way to appeal to prospective tenants.

Other cost-effective improvements include replacing kitchen cupboard doors, installing a new shower curtain or replacing worn out lino.

Let it fast

Murphy says properties that don’t let within the first two weeks are at risk of sitting vacant for longer periods.

“Interest in a property peaks within the first day or two of it being listed. That’s when you get the most enquiries and you really want to see the property let within the first fortnight.”

“As time goes by, a property listing slips further and further down the search results on real estate websites, as newer properties come onto the market,” explains Murphy.

“As your property moves down the list, prospective tenants assume there’s something wrong with it and no one wants to live in it. Many people won’t even see the listing, as lots of tenants don’t search past the third or fourth page of online results.”

Don’t advertise too early

While it may be tempting to advertise your property for lease as soon as the current tenant gives notice, Murphy says this is a mistake.

“Don’t advertise the property until you can legally gain access to it, you’ve organised a mutually convenient inspection time with the outgoing tenant and you know that it’s clean and tidy.”

“As soon as people see it advertised, they want to view it. They don’t want to wait. Ideally, you get a good number of people through in the first couple of opens, and sign up a new tenant to move in the day after the previous person moves out.”

Timing is everything

Murphy says December is often a quiet time for the rental property market.

“When we let properties in December, we sign the tenant up to a 13-month lease, so if they vacate at the end of the lease, it’s in January, which is much busier.”

“You don’t want to fall into a cycle of having to find a new tenant every December because you run the risk of it being vacant over the very quiet weeks around Christmas.”

Make it easy

If your rental property has a garden, you can attract and retain a tenant by including basic gardening as part of the rent.

“If you pay for someone to come and mow the lawn, you keep your tenant happy and the win for you is that the garden doesn’t end up an overgrown eyesore that’s costly to bring back under control.”

Keep a good tenant

A sure-fire way to avoid rental vacancy is to hang onto your tenant. Murphy says it’s worth trying to keep a good tenant, even if it means forgoing a rental increase.

“The cost of re-letting a property can quickly soak up the increased income generated by a small rent rise. If you have a good tenant in place, consider keeping the rent at the same level in the hope that they will stay.”

Full article can be found at domain.com.au