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You’ve bought a rental property and you’ve had it in tenanted for a while. How do you know your place is performing up to scratch?
Ask yourself these review questions.
Review the rent – are you earning enough?
- If you’re renting out property, how do you know whether you are charging market rent for your investment?
- A simple way is to research your area on realestate.com.au/rent and find out what other comparable properties are on the market for.
- A comparable property ideally is one that is in the same suburb, similar sized house/unit, in similar condition and on similar sized block of land.
- If you discover that you aren’t charging market rental rates, check your lease to find out if you can increase the rent.
- Residential tenancy laws vary across the country but if you have a fixed term lease and haven’t allowed for rent increases, you probably can’t increase the rent until the lease ends.
- However, if you have a periodic lease, you will probably have to give the tenant some written notice (usually 60 to 90 days) and then you will be able to increase the rent.
Review the property condition – room for improvement?
- Often some minor improvements/alterations to a rental property can increase your rent markedly.
- If you don’t want to spend too much money, consider painting, installing air conditioning, built in robes to all the bedrooms and/or a dishwasher.
- Fencing off the backyard and allowing pets in your property can also potentially increase your rent.
- If you’re willing to spend a little more money, how about modernising the kitchen/bathroom, adding an extra bedroom, or an ensuite to the main bedroom.
- Before you embark on any major expenditure, carefully consider the potential additional return on your investment.
- If you were to spend $3,000 on a split system air conditioner and could increase the rent by $20 per week (approximately $1,000 per year), that is an excellent return of 33% pa – you will get your money back in three years.
- However, spending $50,000 on a swimming pool to earn an extra $20 per week is just not worth it. Your return on investment is just 2% and it would take 50 years to get your money back.
Review your tax – are you claiming depreciation?
- Many property investors still don’t understand the benefits of having a depreciation schedule.
- They think that if the property is not brand new, it’s not worth it.
- Even though the house might be 40 years old, it doesn’t mean that everything in the house is the same age.
- I am sure that the hot water system is not 40 years old. How old is the carpet? How about the pergola? Is the kitchen as old as the house or has it been upgraded?
- There are too many items to list here but if you visit the tax office website, www.ato.gov.au, you can find a comprehensive list of items and more detailed information on depreciation for investment properties.
- Having the ability to claim depreciation can increase your tax return and potentially make your investment more affordable and pay it off quicker.
- All it takes is a phone call to a quantity surveyor and they should be able to tell you over the phone whether it is worth paying for a depreciation schedule.
- In many cases, the $600 you will spend on a depreciation schedule is paid back in the first two years of extra claimable expenses.
Review your investment loan – is it still the best available?
Many mortgage brokers/banks offer a free home loan check so why not take them up on their offer.
Be wary of brokers who “churn”. This is the unethical strategy of a few brokers who recommend that a client change lending institutions, not because it is better for the client but because the broker earns a commission for any new business they bring to a lender.
There are a few crucial questions you should ask of yourself/bank/broker:
- Do I have an offset facility?
- Do I have the ability to pay extra off my mortgage?
- Should I have a principal and interest, interest only or line of credit loan?
- Should I have a variable or fixed rate loan?
This provides the ability to offset any interest you are liable for against any savings you have. If you have a few dollars in a savings account and don’t have this facility and can easily get one, do it.
Pay off extra:
It is amazing how a little extra money into your mortgage on a regular/occasional basis can reduce the total interest you pay and the term of your loan. Ask your bank/broker if can have this option.
Principal and interest/interest only, line of credit:
Everyone’s situation is different but generally speaking, an interest only loan is the best for investment property. This helps with your cash flow and you should channel the extra money into personal debt, such as a car loan, credit card or pay off your own home quicker.
Variable or fixed rate:
We are in a very low interest rate environment and I have taken the opportunity to fix the rate of most of my loans. You may wish to do the same.
Review your loan interest rates
- Search on realestate.com.au for a range of loans and interest rates. Is your current interest rate much higher than those advertised by other lenders?
- If so, ask your bank if they can at least match the interest rate of the other lenders. If they can’t, you may consider moving your business elsewhere.
- Beware of fees and charges associated with loans. Even though loan switching fees have been addressed by the Federal Government, there are still many hidden charges.
- There isn’t much point in switching to a different lender that has an interest rate of 0.05% less than your current lender if they also charge hefty monthly, establishment, valuation and application fees.
- A simple way to check on these “extras” is to not just check the ‘Advertised Rate’, but pay more attention to the ‘Comparison Rate’. The comparison rate factors in some (not all) of the extra fees and charges and thus is a better measure of the cost of the loan to you.
Written by Peter Koulizos, university lecturer, author and buyers advocate.