Rising Rents

It's a fact of real estate - it's historically been a very solid investment. Property's will rise in value (over the long term) and with it - if it is tenanted - rents will rise along with it.

I think it's interesting that just the other day Tony wrote a blog post about vacancy rates in Melbourne, and here I am writing about rent increases in Melbourne. How does that work? That's the frustrating thing about Real Estate, you talk to two different people, you get two different perspectives. I might write more about this topic in the future.

Nevertheless, I came across information about rising rents and vacancy rates and wanted to share this with you.

So what increases are we looking at and where are the key locations? Fairfield in Melbourne along with Edgecliff in Sydney are the front runners, up by 13% and 11% respectively. 

This translates to an increase of $60 in rent per week, compared to 12 months ago. With 24 suburbs in Sydney and 18 suburbs in Melbourne having seen rent increases of more than 6% for new tenants.

It's been reported that the median rent for a house in Sydney has reached a record of $500 per week and apartments $460 per week. The national average for a house is $411 per week

It appears also, that apartments are becoming more and more competitive because renting an apartment is a slightly less expensive option, than renting a house. Couple that with Gen Y's desires to live in inner city locations, places which are close to cafes, beaches and transport, plus Sydney's housing shortage and lower unemployment rates it's no wonder apartments are going gangbusters.

To add to that good news, the vacancy rate in Sydney has consistently hovered around 1.5% for the second half of 2011.

So if you have property in these sort after areas, and you haven't had a rental review in the last 12 - 18 months or so, it might be time to talk to your property manager about this. But be conservative about raising rents 'because everyone else is'. You may turn off prospective tenants.

If you're a prospective tenant, to improve your chances in the competitive renting market, make sure you look at doing the following:

• Have your application form filled in and ready to go on the day of the inspection - most agents have downloadable applications online.
• Bring copies of references from previous property managers or landlords.
• If you have pets, bring references for them too (and photographs, if you can). You can get a pet reference from past property managers, landlords or your dog walker. (see our pet friendly post for ideas)
• Bring a print-out of your rental ledger – your current property manager can provide you with this.
• Dress well for the inspection and feel free to ask questions.
• Be willing to move in as soon as the property becomes vacant.
• Be ready to pay the holding fee if your application is approved.

So do you have property in Melbourne and Sydney? have you benefited from these rises in rents? Or are these statistics a bit off in your opinion?

The Truth of the Matter

“The outlook appears less rosy for Melbourne’s property investor market, with the latest rental vacancy figures from SQM Research showing the Melbourne vacancy rate rising to 4.4% in December with more than 16,000 properties now available for rent – up from 3.4% and 12,300 vacant rental properties in November 2011.

Melbourne’s vacancy rate is more than twice that of Sydney (2%) and significantly higher than the national vacancy rate of 2.5%.” Larry Schlesinger – MSN Property

The question needs to be asked, “Why is Melbourne’s vacancy rate significantly higher than the rest of the capital cities?” The answer is very simple; the building boom is going gang-busters in the Melbourne market, particularly in the newer Western and Northern suburbs, and is attracting savvy investors from all around the country.

Those investors know all too well that their returns will follow a parabolic curve. First there is the initial leasing (if they are into the market early, in a newly developed area) where they will achieve the maximum rent at that time. Then when re-leasing, properties will compete with an ever increasing number of newly completed properties. This will be followed by the supply exceeding demand, making it more difficult to lease, forcing rentals to meet the market, normally with zero increase, and in some situations a reduction in rent.

Professional investors ride this curve, confident that over a period of time new building in the area will have reduced significantly, and there will be fewer rental properties on the market. This allows the true rent of the property to be reflected, as the demand remains at the same level, but the supply is reduced.

My advice to all investors in developing suburbs; be prepared for a fluctuation in the rent levels, both up and down for the first 2 to 3 years of ownership.

Common Mistakes New Landlords Make

So you have taken the big leap of faith and have become a landlord, or are planning to very soon. There are a lot of mistakes that new landlords often make. To avoid these pitfalls, I've come up with a list so you can avoid them.  There have been plenty of articles written about the subject, but it never hurts to revisit this.

I've synthesised a few great articles into my top suggestions.

I couldn't agree more with these ideas:

•  Not having enough funds in reserve. Putting away 3 months is good, having 6 months worth of funds is a much smarter idea. You don't know the market, you don't know what may or may not happen. Factor that in, have the money, and your stress levels will drop.
• Not putting enough effort into getting your place in tip top condition. Having your place in the best possible condition, shows your prospective tenants that you expect them to look after it, it shows that you care and will be responsive, and will minimise your initial maintenance.
• Impatient to rent it out. Renting it out as fast as possible opens you up to tenants that you really, REALLY don't want. Take your time, have a list of standards that your tenants need to meet, and don't negotiate on them. If go too fast the chances are high that you will need to dip into those funds that you set aside.
• Not putting the effort to retain good tenants. If you set it and forget it, then you are likely to lose the tenants. Put some effort in, send Christmas cards, offer the odd nice surprise or upgrade. This shows you care and you want them to stay. 

 Adding to these ideas this article included

• Not allowing enough for maintenance and repairs. It takes money to keep your place in good condition.  If you let maintenance and repairs slide because you don't have the funds (see first tip) then you property will quickly go downhill.  You will lose value in your property and your tenants.
• Treating the rental like a hobby, rather than a business. You are in business as soon as you have tenants. Therefore, set it up as such -  have separate accounts, use good accounting software or an accountant, make sure you pay the right amount in tax. If you don't treat it like a business you are more likely to either lose money or owe money.
• Not putting things in writing. From leases, to contractors working on your place. Have everything in writing so there are no questions about who said what.
• Not following through with lease terms.  If you have a clause in your lease agreement that says there will be a late fee for not paying on time, charge the fee straight away. If you follow through quickly, tenants know you mean business.

Don't forget about these emotional mistakes

• Failing to realise how difficult the business can be. It can be tough to follow through with unruly tenants. It's hard to keep many plates in the air - especially with multiple rental properties.
• Loving the rental too much. It is not your place to live in, it is your tenant's. Don't get too attached to it, otherwise, you'll be disappointed when tenants don't look after the property like you would.
• Underestimating tenant drama. Tenants are human and sometimes make bad decisions. Expect them to have some kind of issue, either with the place itself, with neighbours or with you. Prepare by developing a thick skin.
• Being too nice. You are their landlord, not their friend. When tenants slip on one thing, sort it out swiftly, otherwise it can snowball out of control. By being friendly, but not their friend, it's easier to follow through with the unpleasant things.
• Treating new tenants like the old ones. You've had bad tenants in the past, don't expect the new ones to be the same. New tenants mean a clean slate.
• Not understanding the law.  There are many legal pitfalls: from asking illegal questions, not having house to code or not understanding tenant/landlord laws for your area. If you don't understand the law, then you open yourself up to a world of legal hurt!  Do your due diligence to get up to speed.

Finally I would add my own

• Trying to do it all on your own. Sometimes it's better to get some help from a qualified Property Manager and take the headache out of it. That doesn't mean to stand by and not have any involvement, it means the day to day running is taken care of.
• Not becoming a landlord because it seems to overwhelming. It seems to hard when you see all the things that could go wrong, but it's not. Just take you time, develop a good team and you will be a great landlord in no time.
• Buying the wrong property at the beginning. Start small. Don't by a 25 unit complex until you have wet your feet and made a few smaller mistakes, that way you build your confidence and your empire as you go.

Are the areas that I have missed that you think are important? Have you made any of the above mistakes?

The Pet-friendly Niche

I was quite interested to read this article  and find that a pet friendly unit can add up to $15,000 in it's resale value. This means that if you purchase a rental property you can market it to attract pet owners and reap the financial benefit.

Finding a pet friendly rental has always been a bit harder. Either the quality of the place isn't what the tenant is hoping for, or the location of the rental isn't in the desired area. Most pet owners will put their pets needs before themselves, if they have to take a place outside the desired area because it has a nice backyard for their dog, they will more often than not take it.  With the rental market becoming tighter it's been reported  that thousands of animals have been given to the RSPCA or given away to friends, since their owners can't find pet friendly rentals.

It seems then, there is a real niche in the market that could be filled with a good return on investment. Cats tend to be low maintenance but are their other animals that you could promote as being suitable to your property. Would your rental be a viable place for rabbits, guinea pigs, birds, mice, or even reptiles? It's about using what you have, and working with it to suit what you, as a landlord are comfortable with, and what your Property Manager is a easily about to keep an eye on.

There are ways to ensure that your rental property is well maintained and cared for by tenants. If you are a little nervous about having pets in your rental property, you can look at some or all of the following:

• Increased rent.
• Pet cleaning/damage deposit
• Include move out fees such as flea bombing and professional carpet cleaning (if applicable).
• Regular inspections - maybe include an addition inspection each year for peace of mind.

If you wanted to make some changes that would really sell your place as pet friendly you could:

• Change out carpet for tile or hardwood
• Add a cat flap.

If you are tempted to offer your rental to dog owners, but are not 100% sure, a few extra precautions could help.

• Ask for a photo of the dog attached to the application.
• Ask for 1 or 2 references from previous landlords.
• Ask about the dog's behaviour and if they have completed any obedience school training.

Luckily if pets do damage at all, they tend to do damage that can be fairly easily fixed. If they do, then the pet deposit should cover it.

It appears there is a  hole in the market that would allow for bigger returns with a little forethought. Not only could you reap the benefit of increased rent, but tenants who have pets prefer longer term leases, since it's such a frustrating experience looking for new pet-friendly accommodation. If you really want to stand out from the crowd, make sure you don't just market yourself as being pet-friendly, list what features your places has and maybe even highlight what sort of animals your place would be appropriate for.

Is your rental property cat friendly, dog friendly or even reptile friendly? How far would you go to make your property a pet-friendly rental? Is it worth it in your opinion?

Preparing For a Disaster

Mother nature is hitting us again and I want to express my thoughts and sympathy for those who have been affected. It sure does feel like there are more and more natural disasters happening around the world, and just as we are starting to get our feet under us, then we are hit again!  If only there were a way to predict when and where the next disaster was going to be, we would feel more in control.

There is, however, something we can do to help minimise the impact of a disaster and protect ourselves and families. Like with most things, it comes down to planning and preparation. We all know that we are supposed to have an emergency survival kit, and if you haven't  put together a kit for your family or business, then go here (PDF)  Look at what you need to have in your kit, then put it together - sooner rather than later!   Furthermore, when it comes to your rental properties, you need to take a few extra precautions and it all comes down to paperwork and insurance. Without some forethought and a bit of work, you could put yourself at a lot of risk.    

Paperwork

Just like with your primary residence you need to gather paperwork. Along with the usual list of important papers you need to include all your rental property paperwork.  As stated in the article, it may be worth investing the money and keeping your family's and investment property's paperwork at an outside source. Either a safety deposit box, a lawyer, or even scanning the paperwork and keeping a copy at an online data storage service.

Whichever way you choose to go it's important to have multiple copies of the documents, kept in separate locations to ensure that if one copy is destroyed, you will have access to other copies. Keeping a list of important people you need to contact is a great idea too, but remember that in an emergency, it might be difficult to get in contact, as they may be affected also.

Insurance

It's a tricky business to figure out what sort of insurance you need as a landlord, as everyone's situation is different. I can't advise you on exactly what you need, but I can give you an idea on what is not enough. If you just have homeowners insurance, then you are without a doubt under-insured. There are a lot of areas that you could be held liable for, and without the proper insurance you could put yourself in a lot of financial trouble.

Having the right insurance not only will protect you from from natural disasters but also from disastrous tenants. Many insurance policies not only cover damage, but also cover the lose of rental income. They will be a bit more expensive than just homeowners insurance, but the peace of mind is priceless. So please look into this, talk with your insurance agents to come up with the best options for your situation. Here are helpful websites which should point you in the right direction.

Landlord Insurance explained
Why you should have landlord insurance
www.realestateguide.com

I hope that you read this before anything happens, do the work now, before you need it, and you will hopefully get through the tough times with minimal upheaval.

Does it make sense to 'green' your rental?

Does it make sense to 'green' your rental?

Environmental issues are not going away, and regardless of the debate on whether there is such a thing as climate change, it makes sense to incorporate a greener lifestyle. An environmentally conscious lifestyle brings financial rewards through energy savings and for landlords, potential increased earnings. However, most landlords find it difficult to see the value in 'greening' their rental properties.

This wide spread attitude inspired the Australian Housing and Urban Research Institute to undertake a study to find out what was stopping landlords from investing in green changes to their rentals. The landlords in the study felt that the cost of implementing changes were too costly with little financial or personal benefit. They also felt that tenants would not appreciate the changes and it would be inconvenient to access their properties to carry out the work. It sounds like the landlords in question didn't have good property managers!

Doing what is right for the environment is hard to put a dollar figure on. You feel good about doing the right thing, but is there a return on your investment?  The upgrades that you undertake will save the tenant money.  A tenant that is saving money will be far more likely to stay where they are, therefore reducing turnover. This is in addition to the potential long term gains. When looking at green and non-green comparable properties in the USA, green properties are getting 10% higher market price, and selling 25% faster. In Europe properties are obtaining a 7.5% higher market price, and are renting 3.5% faster with 3% higher yields. It's safe to say that the trend will become more apparent in Australia.

How  to 'Green up' your Rental.

There are numerous why to improve the energy efficiency of a house. If you want to make a big impact, and are determined to green your property, consider the following:

Big Ticket items

1. Insulation. Hopefully your rentals should already be fairly well insulated. Look at renewing old insulation, adding extra insulation in ceilings and walls. Without a well insulated place any other changes would be fairly pointless.
2. Water, Water, Water. There is so much wasted water from everyday household activities, harvesting this water to use in the garden is a great move. Even a rainwater tank would make a statement to your green commitment. In Australia's hot summer months, it may even be more important to consider water conservation. Solar hot water is a fantastic way to capitalise on the Aussie sunshine.
3. Solar Panels. If you can stretch, install solar panels for power generation. To get a return on the investment you could conceivably increase the rent and offer free electricity (especially if you have made the place energy efficient). Or you could increase the rent and let the tenants pay for the installation. Prospective tenants will jump when they see your property advertised as being 'Solar Powered'. If you are interested in selling your property, you should reap the advantages here too.  Of course working with a good accountant would help you determine the best way of handling the tax implications.
4. Landscaping. Minimise grass, maximise native plants, and plant fruit and vegetables liberally. Minimsing the landscaping means that tenants have less to maintain and fewer headaches for you. You may want to consider planting easily maintained fruit trees. Fruit trees are appealing and will hopefully encourage good neighbourly behaviour -  what do you do with 20 kilos of apples? Which in turn could increase the security of your rental. Adding even one raised garden for planting vegetables encourages garden maintenance and good health.
5. Double-Pane Windows. They trap warm air inside during the winter, and keep cool air inside during summer, combined with good insulation, new windows will make a noticeable difference to energy costs.
6. Flooring. From renewable resources like bamboo, to stained concrete, and engineered hardwoods. All are great alternatives to carpets, which are known to cause trouble for those with allergies.

Starting Small

You don't have to make a statement with only the big ticket items. You can green a property by focusing on a large number of little things, When combined they will make a big difference to your tenants.

1. Use low VOC Paints when repainting. This is great to promote if you are hoping for families as tenants. (VOC -stands for Volatile Organic Compounds which are toxic)
2. Switch out incandescent bulbs for energy efficient light bulbs. Lighting accounts for about 10-15% of an average monthly bill. CFL light bulbs will last much longer too.
3. Wrap the hot-water heater and adjust the temperature. By wrapping your hot water tank with insulated material you will reduce the heat loss. Approximately 20% of energy costs comes from your water heater, if you can't justify replacing the hot water tank with a tankless hot water system, or installing solar hot water, then at least wrap it, and adjust the temperature down a little and sure there are no hot taps dripping!
4. Change all taps and shower heads to low flow. Hold a 1 litre jug under the tap/shower and if it fills in less than 6.5 seconds you are using more water than you need. Slow the flow and hot water costs will drop.
5. Attend to the nooks and crannies. Caulking around windows, weather stripping doors, thermal curtains will all make an impact.
6. Attack Vampire Power and monitor your energy.  More and more people are becoming aware of the power drain of electronics when on standby. Consider supplying some 'smart' power strips to minimise vampire power and installing an energy monitor  so tenants stay aware of their usage.

It doesn't matter if you decide on a few big things or focus on the small things, you must promote, promote, promote! Make a case for your green property, build a story by combining all the features and tell tenants.  If you don't tell them, how are they going to know what a great place they live in? Let them be proud to live in your energy efficient rental.  

Would you go this far?

A year ago Shane Merrick won an award for being Melbourne's greenest landlord.  He installed a greywater system, rainwater tank, solar hot water, energy-efficient lighting and focused a lot on insulation.  Would you go this far in 'greening' your property? How are you going to upgrade yours? 

Thanks for inspiration and information for this article.

www.helium.com

www.good.is

livinggreenandsavingenergy.com

renew.org.au