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The biggest cost drainer in property investment…and how to avoid it

Tuesday, 19th Nov 2019

When you’re purchasing an investment property, ongoing costs are likely one of the first things you will factor into your buying decision. How much are you going to outlay for maintenance, council rates, repayments and other outgoing expenses against your rental income? And are you comfortable with that figure, or is it going to put a strain on your finances?

With the different expenses that accompany property ownership, your rental income will  likely play a critical role in providing you with stability of cash-flow until you realise longer-term capital growth.

And the single biggest threat to this?  Vacancy periods.

Let’s say you are renting a property for $400 per week, and that property remains vacant for a period of four weeks. At the end of the four-week period, you would already be $1,600 out of pocket, and that’s without accounting for the marketing and advertising costs of re-letting the property to a new tenant. It’s easy to see how these costs would stack up quickly.

Whilst vacancy periods can be an inevitable reality of property ownership, keeping them to a minimum should be one of your key priorities when it comes to keeping your rental expenses in check.  So what steps can you put in place to minimise the frequency and potential cost of vacancies?

Set the correct market rent

Setting the wrong rental rate is one of the single most common causes of extended vacancy periods we see amongst owners. Whilst setting a competitive rental rate is important to maximising your rental income, being overly ambitious with your asking price can be equally if not more detrimental to your overall cash flow.

What our property managers say:

“Increasing rental rates in the right market conditions can (and should) be an effective strategy in maximising rental returns, but owners need to tread with caution when it comes to raising rents out of alignment with market conditions. In cases where owners have been receiving above market rent or are facing a particularly challenging market, they may need to reduce rental rates to avoid costly vacancy periods before readjusting them when market conditions improve.”

Dynamic marketing

If your tenants are vacating your rental property, one of the most important things you and your property manager can do to avoid lengthy vacancy periods is be proactive in re-marketing the property for rent. A good marketing strategy will go beyond simply advertising the property, and should focus on a tailored plan based specifically on your target demographic.

What our property managers say:

“If you’re re-advertising your property for rent, the marketing plan for your property should also be reinforced by strong internal follow-up procedures, including call backs to all parties who have attended any home opens. This is a great chance for you or your property manager to gain feedback on the property and plan any potential improvements that could appeal to future tenants. We generally recommend listing the property at the higher end of the rent range, but it’s important to be prepared to make adjustments to this during the marketing process based on the feedback obtained from prospective tenants.”

Be proactive with improvements

Whilst it may seem counter-intuitive to invest funds into your property as a means of getting greater returns out of it, property improvements can sometimes be an important aspect of the pre-leasing process, and can be a crucial factor in minimising vacancy rates and boosting your property’s long-term potential, especially in softer market conditions.

What our property managers say:

“Performing upgrades to a rental property can be a great way for owners to improve its immediate rentability and encourage tenant retention, but not all property upgrades result in higher returns. Before undertaking any improvements, owners should consider speaking to their property manager about what’s in demand amongst tenants to ensure they’re making worthwhile changes that will appeal to their target demographic.”

Bring the property manager in early

If you’re in the process or yet to buy an investment property, a great way to gauge a property’s rental potential is to involve your property manager from the start of the buying process. By asking your property manager for their insights on aspects such as vacancy rates in the local market, tenant turnover and features that appeal to tenants, you can make a more informed investment decision that supports your cashflow needs.

What our property managers say:

“Owners who are working with a buyer’s agent to purchase an investment property should speak to their agent about including an early access clause in the purchase contract. This will allow the property managers to advertise the property for rent before settlement, which could help to further reduce potential vacancy periods.”

Keep hold of good tenants

One of the most effective ways to avoid vacancy periods and re-marketing costs altogether is to retain good tenants for as long as possible. Many landlords will take a ‘set-and-forget’ approach once they’ve rented out their investment property, and whilst easier in the short-term, this will often come to the detriment of tenant retention.

What our property managers say:

“When it comes to maintaining good tenants, we recommend that owners take a proactive approach and are regularly reviewing their property for potential improvements to enhance tenant experience. Proactively keeping on top of tenants’ needs and addressing their concerns throughout the lease period will help to reduce landlords’ vulnerability to vacancies.”

Account for seasonal changes

Much like the buying market in Australia, leasing markets will also be impacted by seasonal trends and activity. Generally, tenants will be less active in the winter months, which can lend itself to longer vacancy periods if the right steps haven’t been taken to mitigate this risk. In these cases, it’s important to be realistic about the rental rate you ask for and focus additional attention on the presentation of the property to increase its appeal during home opens.

What our property managers say:

“Owners who are leasing out their property at a quiet time of year need to be thinking ahead to strategies that could reduce this occurrence in future. Whilst 12-month lease contracts are considered the norm in Australia, extending or reducing this lease term to prevent vacancies falling during unfavourable periods could help owners improve the leasing process in future and achieve more favourable rental rates.”

Without the right strategies in place, vacancies can turn into one of the most costly expenses for property investors, so it’s important that you take the right steps to mitigate these risks. If you would like more advice on reducing vacancy periods, or to speak to our property managers about strategies to proactively maximise your property’s performance, organise an obligation-free consultation via the Momentum Wealth website.