Five signs your rental property is underperforming
With rental market conditions heating up in Perth, there’s never been a more important time to review the positioning of your rental property. Of course, optimising your rental portfolio isn’t just about keeping on top of rents – there are many different aspects that contribute to a property’s overall performance. In our time as property advisors, we’ve seen many investors suffer losses and achieve below-market returns, or even incur significant costs, due to not having taken steps to protect and maximise their portfolio’s performance, especially during shifting market conditions. So what are the key signs your portfolio could be underperforming?
1 – Your rents haven’t been reviewed in the past 12 months
Rental income is undoubtedly one of the most essential elements of your portfolio’s performance, both in terms of optimising cash flow and also maximising your long-term returns. Whether a market is growing or contracting, it’s crucial that you’re taking regular opportunities to review your rental rates to ensure your property remains aligned with market conditions. This may be a case of assessing whether rents should be increased when a market is heating up (note: this can be done at six-monthly intervals at a maximum), identifying potential clauses that could help you leverage future improvements, and just as importantly – adjusting rents in less favourable conditions to mitigate the risk of costly vacancy periods. While many investors will only review rents when an existing tenant vacates (which in some cases can be upwards of two years), in an improving market especially, this could mean missing out on valuable rental returns. So if you or your property manager haven’t reviewed your rents for a significant time period, there’s a strong chance your property could be underperforming.
A note about rents during COVID-19
While rent increases are currently paused under temporary COVID-19 legislation in Perth, it’s important that landlords who are witnessing market improvements in their local area are taking the right steps to capture improving market conditions once restrictions have been lifted.
2 – You don’t do any proactive maintenance
Many property investors think of maintenance as simply fixing issues when they arise. However, one of the biggest cost drainers for investors, and a significant hindrance to rental performance, comes from not proactively looking after a property. Performing proactive maintenance is an important aspect not only in ensuring steady cash flow, but most importantly in preventing unexpected and costly issues that could diminish your rental returns. In addition to regularly inspecting the property for signs of wear and tear, your property manager should also be encouraging you to opt into regular servicing for items such as cleaning of gutters and timber pest inspections, as well as compliance checks of safety items such as RCD and smoke alarms. The small fee for maintaining these items on an ongoing basis will be a lot more favourable than the larger sum you may need to pay for non-compliance, or the expense you face if a small issue (for instance a minor leak) is left unattended and evolves into significant damage.
3 – You don’t have a value-adding strategy in place
While reviewing the existing condition of your property is an important step in maximising portfolio performance, many investors overlook the impact that proactive value-adding can have on their rental returns. A good property management strategy should go beyond simply maintaining a property, to actively identifying opportunities to enhance value, whether this be through improvements to the property, or additions to capitalise on local market demands (for instance, do properties with more storage space demand a higher premium?) Of course, there are many ways to invest money into a property without actually enhancing its value, and tenant demands will often vary based on the demographic of individual locations. To avoid overcapitalising on improvements that won’t pay you back in returns, it’s important to work with a property manager who has strong local area knowledge to identify improvements that are going to provide maximum value for money.
4 – You haven’t reviewed your finances in the last 12 – 24 months
In addition to rental income, your ongoing loan repayments form another key element of your property’s outgoings. Importantly, you don’t want to be overlooking opportunities to reduce your property’s holding costs – something that could become even more important if you’re anticipating a change in income, or an increase in your repayments, perhaps due to the expiry of an interest-only period. The lending market in Australia isn’t static – it’s consistently changing based on shifts in interest rates, lender policies and broader changes to finance regulations (such as shifts in guidelines surrounding interest-only periods). In order to respond to these shifts and ensure you’re in a financial position to both hold the property and move forward with future investment plans, it’s important that you work together with your finance broker and property manager to navigate any changes, reviewing your loans on a regular basis to identify opportunities to optimise your portfolio’s cash flow.
5 – You haven’t got any special conditions in your lease
We touched upon this briefly earlier, but another crucial aspect when it comes to maximising the performance of your rental property is mitigating risk. This comes from not only keeping on top of maintenance, but also ensuring you have the right lease clauses and policies in place to protect your property and mitigate unnecessary expenses. While industry standard conditions will cover some of this, there are other additional clauses which you may want to consider including in your lease to protect against other common problems. Some key examples include mould due to lack of ventilation, damage to walls from the use of adhesive materials and damage to floorboards from lack of proactive coverings under furnishings.
Is your property underperforming?
As the property market continues to change, it’s important that your rental strategy is adapting with it. If you would like to speak to our property managers about strategies to improve your rental performance, or to organise a rental portfolio review, visit our property management page.