Mercia | Taxation, Business & Finance Advisers

5 ways to boost your rental yield

Rental growth in 2014 seems unlikely in some markets in Australia, but there are still ways for investors to increase the rental income from their existing properties.        

 After a period of impressive growth, the rental market in Perth came to a grinding halt in 2013 and in some areas rents even went backwards. Unfortunately for landlords, the prospect for rental growth in 2014 isn’t much better. There are, however, ways for investors to increase the rental income from their existing properties, even when the market is stagnant.        

1. Minor makeover

It’s no surprise that making improvements to your property will generally result in a higher rental return. But many investors don’t realise that even minor improvements can be worthwhile. Tenants are often happy to pay a bit more for things like new carpets or a fresh paint job, and these jobs can be done in between tenancies. Exactly what you should do varies from property to property, so ask your property manager for a list of recommended improvements.

2. Substantial renovation

For those investors with an appetite for a larger project and the right property, it may be worthwhile undertaking a more substantial renovation of the property, such as a new kitchen or bathroom, or even extending the floor space. Clearly, this sort of work can only be carried out while the property is vacant, but if planned properly it can dramatically increase both the rent and the value of the property.

3. Build a granny flat

With changes to the residential design codes in WA, you can now rent a granny flat (ancillary dwelling) to a third party. Adding a granny flat to your property can therefore boost your rental yield without having to formally subdivide your property. For around $100,000 – $140,000 you can construct a high-quality dwelling that will provide a secondary source of rental income. You can often secure more than a 12% return on the construction costs and increase your overall rental yield substantially. With interest rates as low as they are, you can see why building a granny flat could make such financial sense. 

4. Furnishing your property

Another strategy for boosting your rental yield is to furnish your property, but this is only worthwhile for specific properties and tenants. If your property tenancy targets are executives or university students, who require relatively short-term leases, it may be worthwhile fully furnishing your property and then asking for a higher rent. With the right circumstances, you can often obtain a strong yield on the cost of the furnishings.

5. Asking for more rent

Some investors are missing out on rent simply because their property is rented for less than fair market value. This situation often arises because the property manager is either reluctant to increase the rent (for fear of losing the tenant) or simply out of tune with the market conditions. By employing a different property manager who understands the needs of investors, you may receive an increase in rental income. However, it’s important to remain realistic with the rental asking price, especially when market conditions are soft.     

The best time to gamble on a fixed loan

When is the best time to bet on a fixed-rate loan and potentially save yourself thousands?

There is speculation that interest rates have bottomed out and that the next RBA movement will likely be to increase rates. Does that make it a good time to choose a fixed-rate loan?

Personal circumstances and preferences should always drive the decision to fix your loan, and you should discuss the pros and cons with your broker before doing anything.

But putting aside the relative differences between a fixed and variable loan, what’s the best time to ‘bet’ on a fixed-rate loan and potentially save money?

People naturally think about fixing when variables rates start to increase, but if you wait until then, you’ve almost certainly left it too late to get a good deal on a fixed-rate loan. If lenders expect variable rates to increase (due to an increase in the cash rate or other factors), they will inevitably price their fixed-rate loans accordingly, eroding any potential gain.

Clearly, the ideal time to lock in a rate is before variable rates start to increase, while fixed-rates are still relatively cheap.

While comparing current fixed and variable rates is a useful tool in deciding which way to go, you really need to compare fixed rates and consider what you think variable rates will be throughout the period of the fixed term. This is obviously a much more difficult proposition and highlights the gamble involved with choosing a fixed rate.

Theoretically, even if fixed rates are similar to, or higher than variable rates, it could still be beneficial choosing the fixed option if variable rates increase substantially during the term of the fixed-rate loan. However variable rates may have to increase substantially before you’ll save with a fixed-rate loan.

Choosing a fixed-rate loan is always a bit of a gamble. You should make sure that you intend to be in the loan for the period of time you are fixing (given that there can be substantial penalties for early exit). If you prefer the comfort of certainty in your loan repayments and rates are towards the lower end of a normal range, then fixing may be a good strategy for you.

Have Perth investors missed the boat?

With the Perth market producing solid value growth over 2013, many would-be investors are asking whether they have missed the boat.

While it’s true that growth may slow this year from last year’s growth rates in some parts of the market, the good news is that there are still fantastic opportunities available. Here are my tips for making the most of those opportunities.

Focus on the long-term picture

In the long term, you certainly haven’t missed the boat. Perth is a rapidly-growing city with strong fundamentals, including a solid economy and a rapidly-growing population.

The market hasn’t overshot those fundamentals by any stretch of the imagination. Demand for housing still remains strong, evidenced by the fact that rental yields are still good, even after last year’s growth. Perth is still in a recovery phase.

Always be picky 

You should always be picky when it comes to investing your hard-earned cash, but if you want to see growth over the short and medium-term, you need to be particularly astute with your investment decisions. Specifically, you need to understand what really drives values in the market and look for more localised growth drivers rather than relying on the whole market to shift.

Choose areas that are being re-assessed

Look to invest in areas that are being re-assessed by the market. What do I mean? Imagine there was a ladder of suburbs in Perth with ‘best suburb’ at the top and ‘worst suburb’ at the bottom. What you are looking for are the suburbs that are moving up the ladder, the ones that are changing both physically and in the minds of buyers and renters. There are many examples of such areas in Perth that will outperform the rest of the market.

Keep an eye on supply

The supply of property in some parts of Perth is expected to increase, which will put the handbrake on growth for a number of years. Consider how much future supply an area has before deciding to invest there.

Give yourself the option to manufacture growth

Even if you plan to buy and hold for the long-term, it makes sense to choose a property that has value-add potential. This way, when the time is right you can manufacture your own growth through renovation or development.

Accept the bumps in the road

Emotion is the enemy of investing. It’s important, therefore, to always remain level-headed, regardless of the events that may unfold. When economic conditions take a turn for the worst, creating headwinds for the property market, it’s important not to be spooked into selling what could otherwise be a fantastic long-term investment. Similarly, when the market is red hot you shouldn’t rush in and pay above the odds just to secure a property.

Will we see growth in the rental market this year?

After a lacklustre year, what can we expect for the Perth rental market in 2014?

As far as landlords are concerned, 2013 marked a year of solid capital growth but a year of flat to declining rental returns. So what can we expect for the Perth rental market in 2014?

Let’s look at the major factors at play. Although the population is still growing at an impressive pace, growth has started to slow, putting less pressure on the rental market. Demand is also being affected by the fact that many renters have recently become home owners, reducing the pool of potential tenants. Plus, the situation has been further compounded by an increase in investor activity, which has created more supply.

The vacancy rate now sits at above 3% and while this figure is representative of what many would consider a balanced market, it certainly highlights how things have changed. Go back to the end of 2012 and the vacancy rate was 1.9% and rents were growing at around 15%.

There are simply more properties now available for rent, and for this reason, opportunity for rental price growth will be limited until the situation changes.

Some areas, which are still undersupplied, will record growth in rents, but areas that are oversupplied will suffer, particularly those with a high concentration of investor-owned apartments.

With supply catching up to demand, landlords should think carefully about increasing the rent in the current market and avoid taking unnecessary risks.

A glimpse of the future spurred this young investor

With a level-head and the drive to build a successful financial future, Coby Dawson isn’t your average 24 year old.

While others in similar high-paying jobs indulge in new cars and other extravagances, Coby understands the importance of saving your money and spending wisely, values instilled in him by his father.

Even before entering the lucrative mining industry, Coby was always eager to get onto the property ladder. Scraping together whatever money he had, he purchased his first property, with a friend, in the suburb of Cloverdale.

Yet it wasn’t until a ‘crystal ball’ moment years later that Coby would step up his wealth creation journey.

Speaking with older colleagues, he realised that despite earning good money, many had very little to show for it in terms of assets. Some still rented and others even had to come out of retirement after running out of superannuation.

He wanted to take a different path and use his wages to build wealth, which would provide financial security in the long term and allow him to live his chosen lifestyle. Simply, he wanted his money to work for him.

He says that despite what many people think about the high wages you can earn as a fly-in-fly-out worker, “It’s not all it’s cracked up to be”. Working four weeks on and one week off, Coby has very little down-time to spend with friends and family. “It’s a tough job and I don’t want to have to do it forever”, said Coby.

Coby knew he had to do something, so he set out to speak to others who had already achieved what he wanted to achieve. Like many people, he wasn’t sure who to turn to. A real estate agent? A financial planner? An accountant?

After a few bad meetings with various professionals (including one financial planner who admitted to being broke), Coby was left feeling rather discouraged. However, all this changed when he met with Mark Casey, one of the buyer’s agents at Momentum Wealth. “Everything that Mark said was on the money,” explains Coby. Mark provided exactly what he was after, someone to walk him through the process of building wealth through property, while also sharing his knowledge and experience.

With Mark by his side, Coby purchased his first investment property in early 2013 in the popular northern suburb of Heathridge. The property was purchased below market value and the suburb has already seen 14% growth.

Coby describes the process as “one of the easiest things ever” and that he never once felt pressured.

Mark and the Momentum Wealth team gave him all the information he needed to make an informed decision, and handled everything from the finance through to property management.

What does the future hold for this focused twenty-something young man? Keen to continue investing and building his asset base, Coby wants to finish renovating his Cloverdale home (which he now fully owns after buying out his friend) and then use any available equity to purchase another property. He’ll only stop when he has a substantial portfolio that can support him in the future.

With a passion for health and fitness, Coby is now studying to become a personal trainer. This will allow him to spend more time in Perth and do what he loves to do, even if it means he’ll have to take a pay cut, but that’s why he is investing.

When asked whether he will work with Momentum Wealth again, his answer is an emphatic, “One hundred percent!”

For someone who never knew anything about equity or leveraging your money, Coby now sounds like a seasoned investor and is happy to pass on advice to friends and family.

A riverside suburb currently in hot demand

Named after a major horse-racing track located within the suburb’s boundaries, Ascot is bigger than most people realise.

Previously part of Belmont and Redcliffe, Ascot is a relatively new suburb established in 1991. It covers a narrow strip of land along the southern bank of the Swan River, around 10 km from the Perth Central Business District (CBD).

Named after the Ascot Racecourse, a major horse-racing track located within the suburb’s boundaries, Ascot is bigger than most people realise, stretching out some distance along the river.

Generally considered to be an up-market suburb, Ascot has many luxury homes, some with direct river access, as well as a popular marina development. Uniquely, it also has an area specifically catering to the equine industry, which allows horse stables to be kept.  Adding to the mix of property, west of Tonkin Highway, are several apartment complexes and small townhouses.

Although located close to the city, some parts of the suburb wouldn’t be out of place in the countryside with mature trees and beautiful greenery. Located right on the river is the popular Garvey Park Stables, a park providing for a range of recreational pursuits.

According to the latest figures from REIWA, the median house price in Ascot is $762,500 with the highest sale price being $1,850,000. The median unit price is $502,500, which reflects a growth of 12.8% over 2013.

Based on data from realestate.com.au, Ascot is considered to have a ‘high demand market’ given that there is an average of 97 people looking per property. The WA average is 14.

The City of Vincent has a new Town Planning Scheme

With the City of Vincent recently releasing a draft of town planning scheme changes, there are some opportunities for astute investors and developers.

The City of Vincent has prepared a new draft town planning scheme, which has been adopted at a recent council meeting. A town planning scheme dictates zoning and land uses and also guides development throughout the council. The Minister for Planning has granted consent to advertise the draft town planning scheme between February and May 2014 as the first process to initiating the new town planning scheme for comment.

There are many changes proposed by the new town planning scheme. These  include changes to the zoning of more than 400 properties, the addition or removal of various development standards within the scheme and the change of allowable land use for certain properties and zonings.

The new town planning scheme is proposing higher densities and a greater mix of land uses along major roads, close to train stations and high-frequency bus routes. This is consistent with the State Government’s “Directions 2031” planning policy. The new town planning scheme reduces the number of planning precinct areas from 15 to 5, which will result in a more consolidated approach to development controls. The removal of the R 80 zoning in the Cleaver precinct, coupled with the removal of the multiple-dwelling development restriction may allow for apartment-style housing to be constructed. This denser style of living is an example of a change that may positively affect property values.

A change of town planning scheme gives those with the knowledge the ability to capitalise on the lesser-known information affecting specific properties. It gives the savvy investor an opportunity to get in before the prices reflect the real development potential.

RBA update

Many economists were not surprised that the RBA decided to leave the cash rate unchanged at 2.5 per cent. Rates have now been steady since August last year and they are at a 60 year low.

RBA Governor, Glen Stevens said “In Australia, information becoming available over the summer suggests slightly firmer consumer demand and foreshadows a solid expansion in housing construction.”  He believes that the monetary policy is appropriately configured to foster sustainable growth in demand.

The Australian dollars jumped more than one full cent after the RBA made the announcement.

In Australia the only area of concern is inflation which is expected to be higher than what was forecasted three months ago, but it is still within the 2 to 3 percent target range.

This is good news for many property owners as it will keep mortgage repayments down and it may also allow them to use the equity from the increased value of their investment properties to purchase another property.

It seems likely that if the economy keeps tracking the same way for the next six months and inflation doesn’t increase considerably that the rates may stay consistent for the rest of year.