Where did my returns go?
As property investors we often get excited about achieving a great return on a rental property but this excitement can often turn to despair as the expected return dwindles away due to inflated price expectations and sometimes false hope from real estate agents.
Diminishing returns occur when a property is vacant for any period of time before the start of a new tenancy. There are many reasons why a property can remain vacant. Lawns needing mowing, ripped fly-screens and damaged curtains lead to poor presentation. Having no power connected results in a dark property, and delayed advertising and lack of signage leads to no enquiries because you can’t sell a secret.
When you eliminate these issues the single biggest reason for an extended period of vacancy is price. A property that is overpriced compared to other properties of similar specifications within the area will generally remain vacant. It may take you 4 or 5 weeks to realize this but the damage to your returns will already be done.
For example, you have a property and it’s just been listed for rent at $490 per week but according to the market it should be $450 per week. If it takes you 5 weeks to rent this property because you have had to progressively drop the price, then the effective weekly rental return on a 12 month lease drops to $408 per week. On a 6 month lease this weekly return drops to a staggering $370 per week taking into consideration the 5 week vacancy.
So how do you avoid this from occurring? When choosing an agent don’t just go for the one that has given you the highest appraisal. If there is a considerable discrepancy between appraisals, then this should set off alarm bells. Do your own research - Websites such as domain.com.au and realestate.com.au will let you accurately compare your property to others. Finally, try not to get emotionally involved. If the property is priced correctly, tenants will be found quickly and you can avoid the diminishing returns problem.