There’s no doubting the benefits of bricks and mortar as an investment option, not least of which is the property market’s resilience during a recession compared to other investment options. But new research that shows demand for residential rental properties is cooling may cause some landlords to question their investment strategy.
BY DAMIAN SMITH
The findings I’m referring to come from property research firm SQM, and show that national vacancy rates rose to 1.8 per cent in April, up from 1.6 per cent the previous month. The rise may seem insignificant, but in real terms there are now 48,000 properties sitting vacant around the country – 10,000 more than this time last year.
Given that the national average for rental rates is $440 per week for houses and $417 for units, these vacancy rates equate to around $20.6 million each week in lost rent.
Melbourne’s landlords have been the hardest hit, with the percentage of unoccupied rentals at 2.5 per cent in April, ahead of Darwin at 1.8 per cent, Hobart at 1.7 per cent and Adelaide and Sydney at 1.4 per cent each.
Over the past year the level of stock entering the market jumped by 68 per cent, flooding the market and putting downward pressure on prices. So in effect, some investor’s stock lost value, and quickly.
But the outlook is not all doom and gloom for those of you with rental properties. That’s because there are ways to shock-proof your investment property by protecting your mortgage against loss of rental income. So if you’re without renters for a few months there are ways to survive tough times and many of them don’t involve selling your property or defaulting on your loan. Here’s how:
- Plan ahead
Where possible, it’s a great idea to protect against future financial hardship by putting a little extra money aside in your budget each month. If you can spare as little as $50 extra per month on a $300,000 mortgage, you’ll have an extra $600 per year to be used as payment reprieve. If you can afford to keep doing this over the life of your loan, you could cut two years from your 25-year loan term and save more than $24,000 in the long run.
- Contact your lender
If you’ve hit financial strife or your property is vacant contact your lender immediately, before defaulting. They should suggest a number of financial hardship options such as a rate discount, switching to a low interest mortgage or extending your loan term. Just be aware of the additional costs of adding to your loan, because these can easily jump into double digits.
- Compare online
If your lender’s not prepared to offer you some reprieve, then it might be time to shop around for another mortgage and switch to a more affordable option, because there are hundreds of lenders that will fight for your business. Head online for some of the best rates available on the market and you might just find one that will save you money in the long term.
- Find a new property manager
Finally, if your property has been empty for a period, then there’s a good chance your real estate agent isn’t working hard enough for you. Don’t be afraid to shop around for a new property manager who really wants your business – but first re-read your existing contract, particularly the section that looks at breaking the contract, because you may incur fees for doing so.
Tell us what you think about vacancy rates. Even though they’ve risen slightly, is it a worry for investors? And are there are any other things that investors can do to protect themselves against vacancies?
Damian Smith is CEO at financial comparison website RateCity (www.ratecity.com.au). He’s one of Australia’s most experienced internet and technology executives, with leadership roles in Australia, the US, Japan and the UK for over 13 years.
Damian holds a Masters Degree in Public Policy from Harvard University.
Daiman, The key factor as a Sydney investor and you rightly make this evident is that in Sydney the vacancy rate is at 1.4 per cent .4% below the average along with the bottom end of the market still holding up well in certain areas ( areas which have not yet boomed). Another point to make is at least to try and factor in a loss of income for 2-3 weeks per year as a average which will give you a buffer when working out ones figures. I can safely say that the rental market in Sydney (from my experience) is holding up well provided one undertakes their homework. I recently bought last month (not within the 25km radius) up north and had a tenant the next day after settlement at the advertised rental yield which is in line with the data reviewed from APM.
Cheers
Comment by Rosco — June 14, 2011 @ 9:53 pm
Daiman, with regards to your point 3 (compare online) I actually found it more beneficial from both a monetary standpoint and a customers service standpoint in dealing with the banks directly face to face. In this instance I found that dealing with the Banks managers helped when securing a deal which was 1% below the standard variable rate along with and a .85% reduction for the life of the loan, no fees, no establishment fees a refund of my previous loan package fee, two credit cards with no annual fee (which come with their benefits, provided you used them correctly). What I must note is that dealing with several banks at a time and just the mention of their name when in a competitors offices sends instant signals to them in trying to retain you as a customer! Works every time…..
Cheers
Comment by Rosco — June 14, 2011 @ 10:03 pm