Reno Kings - Rethink Your Rent Return
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Rethink Your Rent Return

For anyone looking to buy an investment property to hold long term, we generally want to see a pretty good rent return. Over the years we’ve seen some cracking returns, or at least that is how it seems at first glance.

Apples

When it comes to buying for rent return, the number one rule (out of many), is to ensure you are comparing apples with apples, and the easiest way to do that is to compare net rents. Unfortunately, most quoted rents by marketing agents, is the gross rent, not the net rent.

What is gross rent?

The gross rent is simply the annual rent received, divided by the purchase price. It does not take into account any costs or vacancy periods, and is the easiest way to express the rent return. It is ok to talk about gross rent where you have stock standard product, i.e. a 3 bedroom house amongst many 3 bedroom homes, and you are comparing with a like product with the rent expressed the same way.

What is net rent?

Net rent takes into account all costs, to leave you with the resulting income or loss. The reason net rent is important, is the costs can vary greatly between different properties, especially different types of properties, even if they have the same purchase price and same weekly rent.

For Example

Take a 2 bedroom home that is purchased for $400,000, and received $400pw rent.

Compare that with a 2 bedroom unit in a high rise, that is also purchased for $400,000 and receives $400pw rent.

They both achieve the same gross rent, however, the net rent will often vary by a fair bit, as the costs are very different.

A house typically has higher council rates, higher maintenance costs and often higher insurance. The unit, whilst lower in these areas most of the time, will have body corporate fees, especially one with lots of common areas such as a pool, gym, BBQ area, on-site manager and lifts, and these fees can be quite high.

You should not compare the gross rent return of these two products.

Another example is a holiday unit or motel unit. The management fees for these can be quite high, but the biggest factor is the vacancy period, which will be a lot higher (in most instances) than a long term rental. You definitely don’t want to be using gross rent with these!

Beware

One property that gets a giggle, and a shake of the head from us every time, is a property being marketed as cash positive, or having excellent returns, or is the bargain of the year. Yet it is being taken to auction.

An auction means we can’t possibly know what the returns will be, let alone whether they will be cash positive, or whether it really is the bargain of the year. Honestly, a selling agent should know better.

More Returns

When it comes to rent returns, we’ve just touched the surface. There are so many more things you need to be aware of, such as:

  • what constitutes cash positive,
  • how to work out the return,
  • the costs you should be including when trying to work out net return,
  • the upside and downside of rental guarantees.

The rent return is only one small aspect you should be considering when buying a long term purchase.

In our Feasibility Mastery Workshop, we look at all of this in more detail. After our workshop you will be able to proceed with your next purchase with confidence, or walk away from a dud!

So join us, and like-minded property investors on Saturday 21st May 2016.

Renovate on a Budget | Finding Cash Flow Positive Property
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