Wednesday, 16 March 2016

Massive Oversupply of Inner City Apartments Part #2 - What to do to Avoid a Rent Drop

The following is an extract from my book The Collapse of Self-Managed Superannuation Funds. This book deals predominantly with people buying property in their SMSF and has great ideas and principles that can be applied to buying property in any situation.

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Watch the Channel 7 News Feature: Residential High-Rise Boom to End

Problem #3 - You must drop the rent on your property

Note: These solutions apply to any property even held in a Self-managed Superannuation Fund.

If rental demand for your property falls because there is an oversupply of similar properties on the market, then you will be faced with the very real prospect of having to drop your rent simply to secure a decent tenant. This can especially happen if your property happens to be an inner-city unit or apartment. In this case, you are competing with literally thousands of other apartments and their owners who are all willing to compete with you to secure a valuable tenant.

In early 2015, a lot of my clients called me on the phone, distressed. Their property agent told them that if they did not drop their rent by at least 10%, then their inner-city unit would simply not be tenanted. I had one client who refused to drop his rent. Two months later, it was still empty, and he had no choice but to drop the rent. The property agents that I spoke to admitted that there was an oversupply, and clever tenants were “shopping around” to get the best deal for their rental dollar. Landlords had no choice but to drop the rent below the rental level that they were receiving from the previous year simply to get a tenant for the next 6 to12 months. This can be disastrous for you if you have to drop the rent on your property. It means you are getting less retirement income, and your retirement nest egg is slowly shrinking instead of growing.

Proactive Solutions

  1. Follow Law #5: Mastering your Due Diligence, before you even consider buying an investment property. If you already have a property where you are faced with the reality of having to drop the rent in order to attract a tenant, it may not be too late. You need to re-read this chapter and absorb the valuable information and guidance it contains.Don’t buy the types of properties that could be in oversupply, such as inner-city units and apartments. Avoid high-density complexes and housing estates with large, undeveloped tracts of surrounding land.
  2. Always look at buying an property that is scarce and offers unique features that other properties do not. For example, stay away from townhouse estates. These are dotted throughout all capital cities, and some of them have up to 100 townhouses in the estate. None of these are ever fully tenanted during the year, and if there is another landlord willing to drop the rent more than you, then you will never make a decent return.
  3. Don’t buy properties in staged-released housing estates. These are housing developments where the plan is to stagger the release of land at various stages that could run for years. Hundreds of house and land packages could be planned, and you will never know when the land will run out. This means that there is plenty of current and future supply and little chance of capital gain in the long-term. Many of these estates are located in the outer-lying suburbs of major city and towns. Most of the houses look the same, because they have been churned out by a property developer using a “cookie-cutter” production process. This means that if your property needs to be rented and it looks like every other property on the estate, then your rent will never increase significantly over time.In addition, if further stages are released, then there is no scarcity of supply. Your potential to grow rental income from your property will be limited.
  4. Do not trust Rental Income Valuations. Do your own research, and take the time to compare what other properties are renting for within walking distance of the property you are looking at purchasing. “Mystery Shop” the local area within two kilometres of your property by pretending to be a potential tenant. Find out the rent of other properties similar to yours. The local newspaper is a good source of this information, and they often publish apartments for rent in the Saturday edition. Failing this, after you have found a unit, ring up the agent who is leasing it and pretend to be a tenant, and find out what the asking rent is. Visit the main shopping strip that is the closest to your target property. Real estate agents tend to cluster together, so use this opportunity to “window shop” their shopfronts, searching for comparable properties listed.
  5. Make sure your property has constant “kerbside appeal.” Being proactive to ensure that your rent doesn’t decline means keeping your property always looking “sale ready”. If you pull up in your car in front of your property, how does it look? Is the front yard neat and tidy, or is it overgrown and unkempt? Does the property look freshly painted and clean, or is the paint dull and peeling in places? Are the gutters full of leaves and can you see some rotting timber, or is everything in tip-top conditionYou will never secure decent, high-rent-paying tenants if they view your property as unappealing, rundown and tired looking. Be proactive by simply keeping the outside of your property, its kerbside appeal, in the best possible condition you can afford. After all, why should you drop your price on your property just to secure a tenant if you have the best-looking property in the street? Let a tenant go and pay $20 less per week for another property that doesn’t look as smart and clean as yours.
  6. Get annual, independent rent appraisals. Be proactive and get a market rent appraisal every 12 months. Don’t wait to be told that you have to drop your rent; be proactive and on the front foot, and know well in advance how rents are moving in the suburb your property is located in. Having an independent rent review can also act as ammunition to counter any argument thrown at you by your property agent or by stingy tenants who are looking for any reason, no matter how unfounded, to get you to lower your rent before they sign on the dotted line of the tenancy agreement. Don’t give them this chance. Have your ammunition in the form of an annual rent review available, and cut off any objection that they may have. 

Reactive Solutions

  1. If you have to drop your rent just to secure a tenant, then insist on a “Split Rental Agreement”. This is where you want to secure a tenant of a minimum of 12 months and you are willing to drop the rent only for the first three months. After this honeymoon period, the weekly rental will revert to the normal full rate. You are giving your potential tenant a reduced rent for three months only to entice them to sign for a full 12 months, knowing that you will get at least full rent for nine of those months. Do not, under any circumstances, agree to a rent reduction for a full 12 months. Waiting for the full 12 months to finish will be excruciating for you. There is also no guarantee that tenant will resign for another 12 months at the full rate and you will have lost valuable income and feel cheated.
  2. “Unbundle” your property for maximum income not for maximum rent. This involves you viewing your property as having multiple income streams, not just one income stream from someone renting it. Can you rent out to other tenants in the complex or to other third parties features of your property such as the car parking space, storage areas or other facilities? It is becoming an ever-increasing trend, especially in European countries, where owning a car is discouraged and tenants actually have to pay more for a car space. I have produced a great online seminar entitled “Unbundling Your Property for Maximum Profit.” Go to the Members Library of my website, to access this seminar. This seminar runs for 30 minutes and is crammed full of ideas on how to capitalise on other income streams from your property without just focusing on getting more rental income. It is well worth watching and is an unorthodox approach that I have developed to help investors solve this exact problem.
  3. Add Value to your property to insulate it from the rent dropping. You need to understand the tenant of today. People who rent tend to be younger and more mobile. They will rent upwards of ten times in their lives before they actually purchase a property. They don’t want to be tied down with a mortgage, preferring to travel instead of being bound to one location. Whilst they prefer short-term tenancy periods of six months, you can easily entice them to sign off on a 12-month or longer rental agreement by adding value to your rental offering. Given that the tenant of today is looking for mobility, they do not want the hassles of carrying around their furniture and their white goods with them. They want the ability to seamlessly shift between rental properties without having the burden of carrying clutter with them. This means, to attract a high-price rental and to insulate your property from a drop in rental income, offer the following:

*          “White Goods”, such as a washing machine or fridge;
*           Extra security;
*           The ability to have pets;
*           “Black Goods”, such as flat-screen televisions, DVD players, and sound systems;
*           A furniture package, such as beds, lounge suite and dining table.

The upwardly mobile tenant of today or young professional couple who are looking at renting your property are willing to pay more if you provide them with the convenience of having a furnished or partly furnished SMSF property. For a small initial capital outlay, you can easily find heavily discounted white and black goods at “Scratch and Dent” sales or at auction houses for hundreds of dollars less than full retail price.

Case Study – The Smart Shopper

I had a client who furnished his rental apartment complete with dishwasher, washing machine, clothes dryer, beds, lounge suite and dining suite, all brand new, for less than $3,000. He simply shopped smarter and did his own homework by visiting outlet centres and discontinued stock clearance sales. The in-house body corporate was offering the same furniture package purchased through them for close to $15,000. My client, through his proactive actions, has insulated his property from any decline in rent, and in fact, each year, he increases his rent.

It’s vital that you understand the demographic of whom you are targeting to rent your property to. If you can offer them some value-added benefits of renting your property at a higher rate than a competitor’s, you will have insulated your property from being hounded by your property agent asking you to cut the price. A short-term capital outlay on such items can translate very easily to long-term, high rents for your property.

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