The Ups and Downs of Rental Income
Property investors pay for their properties from the rental income and so many investors focus on high rental income and yields believing this will give them a positive cash flow.
Looking for high rental yields may not always give you the outcome you want. Read on for different strategies on how to maximise the ups and minimise the downs of rental income.
Cash flow positive properties
Building a portfolio of positive cash flow properties is what most investors want.
If the properties pay for themselves this can give them a set and forget strategy with minimal outlay from their own pockets. So how do you find cash flow positive properties? Is a high rental yield the best indicator?
High yielding property can leave you high and dry
Many investors select property on the criteria of a high rental yield of 8 – 10%+ to get a positive cash flow.
The downside is a high yield can also mean a higher risk. Many investors bought in mining areas in WA and Qld when mining companies were paying huge rents up to $1000 - $2000 + per week and they enjoyed a few years of phenomenal rents. Now with the reduced workforce in the mining sector and decreased rental demand, some investors are left high and dry with substantially reduced rents or at the very worst, no tenant at all.
To minimise the effects on rental income and cash flow, buying standard residential properties in areas of high population growth and a diversified economy could give you much more security for the long term, and even with yields of 5% they can still be cash flow positive.
Dual Income properties can increase the rental income
In Sydney building a granny flat in the backyard has been a popular way to increase rental income and achieve positive cash flow. The downside is the high price of Sydney property making this option unaffordable for any but the cashed up investor. Potential tenant problems during construction and ongoing maintenance on the original property could also reduce cash flow.
In many areas in Qld, NSW and Victoria building a brand new Dual Occupancy investment home is popular due to the increasing population in the growth corridors of the capital cities, and in many regional areas. The Dual Occupancy can be two rentals under the one roof eg: a 3 bedroom house plus a 2 bedroom house, with separate entrances, driveways and gardens.
Another option is building a Duplex Pair of 3 bedroom double story homes on the one block for two incomes and potential equity uplift once the block is subdivided at completion. The downside would be if vacancy rates rise and your property manager cannot rent both properties, or if you select an area that has been saturated with too many investors or too many dual occupancy properties.
Selecting the right area is critical.
To Furnish or not to Furnish
Furnishing a property can attract a higher rent, more depreciation claims and a positive cash flow. I have a furnished 3 bed apartment with the same tenants for the last 3 ½ years with a good return. The apartment was bought brand new with a furniture package included, and the tenants were young and pleased not to have to buy furniture for their first rental and they love living in a complex with pools, BBQ’s, and gym included. If the market changes and there is reduced demand for furnished apartments, then it is suggested that if the cost of storing the furniture is too great, then you can sell it online or give it to charity.
Markets and rental demand can change with the changing property cycles.
Rental income and yields can go up and down, and investors need to factor this into their strategy and their budget. A buffer account is always recommended to get through a declining rental market, and diversifying your investments into different areas and states will mean if a market slows, then you have other properties elsewhere to balance your cash flow. In my experience equating high rental yield with positive cash flow can be a trap for the unwary.
Potential for capital growth is a prime selection criteria to be considered. To understand how to estimate cash flow for a property, register on our website rocket propertygroup.com.au/advice and
I will be happy to forward our cash flow estimator to you.