Investors entering the property market need to protect themselves against overzealous rental quotes. Often the agent spruiking the proposed rental return is a sales agent and not a property manager.
To protect yourself against an unwanted and unexpected shortfall in the income on your new investment, disregard a selling agent’s rental assessment.
That’s not to say that every agent will inflate the rental estimate to make a sale. The reality is that there is an incentive to do so, though.
To get a true read on the market, have an experienced independent local property manager assess the property’s respective rental value before you buy it.
Property investors often make purchasing decisions and value assessments on the return a property produces. This is particularly relevant in the commercial property market and a common theme in the residential market.
Any time a real estate agent can inflate the good news in order to make a sale, there is a risk for the consumer on the receiving end of that promise.
In the commercial property market, the lease arrangement has a huge bearing on the likely sale price of the property.
A vacant property will often sell for 10% less than fair value. A leased property to a quality tenant on a securely fixed tenancy with lease extensions will sell for 10% or more above fair market value.
Commercial tenants are much harder to secure than residential tenants. The upside is that commercial tenants tend to stay a lot longer than residential tenants.
The impact of the rental return on the asset’s value is not as extreme with residential property, but it is still a component of the value offering.
Given finding a return on cash is so difficult in the modern world, many investors will and are taking cash out of the bank to invest in property. Investors are likely to play a crucial role in supporting the market against a severe price drop as the market eventually cools in the years ahead.
The most common trick used to dupe investors in the market is developers offering fixed guaranteed rental returns. Investors are reassured about the merits of the apartment in the high rise due to the developer’s promises to lease it back for 2 years, at a very generous price.
The apparent security of a high rental return compels the investor to pay a purchase price relative to the inflated rental income.
A vacant property will often sell for 10% less than fair value.
Two years after completion of the apartment block, all the rental guarantees expire, leaving the investors exposed to the open market.
Unsurprisingly, the open market is significantly lower than where the developer’s price guarantee was set at.
While this happens in the world of off plan apartment sales, investors looking to buy in the open property market also fall victim to rental over quotes. It is common for properties to lease for $100 to $150 per week, less than what the sales agent told the buyer.
The loss goes beyond the weekly shortfall though. If you buy a property believing that it will lease for $800 p/w and its true value, unbeknown to you, is $650 p/w, it takes time for you to discover the disconnect.
The property will undoubtedly sit vacant for whatever period you leave it priced at $800 p/w. This vacancy period can quickly run into thousands of dollars in lost rent if you wait a month or two looking for that $800 p/w tenant.
At a time that feels as though everyone is making pots of money from property, it pays to remain clear-headed and prudent.