What you need to know if you are thinking of investing to lease
25
Oct

What you need to know if you are thinking of investing to lease

Canberra is a property investment goldmine. It’s no secret that the rental market is particularly buoyant in Canberra at the moment, showing no signs of slowing down. The only challenge for investors is deciding which rental strategy to pursue; short-term or long-term. Here are some pros and cons to consider for each strategy:

PROS

Long term pros:

  1. Security of a signed lease

A signed 12-month lease from a high-quality tenant is what most landlords aspire to. Once the tenant has been approved, the landlord can rest easy that their property manager will take care of the rest, only getting in touch if a large or costly issue occurs. This is the type of set-and-forget strategy that many landlords like, especially if they live interstate or overseas.  

  1. Less wear-and-tear

There is a theory that fewer tenants in a property result in less wear-and-tear on a property. This may be the case in some instances, but this does largely depend on the type of property and tenant you have. For example, a family home that is marketed towards young families will probably take a fair beating, regardless of how careful the family are in comparison to a professional couple. Reduce wear-and-tear on your property by:

  • Selecting your tenant carefully and obtaining previous rental references

  • Making your home as durable as possible by selecting hard flooring and using wash-and-wear paint

  • Conducting regular inspections.

  1. Capital appreciation of property

There is no denying that a block of land with a property in the right location should receive a solid capital appreciation over time, possibly more than an apartment in an apartment block. However, the key is holding onto this property for as long as possible and riding out any declines in the market to benefit from this appreciation.

Short term pros:

  1. Higher rental return

The most compelling reason to opt for a short-term rental strategy is the higher rental rate in comparison to a long-term rental. To fully maximise this return, the key is ensuring your short-term property is occupied as frequently as possible – something a good property manager will be able to assist with.

  1. Great location 

Whilst the comparative capital appreciation of a house vs. an apartment is often in favour of the house on a block of land, there are a number of new apartment developments emerging in Canberra in prime locations close to the city and other major town centres. 

This presents an excellent opportunity for investors to secure a property in a location where they would never be able to build a house at an affordable price, or because of zoning. These prime locations are also a major attraction for short-term tenants as they are close to businesses for work and shopping centres and restaurants for entertainment.

  1. Building management

“Body Corporate Fees” are often seen as dirty words, but it is important to remember what your body corporate fees are for. Many new building developments popping up around Canberra at the moment have a host of amazing facilities, such as gyms, pools, BBQ and picnic areas, cafés and bars, and stylish outdoor spaces. Whilst all of these added extras cost money to maintain, they are a unique selling proposition that will make your property stand out. A gym or pool that your guests can use while they are travelling for work means they don’t need to miss out on their workout when they are away from home – giving your property an advantage over others.

  1. Opportunity for repeat business

Many people who use short-term accommodation for work in Canberra travel here for ongoing projects. The nature of many projects often requires more than one visit, either from the same person or from other people in the same company. This presents an excellent opportunity for investors to capture repeat visits from the same guest, or other people in their company if guests are impressed with their experience. 

People are creatures of habit, so it is often easier to stay in the same property than spending time searching for another property. The key is firstly attracting people to your property, then giving them a reason to come back.

CONS

Long term cons:

  1. Maintenance

Never underestimate the amount of maintenance work associated with a rental property, especially if you have a sizable property and block. Unlike the short-term rental strategy for a smaller property, such as an apartment or town-house, long-term rentals will arguably receive more wear-and-tear on assets such as a dishwasher and kitchen. These areas will not be used as frequently in a short-term rental as guests often like to dine out for convenience.

The garden, deck, and backyard, as well as gutters, eaves and drains are other areas of a larger long-term rental property that will require more maintenance than an apartment with a dedicated building management team responsible for taking care of these areas.

  1. Neighbours

Whilst apartments are subject to noise, the quality of sound-proofing has vastly improved and modern buildings are generally quieter than their older counterparts. Conversely, houses are often at the mercy of at least two neighbours - usually more when you include neighbours behind as well. Noisy or messy neighbours can put potential tenants off your property and unfortunately are largely out of your control.

  1. Difficult tenants

Whilst offering a level of security for a landlord, a signed lease does not guarantee a hassle-free tenancy. Tenants can still break their lease, neglect to pay their rent on time, or damage your property. If a tenant is not working out and they are still within their lease period, there are certain steps that need to be taken before they can be evicted from your property, all of which take time.

  1. Lower rental return

Whilst a lease offers security and stability to the landlord for a period of time, the rental rate of a long-term rental is lower compared to a short-term rental property.

Short term cons:

  1. Body corporate fees

The annual body corporate fee owners are required to pay varies significantly between buildings. This is something that always needs to be carefully considered before purchasing a property, and budgeted into your rental rate accordingly. Most buildings will have an owner’s corporation and will hold annual meetings with the body corporate committee. It is advantageous to attend these meetings, or be across what is covered in them. If there are any surplus body corporate funds in the sinking fund owners can have an input into how this money is spent to benefit the building, and ultimately your investment.

  1. Increased wear-and-tear

Whilst short-term rentals receive a bad rap for having increased wear-and-tear there are ways of negating this. The key is to attract high-end guests that will treat your property with respect. Engaging the assistance of an experienced property manager is crucial as they will be across the best way to attract quality guests. They will also have a process for thorough check-out inspections and inventory of your property.

  1. Cost of furniture, cleaning and added extras

Short-term rental properties are rented fully-furnished. This can present a barrier for some potential investors who have never offered a furnished property. Your property manager can add enormous value to this process. They will be able to advise on the types of furnishings and décor to use, as well as reputable companies that other clients use.

Cleaning, linen and other extras such as Wi-Fi, tea and coffee, etc. are all ongoing costs for short-term rentals that will need to be factored into the rental rate. Your property manager will be able to recommend reliable cleaning companies who are experienced with short-term rental properties and charge a reasonable rate.

It is important to remember that any of the above expenses are tax deductions and taxable assets that can be depreciated over time. 

Selecting the most appropriate rental strategy will depend on the location and type of property you invest in. Also, you don’t need to stick to one strategy for all your properties – it’s ok to have more than one strategy for different properties. Strategy diversification between properties will assist you with maximising your return in different markets. If all else fails, you can try a different strategy if you are not satisfied with the results of the first, which may vary depending on market demand. Be brave and open to new strategies, as there is always more than one way to lease a property. 

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