Sourcing a reliable rental appraisal should be at the top of an investor’s list when considering purchasing an investment property. We aren’t talking about getting the highest number you can get on an agency letterhead; it needs to be an achievable number from a reputable agency that you can confidently base your cashflows on.
There are a few golden rules for rental appraisals that our Post-Sales Advocate Renee Berger follows when assisting our clients through the final steps of their investment property acquisition process.
Here are Ren’s best tips….
1. Be cautious of the listing agent’s rental return as many can be a little more bullish with their estimations. Their job is to make the property as appealing as possible to both home buyers and investors. A generous rental appraisal can get an investor excited, but leave them disappointed when they can’t achieve the suggested rental amount post-purchase.
2. If possible, source two or three independent appraisals from separate agencies in the area. If the property is an ‘off-market listing’ it’s wise to ask the agent’s permission before you obtain an appraisal from another agency, just in case the agent doesn’t have a signed authority. By calling another agency the buyer could run the risk of tipping another agent into the sale. If we’re not sure on who to call we can find an agent who is actively leasing in the area by look on the online search portals and noting which agencies tend to be more dominant. Larger agencies will often have a Business Development Manager (BDM) who is in charge of all new listings and rental appraisals. Their job is to attract new business to the agency and part of this role involves providing rental appraisals. Ask to speak to them when you call in.
When speaking to the BDM you will need to provide them with the address and be prepared to discuss the property with them. For example, explaining that the property is “3 good sized bedrooms, (under 3m wide is usually considered small), whether the laundry is in the bathroom or if it has a very small south facing courtyard” is the type of detail they will require. If they’re not physically inspecting the property they need to have a good understanding of the positive and negative aspects to give you a fair and reasonable appraisal. Floorplans can be deceiving. If there are no photos or floorplans available online it will make the task much more challenging and they may only be able to give a very rough ballpark figure.
3. Ask for comparable rental properties and don’t be afraid to question their appraisal, for example – have they considered the off-street parking? Is that worth more for the area compared to a property without a parking space? If so, how much extra would a tenant be willing to pay? What sorts of things do tenants in the area regard highly – is it ducted heating, a dishwasher, or a modern interior?
We recently received 3 very different appraisals for one property with a variation of over $150pw between the lowest and highest estimate.
We had lengthy discussions with all three property managers and only once we had talked through the property features and comparable listings could we gain some confidence around the likely expected range.
There are some online portals which publish historic rental figures and whilst these can be a good guide, they are not always accurate. If we find an anomaly online we will always call a property manager to confirm the amount the property actually leased for, versus what they were originally advertised for. Your best fountain of information is via the property managers in the area. They have access to industry databases for this type of information and are also at the coal face each and every weekend when meeting tenants and gauging demand.
Some agents will talk about an “optimum leasing time” or “in the current market” when they talk about getting great rental results. Generally the end of the year and the summer period is a good time to lease a property – demand is high, people are actively moving around as opposed to winter when it can be a difficult to lease a property and the returns may not be as strong during that time. Ask what they think of the current market – has it been hard work leasing or are they moving quickly?
As Christmas approaches however, rental demand usually dips.
It pays to be aware of this when setting lease periods or considering advertising a property for lease in December.
You may also hear the term “days on market” which relates to the number of days a property is available before a tenant placed. A low figure means the vacancy rates are tight and properties are leasing quickly, whilst a higher number of days on market means properties are sitting vacant for lengthier periods of time. This can signal a few things… Perhaps the property is priced too high, there something about the property which tenants are hesitant about (such as security, lack of heating/cooling, a noisy location), an oversupply of comparable properties currently online, or a lower number of tenants searching in that market at that point in time. Price sensitivity is something that should also be considered, as tenants in lower priced rental areas are usually more price sensitive to even a $10 per week change in rent.
Ensure you complete thorough and independent research when it comes to the rental returns for your investment property and be ready to question the appraisals you do receive. You need to be comfortable that the number you are working with is the most accurate return for your investment and that your cashflows will sustain that return ongoing.
A firm understanding of the actual cashflow will make all the difference at the start of your journey as a Landlord.