At a recent presentation I was asked this question – How Much Rent Should I Charge? and it resulted in a LOT of audience interest and participation.
So let’s explore this topic further!
Follow along below!
Hi, this is Christine Williams coming to you from the Property Couch, brought to you by Smarter Property Investing.
Today I am going to talk about – last week I presented at a community group and we had quite a lot of people attend.
They were interested in how you invest or why you invest in property – but one of the questions that kept on coming up or generated a lot of excitement in the room and participation was “how do you know how much rent to charge?”
The question took me back a little bit because I have never really thought about that in my strategy because I basically have a strategy whereby to me it’s all about numbers.
It’s about cashflow and numbers.
You have to work out these numbers before you can even consider how much money you have to charge.
And the words “have to charge” or work out “what to charge” that was probably what pricked my ears because if you have a mortgage (let’s say for the purpose of this conversation your mortgage is $2,000 per month) and you have expenses at $5,000 a year which would work out to $100 per month. Expenses such as rates, your property management fees, your insurances.
Therefore, to me that would mean you would need to charge $600 per week just to cover expenses.
Well you may not be able to get that in your area. Your area may only deem for that property to generate only $450 per week. So, if you need $600 per week to cover your costs because you can’t afford that extra money, your numbers aren’t working so you shouldn’t have bought that property in the first place.
So, it’s about what the area will generate for you in return on investment. One of the things that I explained was if you’re driving around an area and you see lots of for sale signs. We know there are lots of properties in the area that are up for sale. If there are lots and lots – I would be asking the question why are all these properties up for sale and there could be something happening in the area that you do need to find out or investigate.
But, we’re talking about leasing properties and renting properties and being landlords. So, if you’re driving around an area it’s very rare that you see for lease signs on properties. Yes, you might see them on apartments or shop windows but it’s very rare you see them on houses.
But, if you’re driving around an area and you see lots of for lease signs on houses – I can assure you what the means is that there are a lot more properties for lease in that area then there are tenants looking for property.
So, return on investment would be equal to supply and demand and at the moment the area is in oversupply. We have too many properties for lease so therefore if the tenant or potential tenants drive around the area and they want something – they actually get to pick and choose.
They can generally say what they’re prepared to pay in rent because there are so many to choose from.
So, the question or answer there is that if an area is in oversupply (too many houses to lease) as a landlord you need to be prepared and make sure that your cashflow can account for it. You might have to drop what your expectations are in rent.
Alternatively if you’re driving around the area and there are no for lease signs it generally means that the area is in undersupply and as a landlord you actually get to choose or generally be able to charge a bit more for rent because it’s in undersupply and there will be more tenants out there than properties.
So, it is a numbers game. It is about over supply and under supply. It’s not about what you HAVE to charge, it’s about what the market will give you and your numbers need to work.
As a landlord, if you have to get a minimum amount just for your cashflow and family to survive (and things may go wrong – your tenant may be a week late, may be two weeks late – things do happen) if it’s so important for you to make sure that rent comes in on the day that the mortgage is due really you have over exerted yourself, overspent and your commitment was too much.
So, it really is about the numbers and making sure the numbers work.
Donna: Would you do that kind of calculation with a client before they buy anything? So, you work out how much THEY need, how much that gap is so it does fit their family budget?
Christine: I don’t do borrowing capacity; I send the client away to talk to their bank or mortgage broker to find that out – but I actually ask them about their discretionary spending. Because it’s all very well to have specific commitments and liabilities that you have to pay for like your own mortgage or your own rent, car payments or store car payments, VISA card payments and that sort of stuff – but then I look at discretionary spending.
I ask them, can they actually save or if they are actually saving $100 or $200 a week now are, they prepared to contribute that to a property.
If they can’t save anything today, I actually take a look and try to find out where we can reduce some of their spending so that they can save because there will be a commitment as a landlord to contribute money until the property is working passively.
There will be a commitment for you to inject some of your own funds and if you are desperate for the rent to be paid the day the mortgage is due you have overextended yourself on your cashflow payments.
I would make sure that there is some sort of leeway there and that you’re not overextending yourself. What it does mean is that you will start to understand as a property investor that it’s not specifically about the property, its about the numbers.
Then you start thinking about this as a business and we are looking at from cashflow because there will always be the right property for you and your cashflow. You will always get the right return on investment and you will always get the right capital growth – you just need to know when, where and what.
That’s what I help work out for you, with you – as well as your cashflow.
Donna: Would you say that it’s safe to say that if you can currently save, after your mortgage has been paid or your rent has been paid – say you don’t have an investment property yet but you have groceries, car loan, credit card – whatever other debts you have and other expenses you have, train tickets etc etc, if you can put away $100 per week to save today – then you probably have the right capacity to look into getting a property.
If you don’t have a dollar left at the end of your pay cycle, then you either need to earn more or spend less.
Christine: Those three things Donna are exactly right. If you have got excess money to $100 a week, yes definitely. It may not be the property that you think should be going into, but you would definitely be looking at the numbers and we look at what type of investment property. It may not even be in your state – but what type of investment property. Would it be an apartment? Would it be a town house? Would it be a house and land package? What would your figures work with?
By the way if $100 per week is all that you have left, I certainly wouldn’t be wanting $100 a week. I would try and keep it under the $75 because you still have to have leeway.
Donna: So, it’s a good habit we should be starting then. If you don’t have an investment property yet at the moment but its something that you want to look at next year (for example) start saving. Not because you need to have that money for a deposit but just get into the habit of knowing that $100 is not going to be there available for you to spend.
Christine: Something that I sort of teach some of my clients along the way that are particular either first home buyers or first investment property buyers is that from an apartment (there are people out there that aren’t interested in buying an apartment, but I can assure you as a property investor and running a business you should have at least one apartment in your property portfolio) however if you have come across an apartment or a town house and you have put down 5% or 10% deposit and that’s all you have to pay until it completes and it might not be completed for 12 months.
For the purposes of this conversation let’s just say its $500,000 and you put down $50,000 – and your loan is going to be the $450,000 and we know our mortgage repayment is going to be (I don’t know the numbers guys, just hypothetical) $2,000 per month and your expected rent is only going to be $400 per week – you’re already $100 per week short.
So I suggest that you pay your deposit and you can start putting away $100 per week now for 12 months, you’re already ahead of the game because you’re getting your cash buffer put in place and you’re getting used to contributing that $100 per week and you wean yourself into it and then it just becomes a habit in the end.
It’s a very good example of putting a deposit down now and waiting until its finished and getting used to it or saying that you want to do this in 12 months time let’s start saving and getting in the habit of doing it.
Donna: It should be a habit that we teach children.
Christine: “chuckles” definitely we should be teaching children!
Donna: If we have any questions, what should we do?
Christine: As always my details are below, happy to take a call or an email (even a text) and I will get back to you.
So, bye for now, Christine Williams coming to you from the Property Couch brought to you by Smarter Property Investing.