Under Renting your Apartment is Costing You More than You Think
Today I will be going through the 10 mistakes I see that Auckland apartment owners make that are costing them thousands of dollars when they go to sell their apartment. This is an important topic. It’s from a report I put out that had a lot of positive feedback, and I have had requests to go further in depth on this subject, so I thought I’d talk about it here.
Firstly, I’m going to be talking about under-renting. You’re going to be surprised about this one, as under renting your apartment has more of an effect on the value than you would realise. I made a really bold statement in that report, and I stand by it, where I said that for every $20 that your apartment is under-rented, that’s reducing the perception of the apartment's value by $10,000 or more when it's time to sell. That $20 a week is costing you $10,000 and that’s a lot of money. I’ll go through an example and show you how.
Many owners ask me “How am I supposed to know what rent I should be getting?” However it’s not the owner’s fault, it’s the fault of whoever they’re employing to rent their apartment out. That’s a tricky one because 67% of the market is investor stock that is being rented out with the owners not actually living in the apartment. So how are you supposed to know the rental value? It's likely you're in another suburb of Auckland, or another part of New Zealand, or even in a different country.
And if you own multiple apartments, how are you supposed to know what the market rent for those are? Each apartment is different, every building is different, the condition of the apartments could also be very different and so on. So, it’s extremely tricky to know, and ultimately this comes down to the property manager. Just like real estate agents, property managers differ massively in regard to what they deliver and the quality of the service. It is a tough one, but I can help you out with that. Just send me an email at [email protected]
I want to go through an example using my own figures. This involves math, so don’t be shocked. I’m only using general figures.
Now, if you’re sitting there thinking that you're going to sell your apartment to an owner-occupier to get a higher price - well spot on, well done and you’re correct. However, the apartment market is very different to the housing market, because in this market you’ve got a majority of people who are looking to buy apartments as investors, and these investors will push those values up and owner-occupiers will have to come up in price to beat them. This is pushing those values up for the owner-occupier.
As these owner occupiers have to come up in price to beat the investors, it’s actually working in your favour and this is very important. If the apartment you’re renting out is an owner-occupier-type of apartment, of course you’ll want to get the most income possible from this.
I will use a standard investor apartment for this example, which is pretty small, and we will say the market value is around $300,000. Two bedrooms, around 50m2 without a car park, and the investor who’s the typical kind of buyer for this stock is looking for a 7% return. I am using my own numbers for this calculation, every investor is different, but for the example we will say they want a 7% return.
This is a net return which means after expenses, which is the body corporate fees and the rates. A 7% return means if an investor spends $100,000 of their money, each year after expenses they want to receive 7% of their $100,000 back, so seven grand back in income. If it was 8% net return, they would want $8,000 back.
They then use an equation to work this out. There are various equations that are used but they all end up with the same answer. Your income is your rent x 52 weeks. Some investors use 50 weeks, some use 48 weeks, and then you minus your expenses, which is your body corporate and your rates, and then you divide it by the return you’re looking for in the decimal value, which is in this case 0.7 which is 7%, okay? This apartment should be achieving $500 per week to be at market level rent. If it is not achieving this, then it’s either not being rented properly or there is some other reason.
Let’s say the body corporate fee is $4,000, and your council rates are $1,500 per year. Now you have rent x 52, so 500 x 52 minus those expenses, and divide it by that 0.7 which is your 7% return the purchaser is after. This provides you with a figure and that will come out at the value of what your apartment’s worth. So, this investor is saying to you “At that rent, at market rent, to me that’s worth $292,857” and they may go to around a $300,000 purchase price for that apartment.
This is where my job comes in, to make that perception of the apartment as good as possible, to look at the rent trends and see how the rents will go up, and to work with property managers and tenants. That’s something I do with each apartment. Sometimes I will talk to the vendor and ask if they can wait to sell, because I want to be able to make sure that they’re getting the best possible rent they can for their apartment, and we can probably work with tenants and the property manager to see if we can achieve that rent. I don’t do rentals myself, but I know who the good ones are and the ones that I prefer to work with. I can help with that if you’re interested.
I made a very bold statement that each $20 costs you $10,000 as to an investor it’s then worth $10,000 less than it should be. That’s a lot of money. Let’s say your apartment has not rented for $500, where the rent should be, and instead it’s rented for $460 which is $40 a week less than you should be getting. Some people would say that’s not a big deal. But it’s over $2,000 a year, which is a lot of money. It’s really interesting how it affects the value when an investor looks at it.
If you put those figures into the equation that I mentioned before, which was 460 x 52 which comes out around 23,000, minus your expenses, you get a completely different figure - $263,142. That’s almost a 40-grand difference. This shows that if your apartment is not receiving the correct level of rent, even by just $40, the perceived value by the investor has gone down by $40,000. You can really see the effects and why it’s so important to have the right property manager, the right people looking after you and therefore the right advice.
I hope this has been helpful.