Factors to consider when looking to invest in rental property

The opportunity to earn an income from a rental investment property can be very appealing. Property is often a preferable investment vehicle for various reasons. The main reason being that it does not carry the same risks as other investments because, bar any major catastrophe, property does tend to retain its capital value.

Rental investors will tell you that not all properties are suitable rental investments and sometimes they do not quite deliver the desired outcomes. Thus, aside from the importance of doing your due diligence before investing to ensure you choose the right area, property type, it is important to consider what is involved in managing a rental investment and what factors could influence your anticipated rental returns.

The rental income is what you earn on the property. The rental yield is the percentage return that you earn on your rental investment. It is calculated by dividing the total rental income for the year by the cost of the property and multiplying that by 100 to arrive at a gross yield percentage. The yield will differ depending on the area and property.

There are typically five key drivers which influence rental returns:

Factor #1 - Economic growth and interest rates - a growing economy drives up rental rates. A weaker economy with rising costs and interest rates affects the output costs of the property and the tenant's ability of pay higher rentals, thus driving the income and yield down.

Factor #2 - Location and demand - where the property is located is important because it will affect the demand. Aspects such as security of the area, transport networks, schools and amenities as well as leisure will affect this.

Factor #3 - The property - what it offers, the condition and security will affect the demand. Ensure it is well maintained that it offers adequate accommodation. Beware, extra features or too many bedrooms may not achieve a higher rental rate. Pet-friendly properties are increasingly in demand.

Factor #4 - lifestyle preferences and migration shifts - for example, a trend towards coastal properties or lifestyle estates can result in pushing up demand and rental rates and result in higher rental yields/returns.

Factor #5 - Rental price - while a higher rental rate is often desired as a means to earn a higher yield, the risk comes when it is out of step with other rentals in the area which could increase the vacancy rate and ultimately result in a lower return in real terms.

It is always advisable to work with a credible and experienced local rental agency to mitigate your risks and leverage maximum returns from your investment.

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