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RBA leaves cash rate steady

Interest Rates

At today’s meeting, the RBA decided to leave the cash rate unchanged at 2.00%, following the cut at the last meeting. As a result, the Australian dollar rose slightly with shares trading lower.

No real surprises from the RBA with this decision given their preference for allowing time for rate cuts to work their way through the economy. The RBA ended their statement with guidance that any changes to the cash rate ahead will be data dependent, not wanting to indicate their bias prior to the next meeting.

We believe the RBA remains on an easing bias given weakening economic conditions (low wages growth, falling inflation, sharply falling business capital expenditure, subdued public spending) and a stubbornly high Australian dollar.

The RBA’s statement was very similar to last month’s. They noted some increases in bond yields globally, but that long term borrowing rates still remained remarkably low. They also highlighted that weakness is likely to persist in business capital expenditure in both the mining and non-mining sectors, which will result in a drag on private demand. This is likely to further play out in the second half of this year.

The RBA reiterated the work they’re doing with other regulators to contain risks arising in the housing market (Sydney and Melbourne) as well as reiterating the importance of the Australian dollar falling further to assist the economy.

Barring any positive changes to data over the coming months, we expect the RBA to continue an easing bias with another cut to the cash rate possible at the July or August meeting.

 

RBA leaves cash rate steady

Interest Rates

The RBA decided to leave the cash rate steady at 2.25%, preferring to let the February cut work its way through the economy and to retain some ammunition for future rate cuts, if required.

Consensus amongst economists was evenly split leading into the meeting, but the Australian share market appeared to be certain of a rate cut given a near 80 point rise since this morning. At the time of writing, the market has already given 60 points back. In contrast, currency markets appear to have got the call right with the Australian dollar (AUD) up just over 1 cent against the US dollar (USD).

In their statement, the RBA cited the expectation of moderate growth in the global economy in 2015, with the US economy continuing to strengthen in contrast to a slowing China and falling commodity prices.

The main concern for the RBA is the Australian economy growing below trend with weak domestic demand growth and the large fall in the terms of trade (difference between what we get paid for exports versus what we pay for imports) severely reducing income growth for the economy. As a result, they expect the unemployment rate to rise a fair bit from current levels and for inflation to remain low as labour costs remain subdued.

They also cited the pick-up in credit growth, which has largely been seen in the strong growth in lending to investors in residential housing. Though they did note that continued strong house price rises in Sydney were somewhat at odds to the trends in a number of other cities more recently. The RBA specifically made mention of the work they’re doing with regulators to curb risks arising from excessive house price growth.

The RBA maintains the dollar needs to be lower against all currencies, not just the US. They continue to be concerned with the AUD stabilising in the high 70s (against the USD) and actually rising against other currencies, given the expected delay in the US central bank raising rates (second half of this year now looking likely) and the commencement of quantitative easing in the Eurozone (significant downward pressure on the EURO).

On balance, the RBA appears to be waiting on data to gauge the effects of the February rate cut and to assess whether the economy is stabilising or worsening, which would likely lead to another rate cut before the end of the financial year. The path of data is now key.

 

The Sydney market hits the ground running in 2015

Auction Results

In a worrying sign for prospective property buyers the Sydney market has started very strongly in 2015. This time last year the Sydney auction market started very strongly and with some sense of déjà vu 2015 has begun in an eerily similar fashion. In what must be an added worry for hopeful buyers, the RBA has also lowered the official cash once more. Even more so property buyers are spoilt for choice when it comes to securing low interest rates. Investors are anticipated to be heavily active in the market place, especially as vacancy rates and letting times decrease (indicating a tightening rental market may be forthcoming). Overall yields and rental growth still remain subdued; giving some hope to first home buyers in the lower price brackets.

Last weekend the auction clearance rate was a very strong 82% and it will be interesting to see how the next few weeks perform. If the strong results continue we expect more vendors will be encouraged to list their properties for sale and the first half of the year should see worthwhile growth once again across the Sydney market.

 

Interest rates cut as Reserve Bank acts to lift economy

Economic update

The RBA decided to lower the cash rate by 0.25% to 2.25%. The rate and the RBA’s policy stance had been on hold since the last rate cut in August 2013.

The decision was largely unexpected by markets, though recent murmurings had the probability of a rate cut at 60%. It appears the RBA may have moved too early given recent data is seasonal and limited. However, monetary policy settings have eased recently in Europe and Canada, and the RBA may have been concerned with moving too late to cut rates given there is a reasonable lag effect following a change to the cash rate.

In their statement, the RBA cited weakening of the Euro area and Japanese economies, along with the sharp fall in commodity prices, reflecting a combination of lower growth in demand and increases in supply.

The main concern for the RBA was the Australian economy growing below trend with weak domestic demand growth and the large fall in the terms of trade (difference between what we get paid for exports versus what we pay for imports) severely reducing income growth for the economy. As a result, they expect the unemployment rate to rise a fair bit from current levels and inflation to remain low as labour costs remain subdued.

They also cited the pick-up in credit growth, which has largely been seen in the strong growth in lending to investors in residential housing. However, they did note that continued strong house price rises in Sydney were somewhat at odds to the trends in a number of other cities more recently. The RBA specifically made mention of the work they’re doing with regulators to curb risks arising from excessive house price growth. Though, the rate cut at today’s meeting will make it increasingly difficult for them to curb these risks.

The RBA maintains that the dollar needs to be lower against all currencies, not just the US. They appear to have become concerned with the Australian dollar stabilising in the high 70s (against the US dollar) and it actually rising against other currencies, given the expected delay in the US central bank raising rates (second half of this year now looking likely) and the recent announcement of quantitative easing in the Eurozone (significant downward pressure on the Euro).

On balance, the rate cut appears to be a pre-emptive move to counter the expected weaker economic conditions ahead in the first half of this year. Time will tell if they were correct, but we think they have moved too quickly. The market may now begin to expect another rate cut in quick succession, but we think the RBA will hold for at least the next few months to assess the effects of today’s cut.

At time of writing, the Australian dollar is down 1.77% to 0.76 against the US dollar; the equity market is up 1.60% having moved sharply higher post the RBA’s announcement.

Article written by PSK Financial Services

 

2014: The Year in review. 2015: The outlook

Economic update

2014 certainly proved to be a very active and interesting year for the Sydney residential property market. There were highs, lows and everything in between. This brief report will aim to highlight some of the main observations from 2014 and what we may expect in 2015. At present the median price for a detached Sydney house is approximately $844,000 and the median unit price is $581,000 (source: APM). These figures represent an overall dwelling price growth figure of 14.6% for 2014. As the graph below demonstrates, Sydney House prices (unsurprisingly) have outperformed the national market and continue lead the other capital cities.

 

Housing prices 2014

 

Following the strong finish to 2013, pent up demand carried over into Q1 2014 ensured the property market got off to a bullish start.

The calendar year does not always start so strongly and typically the first quarter is comparatively quieter than the rest of the year. However buyer confidence saw some impressive sales results and this set the tone for much of 2014.

From March through to October Sydney witnessed some of the hottest market conditions on record with consistently high auction clearance rates, stemming from record level buyer demand continuously outstripping supply. During this period the monthly average clearance rate was an impressive 80%. As sales results throughout the city continued to surpass both agent and vendor expectations more and more owners made the decision to take advantage of the sellers’ market and list their properties for sale.

There’s always a tipping point in the supply:demand curve and this point appeared to be reached in late Q3 where record stock volumes appeared to be meeting the seemingly insatiable appetite of the market.

 

NOV auc graph

 

At this point the sheer number of properties on the market outweighed the number of committed buyers and the undersupply of good quality properties that buoyed the strong results earlier in the year began to dissipate. Having said that, good properties still sold well but the market-wide ‘heat’ was clearly on the wane. As 2014 drew to a close many Real Estate agents chose to reward themselves for a bumper year and take an early Christmas break. This, coupled with the softer selling conditions, further highlighted the rapid drop off in clearance rates and market activity heading into the holiday season.

A more tangible explanation behind the cooling market conditions was the drop off in rental yields as price growth outpaced organic rental increases. Simply put, the market could not continue to justify rental increases and a natural ceiling was reached. As the growing disparity between rental price stagnation and continuing sales price growth became evident, more and more investors hit pause in order to re-evaluate their investment purchase objectives.

A more pragmatic approach seems to be the order of the day as investors keep one eye on market trends and another on the RBA and the much-debated rate cut “likelihood” at the next RBA meeting.

 

 2015 Outlook

The fact remains that both 2013 and 2014 were both extraordinary years for property growth in Sydney. While our outlook is positive for the local market we anticipate that growth will be more subdued over the course of 2015 and revert to a more stable level than that experienced over the preceding two calendar years.

Loan approval figures remain an excellent way to predict the year ahead. While these remain positive overall they are not increasing at the same rapid rate that they were this time last year, indicating buyer activity may not be as strong at the start of 2015. In fact, according to the ABS, owner-occupier loan approvals have fallen for four consecutive months – irrespective of the perceived housing boom – and this is evidence that positive buyer sentiment has slipped. Despite this fall in owner-occupier approved loans investor approvals remain very strong indicating that property is still seen as a worthwhile investment for many.

The two graphs below show that the value of owner occupier and investor loans for residential property are closely matched while the graph on the right shows NSW has a whopping 47% share of investor loans. If the market does cool expect investor interest to continue to contract to proven areas of growth in established areas with good access to infrastructure.

 

ABS housing loan approvals 20142014 NOV ABS Home investor loan share

 

Another factor contributing to a slowdown is economic uncertainty with specific concern around unemployment figures. With unemployment rising 0.5% between December 2013 and December 2014, now sitting at 6.1%, there will be some knock-on effect on the property market. Low unemployment in particular drives rental growth and thus positively influences capital growth as a result. With low commodity prices and even the resource sector shedding jobs buyer sentiment is likely to be affected.

With some economic weakness many are predicting a rate cut in 2015 to help stimulate job activity and this may, once again, fuel cheap credit and increase interest in property. Rates have now remained unchanged since August 2013 so there is ample scope for the RBA to drop rates if required. The falling Australian dollar will also ensure that interest from overseas investors will remain strong which was a hot topic during 2014 due to the high level of Asian investors active in the market.

In summary, there are both positive and negative dynamics afoot that will make 2015 another interesting year for Sydney property. If buyers stick to the fundamental principles such as purchasing in established locations and at fair market value the medium-term prospects remain very good. While 2015 may not be a massive year there still is great potential to do well.

As always, whether buying, selling or even simply looking to renovate it’s important to seek good advice from a qualified and independent property investment adviser to ascertain the most appropriate strategy for this particular step in your life.

 

Sydney Clearance Rates Ease – Good Buying Opportunities now

Auction Results

Sydney has now recorded its fourth consecutive week of auction clearance rates under 80% with November recording an average weekly clearance rate of “just” 75.8%.

Since June the property market has been running hot. However, with the sheer number of properties for sale (last weekend saw 1,000+ properties go under the hammer) We’re finally seeing some long-awaited dissipation of the market heat. With the year drawing to a close many vendors who have left the preparation of their properties to the last minute are now rushing to list their properties for sale hoping to take advantage of the heated market conditions. However, the number of active buyers has not increased with the influx of properties and now, in many areas, some buyers are spoilt for choice.

While the more desirable properties are still being hotly contested, there are many that are failing to sell at the original hopes of the vendors and their agents and this is evidenced in the increased number of properties passed in, sold after auction plus those failing altogether to sell.

NOV auc graph

Another indication that the unseasonal spike in stock volume is undermining sales figures is in the number of properties being sold prior to auction. This is quite unusual since, for so long, optimistic vendors and bolshie agents have almost exclusively pushed campaigns through to auction day – and to great success.

Now. a significant number of vendors are showing a willingness to take the “bird in the hand” option and lock in a buyer prior to the extended holiday break. Again, this is in stark contrast to the majority of 2014 wherein vendors were happy to let their campaign run through to auction, knowing they’d have good numbers show up to compete on the day.

If you’re in the market to buy and are willing to hold your nerve, now might be a great time to put in a cheeky pre-Christmas offer with some attractive terms.

You never know, they may just take it…

Sydney price growth continues as 2014 sales volume increases

Auction Results

It shouldn’t be a surprise to any Sydneysider that the property market continues to run hot. According to the Australian Bureau of Statistics Sydney recorded an impressive 2.7% growth in house prices for the September quarter. What is surprising is that this growth is almost three times that of Australia’s other cities with Melbourne, Brisbane and Adelaide recording just 1% growth over the same period. This takes the twelve month growth for Sydney to an impressive 14.6%. In comparison Melbourne and Brisbane (the next best performing cities) rose by 6.9% and 6.7% respectively.
The price growth across Sydney has been experienced at all price points with the best performing price bracket being units between $550,000 and $650,000. Compared to previous quarters we have seen a larger number of higher value properties trading. Up until now the market for $2.0m+ properties has been subdued. Home-owners across the board are now more active in looking to upgrade with a greater sense of security in the market and as a result of buoyant selling conditions there are a greater number of homes on the market.
As the year comes to a close and vendors rush to beat the Christmas cut-off there has been a deluge of properties listed for sale and for the first time since July this year the auction clearance rate has been as low as 75%.

Australia’s Property Boom – what happens next?

Economic update

Without a doubt, you’re all aware of the booming residential property market we’ve had for the last few years now. We’ve purposely left the word “bubble” out of our opening sentence, and you won’t see it again in this piece, as the word “bubble” means different things to different people and its original intended meaning has been lost over the years.

So where are we at with regard to national and capital city property prices and what moves are likely from the authorities to curb the current boom?

Nationally, a recent publication in the Australian Financial Review showed house price movements since the end of 1995 and the end of 1999 for Australia, UK, NZ, USA, and Canada.

The same publication also showed house price growth in those same countries since the GFC.

On the Australian capital city front, Sydney and Melbourne have grown the strongest since both the GFC and the November 2010 price peak.

This run has continued so far in the 2014 with Sydney prices up 11.5% year to date and Melbourne not far behind at 11%. In contrast, mining exposed cities Perth and Brisbane have growth at 0.3% and 2% year to date. Auction clearance rates in Sydney have consistently been over 80% in the year so far.

The more concerning is trend that speculative investors now account for as large a share of new housing finance flows (above 40%) as they did during the 2002 and 2003 boom that caused the RBA so much grief. The share of risky “interest only” loans has surged to 43.2% in June, making up around 30% of new mortgages and roughly 60% of new investment loans. This is all in addition to the increase proportion of lending by the banks on a fixed-rate basis – what happens if interest rates are markedly higher than we currently expect when these fixed rate periods come to an end?

In contrast to all this doom and gloom, the household saving ratio remains elevate at levels last seen during the GFC and the early 1990s, interest paid as a percent of household disposable income continues to fall, aggregate mortgage buffers (ie. how far ahead mortgage holders are on their loans) amount to 2 years’ worth of pre-paid interest; and the 90 day arrears rate on home loans is very low at 0.60% or less.

To date, the RBA and the Federal government have maintained that the residential housing market isn’t in a bubble and that house price growth has been sustainable. However, the RBA changed their stance swiftly this week stating that it was worried about the build-up in speculative investment activity to levels exceeding those reached in the last boom in the early 2000s. They also indicated that they have been in talks with other regulators (APRA) to introduce “speed limits” on credit creation.
 

Speed Limits

Whilst we are not residential property experts and cannot forecast whether house prices will rise further or fall, we can shed some light on the potential “speed limits” the RBA and APRA (the banking regulator) are now exploring.

  1. RBA raising rates – the RBA raising rates earlier and quicker than people expect would seriously curb house price growth. The RBA wants to curb excessive growth and growth in certain areas / pockets, so in this scenario rate rises are likely to be slow and steady, but earlier than people expect.

  2. RBA placing “friendly” (private) phone calls to bank CEOs and/or instigating “macroprudential” measures (publicly) – whether a friendly nudge by the RBA or public policy, measures would include limits on loan-to-valuation ratios; limits on debt repayments to borrower income or loan size to income; forcing lenders to lift the interest rate buffer test they use for loan serviceability; placing high risk weights on particular types of loans in particular geographical areas; forcing banks to reduce the number of loans to certain individuals and to certain geographical areas, etc.

  3. APRA forcing banks to lift their capital requirements – this is likely to come out as part of the Financial System Inquiry. There’s been a lot of press from the banks that they are more than adequately capitalised, but given the increasing size of their residential mortgage books and their current all-time low provisioning for bad and doubtful debts, they may not be as adequately capitalised as they think in a severe housing market downturn, in which case they will be bailed out by taxpayer funds (something the government wants to minimise).

  4. APRA forcing the banks to increase the risk weighting they currently assign to loans – extraordinarily, banks have been able to “self-assess” the riskiness of each loan they grant and assign their own “self-assessed” risk weighting to a loan. For example, a $1,000,000 loan assessed at a 15% risk weight, means that only $150,000 is used to determine the capital required to be held by the bank. Risk weights vary globally, but the average is circa 30-35% mandated by a regulator (ie. no self-assessment).

  5. Revamp of the negative gearing and capital gains tax discount benefits currently available to property investors – the government could remove negative gearing on residential property altogether or could reduce the amount of the negative gearing benefit to an end investor. They could also remove the 50% capital gains tax discount for properties held longer than 12 months, or more likely, only allow the 50% discount to be applied for properties held longer than 5 years. The government could also increase stamp duty.

  6. Levy on foreign buyers of Australian residential property – it’s been speculated in the press that $1,500 levy on foreign buyers of Australian residential property would raise circa $400m. Whilst $1,500 is likely in sufficient to curb foreign buying demand, a percentage levy based on the purchase price (ie. 3% or 5% of the purchase price) may do the trick whilst raising much needed funds for the Australian economy.

Of these potential measures, we think points 3 and 4 are highly likely, and that 5 is more than probable, though any changes to negative gearing and the capital gains tax discount are likely to be phased in over time. Point 6 is also possible, but not favourable on a political foreign relations front.

The RBA is highly unlikely to raise the cash rate simply to curb house price growth as it would hurt other parts of the economy which are only just starting to recover and would also put a pause on the Australian dollar falling further. The much talked about “macroprudential” measures are broadly unlikely at this point given the mixed feedback and data from the recent attempts made by the UK and New Zealand, and the potential to hurt first home buyers even more. However, some targeted measures are possible.
 

What does this mean for housing prices and the banks?

If we are correct, the growth in housing prices will slow, but house prices will still grow, just at a more reasonable and steady pace as the RBA cash rate remains lower for longer. For housing prices to fall off a cliff, we would need a massive spike in unemployment and/or a massive spike in inflation and/or China to fall off the same cliff. These are all unlikely at this point. The RBA wants to curb excessive growth and speculation, not bring the property to its knees given the benefits of the wealth effect (ie. steady rising prices encourages homeowners to spend and invest thus benefiting the overall economy).

If we are correct, the profit growth banks have enjoyed since the GFC will stagnant as they will be required to curb the growth in their lending and hold more capital on their balance sheet to protect themselves from housing price falls.

 

Reserve Bank of Australia Interest Rate Decision

Interest Rates

The RBA decided to maintain the cash rate setting of 2.50%. The rate and the RBA’s policy stance have now been on hold since the last rate cut in August 2013. The RBA continues to remain comfortable with a period of stability in interest rates.

The decision was expected by markets given the RBA has continued its rhetoric regarding a period of stability in rates. Specifically mentioned in the RBA’s announcement was growth in the global economy continuing at a moderate pace, with firmer conditions in advanced countries and Chinese growth in line with policymakers’ objectives, with the backdrop of weakening Chinese property markets. Volatility in both bond and equity markets remains unusually low, and markets globally are attaching very low probabilities to any rise in global interest rates or other adverse event over the period ahead.

Locally, resource sector investment spending is starting to decline significantly, with signs of improvement in business conditions and household sentiment, suggesting moderate growth in the economy. The RBA still expects growth to be a little below trend over the year ahead.

The RBA made specific mention that whilst there has been a recent improvement in indicators for the labour market, the unemployment rate has increased recently indicating that there is still plenty of slack in the labour force, with growth in wages continuing to decline and expected to remain relatively modest over the period ahead. This should keep inflation in check.

The RBA also made reference to investors continuing to look for higher returns in response to low rates on safe instruments, the increase in dwelling prices continuing, and the exchange rate remaining stubbornly high and offering less assistance in balancing growth in the economy.

Looking ahead, continued accommodative monetary policy should provide support to demand, and help growth to strengthen over time. We believe the RBA will be on hold for an extended period of time, in line with their rhetoric, considering the economy is still growing below trend, fears of Chinese property collapse have increased, inflation remains under control,  and slack remains in the labour market.

Step 5 – Developing the Right Property Management Strategy

The ultimate goal for many property investors is to retire comfortably, supported by a successful portfolio of ‘set and forget’ properties. While this may easily be achievable for the very few with limitless time available to practice their craft, in reality, the majority of us find it difficult due to the various ongoing commitments we have in both career and family life.

The key to clearing this hurdle is to revisit your specific investment strategy and factor this into your plan. Beginning with the end in mind and taking more of a big picture approach to property investment is why our end-end investment process is so appealing for many investors. Each step covers a separate, specific element of the investment process and enables you to carefully plan ahead so as to avoid making costly mistakes.

Our previous investment articles have used a series of guidelines to help you plan, select and purchase the right asset to match your strategy. Step 6 (next month’s article) will even walk you through the process of adding value to these assets through renovation or re-development.

This next chapter – step five – will guide you through the process of developing your property management strategy. In other words, the strategy you will use to get the most out of the renting out of your property.

Our aim is to ensure that you are armed with enough knowledge to implement a property management strategy that’s right for you and that will ensure you get the most out of your property investment – from having the right tenant placed at the right price and with minimal disruption for the life of your asset ownership.
 

Common mistakes

 It is typical for many investors to rush into this aspect of the investment process and focus solely on ways  to save money where they can. Invariably, this short-sighted approach leads to greater costs in the long term through such things as;

  • Extended vacancy periods – through poorly promoted advertisement
  • Tenancy-related issues: missed/late rental payments, damage to property, tribunal attendance costs
  • Missed rental review opportunities
  • Missed renovation (value add) opportunities

 
Guided by their hip pocket (or desire to get their cash flow moving), many investors will usually choose one of the following;

  • Self-manage their rental property
  • Hire the first property manager they speak to
  • Select the cheapest property manager they can find, or
  • Use a relative to collect the rent

Unfortunately, in almost every case we’ve seen in the above, there was rarely an example of best practice for management of their asset.
 

The Do-It-Yourself (DIY) method of property management can be a disastrous decision unless you happen to have years of local rental market knowledge including having access to detailed market data (e.g.: local median rental returns and yields, market trends and tenant demographics). Additionally, it means being across the changing demographic trends and the idiosyncrasies of your prospective tenancy base i.e. What they are specifically looking for and how much they’re prepared to pay for the right property.

Too many people rush to get their properties tenanted without taking the time to properly plan ahead. Taking that approach increases the risk of getting some element wrong and then ending up worse off.

This approach makes it highly unlikely that the “DIY” method will achieve the same result that a professional property manager could. Penny wise, pound foolish…

Likewise, not taking the time to properly vet your prospective property manager is a common pitfall often resulting in an underqualified and/or, inexperienced manager looking after your investment and seeing your hard-fought gains be squandered through poor ongoing management practices such as;

  • Rent priced above market value – resulting in extended vacancy periods and resultant cash burn as would-be tenants pass over your property to other more realistically priced properties.
  • Rent priced under market value –  Resulting in locked-in losses for the duration of the tenancy (usually 6 – 12 months)
  • Unjustified rent increases – Causes unrest with tenants and can lead to lease break situations and claims lodged with the Consumer, Traders Tenancy Tribunal (CTTT) – time consuming and costly.
  • Missed rental increase opportunities – usually occurs through having a lazy agent or one who is a poor negotiator and who fears losing a tenant even when the rental increase is justified.
  • Poorly screened tenants – Often leading to rental arrears, broken leases, damaged property and time consuming (costly) tribunal attendances.
  • Lack of an effective communication conduit between tenant and landlord – this often results in dissatisfaction on the tenant’s part as they may mistakenly believe that the landlord is unsympathetic to their needs whereas in most cases it’s simply a matter of ineffective communication on the part of the property manager
  • Not understanding the legislation and the tenant’s right to quiet enjoyment of the property
  • Non-compliance with record keeping – Often resulting in claims being awarded in favour of the tenant by the CTTT as a result of incomplete / inaccurate file keeping / paperwork.

 

Typically, the response we hear from clients, after they’ve come to us for help in reviving their portfolios after they’ve made some poor decisions along the above lines, is that they wish that they had done things the right way from the start. 20/20 hindsight sure is a blessing…

The main thing is that they’ve recognised the issue and have taken steps to correct it.

The frustrating thing for us is that there are thousands and thousands of property owners out there whose properties are being poorly managed and where simple opportunities to boost the performance of their asset are missed time and time again.
 

What should you do?

As you know well by now, professional investors always take the time to conduct the appropriate due diligence for each step of the property investment process. Due diligence should be an obvious inclusion at this stage as it helps to confirm that the rental income will be sufficient to address the investment objectives set in place before the property was sourced and bought.

Sadly, this is a step that so many people just don’t even consider.

If professional investors had determined that the rental potential of the property suited their overall strategy and they proceeded to buy the property, they would have a strategy in hand to start making instant rental income through the right property management professional.
 

Benefits of hiring a professional property manager

The only way to really understand the value of hiring a true property professional is to do the right amount of due diligence and select the right property manager.

Hiring a property manager with lower fees doesn’t always mean you’re going to save money. Where you will save money is with a property manager who delivers ongoing exceptional performance.

A good property manager will proactively manage and review your property portfolio (quarterly or bi-annually) and will recommend areas of improvement for the property to benefit you and your tenants. For example, post review of your property portfolio may justify a rental increase, change of tenant(s) or perhaps even a renovation in order to maximise your rental opportunity and create additional equity for buffer or drawdown/investment purposes.

 
The expertise of an outstanding property manager will help you;

  • Make money by setting your property at the right price
  • Make money by using their marketing skills to rent your property quickly
  • Make you money by negotiating the best possible market rent
  • Make you money by guiding you through a renovation to add value/increase rent
  • Save you money by selecting the right tenant
  • Save you money by being diligent with the ongoing management of your property and tenants

 

Follow the following steps during your due diligence finding the right manager.

1.  Go with a specialist

Always enquire with property managers who specialise in in-depth research when managing property. Don’t be tempted to hire a family friend in the business who manages properties in another area nowhere near your property, just because they are offering you a cheaper price. Remember, cheaper rarely means better!
 
2.  Trust your gut

Make sure that you feel comfortable dealing and speaking with your prospective property manager. They should come across as approachable, honest and knowledgeable. Remember, if you get that positive impression, your tenants will likely do so too and have a better experience with your manager.
 
3.  Check their qualifications

Make sure your prospective property managers is a licensed real estate agent in your state or territory. You can easily check this by contacting the Office of Fair Trading (OFT) in your state or territory.
 
4.  Put them on the spot

Ask questions there and then. Many property managers have pre-prepared answers for many of the questions that landlords might ask. You want to know that your manager has the knowledge rather than the script to refer to.

Ask things like;

  • What is your level of experience managing rental properties?
  • Will you be managing my property or will another manager be taking over after I engage your agency?
  • What is your strategy for chasing up rent arrears?
  • How do you approach the issue of repairs and maintenance of a rental property?
  • How would you go about finding the most competitively priced contractors to work on my property?
  • How often do you conduct scheduled and unscheduled inspections on a rented property?
  • How many properties do you personally manage? Many property managers have portfolios that are too large for them (200+) to really work in a proactive manner. They’re usually spending their days chasing rental arrears (poorly screened tenant!) or maintenance issues as opposed to having some breathing space to review your property and assess any value add or rental increase opportunities based on local market conditions.

 
5.  Check references and testimonials

References and testimonials are the key to finding out what your prospective property manager is really like. Each potential manager should be able to provide you with at least three names and contact details of clients (current or former) who can vouch for their service. Check them.
 
6.  Ask about their past

This will give you a fair idea about their professional history. A good sign of their honesty is how they handle themselves in answering these questions on the spot.

Ask questions like;

  • How long have you been in the industry? (many property managers are juniors with little or no professional experience)
  • What was your role or profession before this?
  • How often do you contact your clients and provide progress reports?
  • How do you handle dispute resolution with tenants? Give me an example and how you resolved it.
  • Have you ever been involved in a dispute with any of your landlords? If so, give me an example and how you resolved it.
  • What are your strengths and weaknesses as a property manager?
  • If you were a landlord, would you pay for the services you provide and why?

 
7.   Ask about their tenant selection methods

A great property manager should be able to demonstrate their methods of tenant selection before you enlist their services. Ask for examples.
 
8.   Most importantly, ask about their services

Today’s market is a far more sophisticated one and the days of property managers simply collecting rent and handling repairs should be gone! Unfortunately, most traditional property managers still offer the same old service and view property management as secondary to the core offering of their business model which is usually sales.
 

The range of services you should expect to receive in addition to traditional property management includes;

  • Strategic property investment advice
  • Property structure and finance strategy advice
  • Tailored property management solutions including provision of structured rent reviews and lease renewals integrated with renovation and value-add commentary in order to unlock equity and maximise yield
  • Quality renovation advice and project management
  • Portfolio review – providing tailored ongoing advice and support with respect to the performance of your investment property vis-à-vis local and wider market conditions
  • Non-property related advice, including superannuation / retirement planning, risk protection, direct share advice, taxation and estate planning

If you don’t currently have access to the above services as part of the overall service offering of the company you are either with or are considering using, then there are alternatives and would encourage you to pursue those before signing or renewing any agreements.
 

In next month’s article we look at the importance of developing the right renovation plan and how you can transform a dilapidated and undervalued property into a polished, well-oiled wealth creation machine – on time and on budget.