Under Renting your Apartment is Costing You More than You Think
Apartment Specialists Podcast No: 4
Learn the 10 costly mistakes most Auckland apartment owners make. We'll also tackle the ways on how you can avoid these blunders. Why under renting your apartment can cost you a lot of money? All these from this podcast!
Good day, it’s Andrew Murray from the Apartment Specialists back again. And today I’m going to be talking about, or going through the 10 mistakes Auckland apartment owners make that are costing them – that I see them making that are costing them thousands of dollars when they come to sell their apartment. So it’s a bit of a biggy. Now this is from a report I put out that I’ve had a lot of positive feedback from and I’ve had people ask me to go into more depth into each one, so what I thought I’d do is each podcast I’d go into one of these points.
So the first one I’m going to be going through is about under-renting. Now it actually has a bit of an exponential effect, it’s a lot more than you think and I think you’re going to be quite surprised with this one. Okay so I made a very bold statement in that report and I stand by that, that every $20 your apartment is under-rented, when it comes to sell, that’s reducing the perception of value by $10,000 or more. So that $20 a week is costing you 10 grand and that’s a lot of money. And I’ll go through an example and show you that.
Now a lot of owners have asked me “Well, how am I supposed to know what rent should I should be getting?” Well, the thing is, it’s not your fault; it’s who you’re employing to do it. And that’s a tough one because if you look at the market being 67% investor, so being rented out and the owners not actually, like you, you’re not actually living in your apartment, how are you supposed to know? You’re going to be in another suburb of Auckland, another part New Zealand or in a different country.
And if you’ve got one or two in a building, how are you supposed to know what the market rent is? And each building is different and then each apartment is different, and then the condition of your apartment and so on. So, it’s very, very difficult and it comes down to the property manager, where, I mean, that differ, it’s just like real estate agents, they differ so hugely in regards to the service and what they do deliver. So yeah, it is a tough one yeah, but I can help you out with regards to that. Just drop me an email to [email protected].
One easy one would actually be able to go to www.apartmentspecialists.co.nz to the website and a) you can download the report that I’m going to talk to, if you haven’t already downloaded it, the 10 mistakes that’s costing you guys a lot of money, and also a report on how to know if you’re being looked after in the rental market and how do you know if you’re receiving the right rent for your apartment? And from there, you can figure that out.
Anyway, so I want to go through an example today using my own figures. Now it is involving maths, so don’t be shocked. So what’s I’ve done is, I’ve put them on, I’ve totted the numbers on a piece of paper, okay, sort of like, you know when you come through - not through customs, but you come through an airport and you come and see everybody and you see these guy’s holding up names? It’s going to be a little bit like that. So anyway, I’m only general figures.
Now, if you’re sitting there thinking “Well my apartment’s got a vista” or “My apartment, buyers or purchasers, I’m going to sell them to owner-occupier and get a higher price”. Well spot on, well done and you’re right. But the thing is, when you look at it, what do you think is pushing those values up for the owner-occupier? It’s very different to the housing market because this market you’ve got a majority of people looking to buy apartments who are investors and investors will push those values up and owner-occupiers will have to come up and beat them.
So it’s pushing the investors up, the owner-occupiers are going to have to come up, you see? So it’s actually working in your favour and very important. And if it’s an owner-occupier-type of apartment but you’re renting it out, well, of course you’ll want the most income possible.
Okay, so let’s say, let me just use a typical investor apartment, pretty small, valuing around about, say the market value is $300,000, okay? So two bedrooms, around about 50m2 and it’s got no car park, and the investor, so an investor who’s the typical kind of buyer, is looking for – I’m using my own numbers again, every investor’s different – so in this case it’s a 7% return, okay? So his goal is a 7% return.
Now this is a net return, what net means, it means after expenses, okay so after your body corporate and after your rates. Now people say “What’s a 7% return?” Now, that is if you take a 7% return means if an investor spends $100,000 of their money, each year, after expenses, that’s net, 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. So you get my drift, okay?
Now, they use an equation and there are various equations that are used but they all come out with the same answer. Okay, so if you’ve got, so here we’ve got your income, which is your rent x 52 weeks. Now 52 weeks, some use 50, some use 48 and then minus your expenses, which is your body corporate and your rates, as I mentioned before, 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? Now, so your apartment – so for this apartment the market rent is $500 per week, so that’s what it should be receiving, okay? And if it’s not, it’s not being rented properly, okay, or there’s another reason for it.
Now, the body corporate fees $4,000, just a round figure, and your council rates are $1,500, so that’s your expenses, your outgoings. So we put that into the equation. So you have rent x 52, so 500 x 52 minus expenses, which is your 4000 for your body corporate, $1,500 for your rates, and divide it by that 0.7 which is your 7% return the purchaser is looking for. And so what that does it gives you a figure and that will come out at the value of what your apartment’s worth. So this investor is saying to you “Okay, at that rent, at market rent, to me that’s worth $292,857” and they may go to around $300,000 to purchase that apartment.
Now this is where it’s my job to make that perception as good as possible, that the rents are going to go, you know, looking at the rent trends to try and get that rent up as I can, work with the property manager, work with the tenants and that kind of thing. And that’s something I do with every apartment. Some will actually say, unless it was an emergency to sell, I’d go “Can you wait? Because I want to be able to make sure that you’re getting the best rate you can for your apartment and we can probably work with tenants and the property manager to see if we can achieve that”. Now I don’t do rentals myself, but I know who the good ones are and the ones that I prefer to work with that I can help with if you’re interested. Apart from that.
Now, so what I’m going through first of all, let’s say – I said a very bold statement in that, and I mentioned it earlier, about that every $20 costs you 10 grand. So every $20 your apartment is under-rented or not getting the rent is should be, you’re receiving, well, it’s worth to an investor’s value $10,000 or more less than it should be. Now that’s a lot of money, okay? So what I’m saying is, I’m going to say okay, let’s say your apartment has not rented for that $500, its market rent which it should be, it’s rented for $460. Okay so that’s $40 a week less than you should be getting. Now some people go “Okay, well that’s not a big deal”. Well for starters, it’s over $2,000 a year, right, which is a lot of money. But you’ll see where it really gets interesting is when it comes to the value on how an investor looks at it.
So, when you put those figures into the equation that I talked to you before, which was that 460 x 52 which came out around 23,000, minus your expenses, you come out with a completely different figure. Now wait for it – woo - $263,142. That’s almost 40 grand. Okay, so that’s just from having your apartment not receiving the rent it should be, just by $40, the perceived value by the investor has gone down by $40,000. So now 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 the right advice.
So I hope this has been helpful. Next week I’m going to be talking about traders, how traders purchase property, how to make sure, how to know if there’s trader interest on your property when you’re selling, what happens in this market with traders. Now, traders are people who buy apartments off you guys, off owners and sell it at a profit. And the weird thing is, is that the majority of traders’ deals they get through real estate agents. So that means you’re paying for a fee, sell to a trader who makes it a profit. So it’s how to be aware of that, understand it in this market, and make sure it’s not you.
Anyway, so, also when looking at this, what I’ve done is, if you haven’t already downloaded this report, I highly recommend you do. I’ve had a lot of really good feedback from it and it will help you obviously with the future podcasts. So just go to www.apartmentspecialists.co.nz, put in your email and I’ll send it out to you and, yeah, hope it helps.