A rented property that returns more in rent than it costs to hold in bank interest, maintenance, property management fees, insurance and other expenses is called positively geared. A property that costs more to hold than it returns in rent is called negatively geared. Always be sure to take all the expenses associated into account when you are researching a property. Some units and apartments may have higher than expected strata fees, or an upcoming expense related to the strata that you will pay not long after you buy the property.
Generally on a very low income you will have difficulty affording to buy a property unless it is positively geared. A negatively geared property will reduce an already low income even further, with the extra downside of having your losses added back on to your income for calculating your entitlement to Family Tax Allowance.
With the current price of property in Australia it is reasonably difficult to find a positively geared property. They are mostly found in regional areas where it may be harder to find tenants. You will need to do your research to find positively geared properties in areas that have strong demand, and you will likely need to travel some distance to find them.
If you have a large lump sum of cash and can afford to buy a house outright without needing to rely on rental income to get you across the line for a loan, be careful that you are buying a house that has a yield better than you can get by leaving your money in the bank. Many high interest bank accounts pay around 6% and can give a better yield than buying a rental property outright.
If you can't find a positively geared property but can find lots of houses that are only a few dollars a week below being positively geared, or you just want to earn more rent, there are many different ways to turn a house with a low yield into a much higher one. Some of these ways are:
A house in poor condition or with a very dated kitchen and bathroom will often rent for a lot more if it is updated. Even a coat of paint and some new carpet can make a huge difference. Going further, adding an extra bedroom or bathroom can also considerably increase the rental on a house, particularly if you are converting a 3 bedroom 1 bathroom house to a 4 bedroom 2 bathroom house in an area with a strong demand from families.
If you own a house on a block that is large enough to split into two or more smaller blocks, you can offset a lot of the cost of buying the first house by subdividing the block and selling the newly created block/s of land. With a much lower debt, the house will have lower expenses, which means more money in your pocket.
- Add a granny flat
If there is not quite enough space in the back of your rental property to subdivide there may still be enough to add a granny flat. The granny flat can then be rented separately, adding to the amount of rent you get each week, or you can live there yourself. Living in the granny flat can be a great idea; it is probably cheaper than renting another house yourself and you can keep a close eye on your rental property.
- Manage your own property
If you live close to your rental property, consider managing it yourself. You will need to educate yourself on the legislation in your state and adhere to the letter of the law, but most importantly you will have to treat your property like your business and not let your tenants fall behind on rent because you like them or feel sorry for them. Managing your own property is not for everyone, but can save you up to 10% of your rent each week and is worth looking into if your budget is very tight.
- Renting by the room
Instead of renting your entire house out, consider renting out each room separately. The combined rent for a house leased this way can be much higher than renting it as a whole. This strategy is most effective if your house is near a university and you can rent to students. If you are concerned at the wear and tear on your house, consider living in it yourself and sharing or offering board instead.
Continue reading to the next technique for making money from property - subdividing.
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