David Farrell writes: I am renting an investment unit but after federal and state taxes, various fees and commissions and occasional repairs (one from a break-in) I am lucky if I make 3.5% return from rent and I shudder to think about how meagre the capital gain would be which of course will be taxed as well. I’d be better off with the cash in the bank or even Telstra shares!
A Canberra investor writes: I live in Canberra and up until recently owned three houses, renting out two. Every time we re-let the properties, we would regularly get between 20 and 30 people/groups for the show-through, with about eight people/groups wanting to rent the property. However, the rental returns from the two houses (a three bedroom house at $300pw and a four bedroom house at $410pw) weren’t sufficient to offset the rising interest rates combined with copious government charges in the ACT (particularly rates, land tax – a tax on investment properties, and water/sewerage). The ACT Government charges have all increased substantially year-on-year for the past two years, meaning it made better sense financially to sell the properties and invest in other assets. From personal experience, I consider that there are definitely supply side problems with the market.
Lachlan McLean writes: I have two rental properties in Canberra. I am constantly told by interstate friends and family that I must be raking it in and somehow exploiting my tenants. Nonsense! Here are four reasons why:
- Tax (Land, Rates etc). Land tax in particular in the ACT is huge. It takes me 17 weeks’ rent to pay all the taxes for a low rent inner suburb house. 17 WEEKS.
- Tenant Rights. If I allow a tenant to stay longer than 1 year, they automatically get “ongoing” status, which means that generally I need to give 26 weeks’ notice to end the lease.
- Politicians. The ACT Government is under constant pressure to address the rental issue. Instead of making the ACT more attractive to investors (increase supply), they accuse investors of expecting too great a return. It would be too easy to base their taxes on rental rates.
- Flood or Famine. The ACT market is heavily influenced by the high turnovers in staff in December/January at the major Federal institutions. So this time of year, there is very high demand. However, when I tried to get a tenant in August, I had to drop the price by $30 p/w. So there is a strong incentive to boot tenants into the January feeding frenzy.
Brian Mitchell of Fremantle writes: We’ve owned our investment property for nigh on five years and in that time seen it grow in capital gains from $150,000 to $360,000. We’re in the midst of flogging it right now, in fact. If we’d sold in July-August 2006 at the height of the madness we probably could have got $420,000. But such is life. During our brief sojourn as capitalist pigs we’ve experienced the highs and lows of landlording:
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Tenant 1, $155pw, single guy, neat and paid the rent on time. Left on good terms after 18 months to look after his dad.
Tenant 2, $165pw, young woman but a bit flaky and occasionally late with the rent. Left on good terms after six months to live with friends.
Tenant 3, $155pw, single mum, always late with the rent and always making promises. Ended up owing more than $2,000 and was formally evicted after 18 months and ordered by court to pay back rent, but she didn’t. I never chased her up for the money (didn’t see the point – she clearly was in no position to pay up).
Tenant 4, $170pw, a lovely young couple who’d immigrated from the UK. Perfect tenants. Left after 12 months on extremely good terms to go back to the UK for work.
Tenant 5, $190pw, another lovely young couple, pay the rent on time but not maintaining yard at all.
So, mostly a pretty good experience with only one shocker. But even the good tenants failed to maintain the yard and rarely, if ever, watered the stubble – despite the fact we built into all rents a $15pw rent reduction for gardening. I recently planted a tree and noticed the other day it had died, despite asking the current tenant to keep it watered. We used to be tenants ourselves and we had a good run with all our landlords. We found that if we paid the rent on time and maintained the place they were pretty happy. After capital gains tax, agent fees and the contribution we made to the mortgage over and above the rent, we’ll walk away with about $125,000 profit for the five years, plus whatever tax breaks we received. We’re pretty happy with that. I’m sure that if we kept the place over the long term it would be even better but we were keen to reduce our own mortgage and put more of our income into super and ridiculous fripperies such as holidays.
Keith Mundy writes: Although I have not been offered three months rent in advance I can verify that the market is tight. We have three properties and recently one became vacant. We were getting $135 pw and the agent said she would try for $185, which I did not think she would come close to. While I was painting it I had people coming to the door wanting to rent it then and there and the agent signed on the first day it was advertised, for $200 pw. It’s about time the landlords got something for their investments. The law is skewed in the tenants’ favour too much.
Rental crisis … what rental crisis?
Ben Morris writes: As a landlord in the Neutral Bay area I have suggested to my real estate that the rent should be raised on a property that I own in Neutral Bay in line with the news that there is a rental crisis in Sydney. His answer has been that there are ten pages of properties for rent in the area and if I wanted to lose the current tenant raise the rents and I would have a period of vacancy. Today I have done a quick check of “domain.com.au” and found the following facts on the supposed rental crisis.
On domain.com.au, there were :128 results in North Shore – Lower in Neutral Bay 108 results in North Shore – Lower in North Sydney 166 results in North Shore – Lower in Mosman 73 results in North Shore – Lower in St Leonards68 results in North Shore – Lower in Cremorne
If there were a real crisis one would suspect that the available properties would be considerably fewer.
Why agents won’t up advertised prices
Chris Davies writes: My view is that there comes a point where the additional income an agent receives for increasing the advertised rental amount is insufficient incentive for them to do so. (This is similar to the theory regarding real estate sales described in Freakonomics by Steven D. Levitt and Stephen J. Dubner.) Agents currently have an easy job – they simply open a house for a 20 minute period, stand at the door while 20+ prospective tenants file in and out (often with pre-filled-in rental agreements) then sift applications to the first reasonable candidate and chuck the rest. Alternatively, the agent could recommend a 5% rental increase in advertised rates. On a $1,500 per month property, this translates into around $72 additional income per year to the agent at 8% fees. But to earn this $72, the agent may need to make multiple visits to the property, potentially even talk with prospective tenants and work harder to find a suitable tenant among fewer applicants. They have little incentive to do so.
Some thoughts on housing affordability Loretta Kelly writes: Here’s the story: 1) The property industry has no interest in public policy other than how it will affect developers’, owners’ and agents’ bottom line (after tax) and will talk everything up to further their own ends; 2) Look at levels of demand exacerbated by record levels of immigration irrespective of the States’ and the environment’s ability to cope with infrastructure needs. No matter, as long as business is happy with short-term growth. Land tax is a way that State governments can get some redress and they get pilloried for it; 3) Look at subsidies to existing home owners through zero capital gains tax and tax subsidies to investors (property and anything else) through negative gearing irrespective of whether they are investing in anything new or just shifting around the cans of sardines.