Many investors may think that it will be easy to generate passive income from their rental properties. However, it still requires you to take an active role, as you need to make sure your rental is up to standards and know your obligations as a landlord.
Thirty-two percent of Aussie households are renting from a private landlord or a state authority, according to the Australian Bureau of Statistics’ 2019 data. This figure is up from 30% in 2015-16 and 27% in 1997-98.
This rising figure makes rental properties a possible great investment, but as with anything else, one needs thorough planning and research before purchasing a rental.
Some of the things a budding rental property owner should do are:
- Set a goal. Your finances dictate what you want to achieve with a rental property. Consider your goals, your timeframe and where you want to invest. Set realistic goals based on your budget.
- Monitor trends. Looking at employment and population trends may help you scout locations where you could purchase a rental property that may earn you a profit.
For example, if you’re looking to invest in a rental property, you may want to look at areas with higher demands like Sydney and Melbourne, as prices in these cities continue to increase because of strong population growth and employment.
Consider looking at the latest population and employment trend through the Australian Bureau of Statistics’ website.
- Know what tenants may want. Consider wearing the tenants’ shoes when looking at rental properties as an investment. Some of the features tenants may look for in a rental are accessibility, schools nearby, security, and activities in the area that fit their lifestyles, but it will depend on the property type and location. Young families may want access to schools, while professionals want to be near to the CBD for work, for instance.
- Know your obligations. Even if you plan to hire a property manager to do most of the leg work for you, it’s important to know your obligations as a landlord. Some of these obligations are maintaining and managing the property, treating potentially health-threatening issues, and anything else specified in the tenancy agreement.
To know more about your rights and obligations, visit the following government websites:
Generating passive income
Passive income is money you earn from a source that doesn’t require a lot of effort from you. It may boost your finances and help you reach your goal a bit faster. These steps may help you avoid financial woes and start generating passive income from a rental property:
- Consider out-of-state investment. Buying a rental property out of your city may be a good strategy. It means you’re not limited to your area’s market and you may find the best deals within your price range if you opt to invest in more affordable areas outside of your own suburb.
Investing out of state may also require you to hire a property manager to maintain your rentals, but it means you will be less active in managing the property and its tenants.
Check out our Top Suburbs page to see which areas have a growing property market and may be ideal for your rental investment.
- Avoid the 'too good to be true’ offers. Stay away from money traps at all costs. It may be tempting to invest in so-called bargains being offered left and right. However, if it seems too good to be true – it probably is.
Many investors have been blind-sided by spruikers, losing their hard-earned cash. The Property Investment Professionals of Australia (PIPA) has heard of developers being offered “cash back” deals of tens of thousands of dollars to encourage buyers to invest in inferior properties, says PIPA chairman Peter Koulizos.
To avoid falling for dodgy operators, ask as many questions as possible. Unscrupulous advisers will never disclose how they make their money in commissions, but an ethical adviser will be honest and transparent. Ask if they are a member of PIPA or the Property Investors Council of Australia (PICA).
- Screen tenants. Screening tenants seems like hard work, but it is never a step worth skipping. Your property manager will do this for you, but you ultimately have the final say. Some of the things you may want to do when screening a tenant are:
- Request an application with formal identification
- Run a credit check
- Run a background check
- Get in touch with previous landlords and current employer
- Interview the tenants
A passive income is a by-product of good tenants. When they pay rent on time and maintain their rental home, it helps with minimising maintenance and repair costs. A bad tenant, on the other hand, can be a headache that may cause you losses.
- Hire a property manager. Unless you’re ready for all the responsibilities of a landlord, hire a pro to manage your rental property. It doesn’t mean that the property manager will do all the work while you just wait for your monthly passive income, though. It means the property manager does most of the leg work for you. The manager can budget maintenance costs, collect rents, advertise vacant units, find tenants (that you will then screen), and manage other property employees.
Protecting your rental investment
Now that you’ve gotten the hang of managing your rental property, consider having an insurance policy in place to protect it. Landlord insurance, while not a legal obligation, has been an industry practice that many property management teams require. It may help you cover from losses connected with your rental property.
Landlord insurance usually includes coverage for the following:
- Loss of rent
- Legal liability
- Emergency repairs
Landlord insurance may help you protect your investment and your passive income from future issues that may arise. Speak with a professional about your options and discuss what is best for you and your investment.
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