Today, I thought I’d write a post regarding a favourite topic of mine: “rentability” or actually “considering the rentability” of a property as part of the investment property assessment process. This is something I feel is often missed by investors, who in the excitement of securing a property, they don’t really think about the long term ability of the property to get rented and get rented out quickly in a tough market.
Whilst investors are mostly concerned with future growth when assessing a potential investment property, the property’s ability to rent quickly in a tough market – as will be the case sooner or later – is often not a major consideration. This article aims to get investors, as part of their pre-purchase assessment, to also consider the rentability of the property before they commit to large sums of money.
Rentability in simple terms is a property’s ability to rent quickly. And whilst in a landlord’s market, this isn’t an issue, in a tough market whereby the tenants have all the power which will happen sooner or later, rentability can be critical. Think of Sydney right now for example, whereby some properties in certain pockets, have had their rents not only sliced, but stayed vacant for weeks, whilst others rented in one open!
Rentability is a rental property’s ability to rent quickly in a tough market.
Pure mathematics suggest that the more appealing a property is to the largest part of the available population, the easier and quicker it will be to rent. The part of the overall population that finds a particular property appealing, is known as the target market for that property. It is a fact of life that EVERY property and property type has its own target market, and landlords ought to know what that is.
Have you ever considered the target market of your property?
Whilst there are exceptions, in general terms the target market for…
- 1 bedroom units/apartments is singles or couples,
- 2 bedroom units/apartments/townhouses/villas and even houses, is couples with 1 or 2 small children, but also increasingly 2 or 3 friends/couples/students looking to share costs,
- 3 bedroom units/apartments/townhouses/villas is families with 2 or 3 small children or teenagers, and
- 3+ bedroom houses is larger families with 5+ occupants which could be any combination of 2 families, parents, children, grandparents, the brother or sister of one of the parents etc.
Target Market is the cohort of the local population that will find the property appealing
The bigger the part of a particular demographic a property appeals to, the bigger the pool of possible tenants, and the quicker the property will rent. For example, if a 1 bedroom apartment ticks all the boxes, then the target market is EVERY single or couple looking for a property in that area. Having 100% of the target market interested, there is a very good chance the property will be rented out to the first people that walk through the door. The rentability of such a property therefore, is high.
The opposite is also true. If the property doesn’t tick all the boxes, then the target market reduces with every added unticked box. With reduced target market, the rentability is also reduced. The more boxes the property doesn’t tick, the smaller the target market and the lower the property’s rentability.
Let’s consider for a moment a perfectly renovated 2 bedroom apartment on the top floor of a 3 story apartment block with no lift. The fact that this amazing property is on the top floor, would immediately eliminate from the target market most potential tenants over the age of say 45 or 50 and anyone who wouldn’t or couldn’t climb 6 flights of stairs every day. It would also remove everyone that is unfit (trust me it takes a lot of effort to take your shopping up every week), anyone that is physically incapable of climbing the stairs (a disabled person, or small kids) and would also remove all couples expecting a baby (now or in the near future). Lastly, it would reduce a lot of the people who themselves may not care for the flights of stairs but have close friends and family that do. Few families will rent this particular property, if they have grandparents or a relative on a wheelchair.
The rentability therefore of a property on the top floor of a complex with no lift is severely impacted!
This was just one example, but there are many others – let’s call them “inhibitors”. The following are some such inhibitors but there are others:-
- Bottom floor unit on a unit complex but no security bars on windows, would remove from the target market anyone concerned about security (ie families with small children, females)
- Properties over 1.5 kilometers from transport would remove from the target market everyone needing to catch transport to go to work every day.
- Properties with dated/small/uninspiring kitchens would remove those that love to cook. You would be surprised how often we miss out on a great tenant on an old unit because their fridge doesn’t fit in the allocated cabinet space (fridges were a lot smaller in the 70’s)
- Small uncovered backyards would remove the entertainers
- Large grounds, lawns and gardens would remove those that are time poor
- Property on main road, would remove the majority of the target market as those properties are noisy and hard to drive into and out (tenants and guests)
- Properties painted with unusual colours (red, green) would remove everyone who doesn’t like that style
- Properties with swimming pools will remove anyone that doesn’t want to hassle to keep it clean
- Properties opposite/next to a cemetary or a funeral home would remove anyone that is worried about that kind of thing
- Power Lines in property, next to property or on plain sight would remove those that are conscious about their health and aesthetics
- Unusual property (badly done DIY renovation or conversion) will remove anyone that has attention to detail
- No garage or carapace would remove everyone with a car
- Sloping backyard would remove families with small children
- Properties who’s neighbouring houses overlooking onto the backyard will remove those that are privacy conscious
- Properties in strong local demographic (religion, ethnicity) would remove most of the target market that doesn’t belong to that group
and so on.
Have you ever thought about the inhibitors impacting the rentability of your property? My favourite has to be properties that don’t have good mobile coverage! This is a major issue and the chances of attracting and keeping a tenant if you are unfortunate to have a property on a black spot, is zero to none!
The more inhibitors, the smaller is a property’s ability to attract and maintain a tenant!
And it goes further… The more the inhibitors, the smaller a property’s rentability. A bottom floor 1B apartment in a large complex whose interior is visible through unsecured windows from common area walkways, 2 kilometers from the train station, on a main road, with no parking, opposite a funeral home, would be difficult to rent, as the target market is tiny.
Now let’s be clear… The perfect property that would appeal to 100% of the target market doesn’t exist. And if it did, it would be expensive enough to immediately knock out all the price conscious prospective tenants in that demographic. So why this article? Because I think there is value in, when assessing an investment property, thinking about the property’s target market and it’s long term rentability prospects. If nothing else, there is value when making the decision to purchase a property, to know what to expect afterwards – especially if cash flow is important.
Vacancy rates are a great indicator, but markets with low vacancy rate that look amazing on paper today, will not be in only a few years’ time. Vacancy rates change but rentability is forever!
Vacancy rates change every few years, but a property’s rentability is forever!
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