Wednesday, April 18, 2012
If you’re buying a vacation home and you’d like to rent it out when you’re not there…or you just want a straight investment that generates rental income…here are our top tips to maximize your property’s rental potential.
1. Rental Yield. The price you pay for your home determines your rental yield (gross yield is simply the annual rent, divided by the property price). You factor in running costs (maintenance, monthly fees, taxes) to get the net yield.
So the less you pay for your property, the higher your rental yield. This is where fire sales and distressed properties come into their own. You’ll pay less for these properties than your neighbor - and command similar rent.
Compare short-term and long-term rentals. Short-term rentals generate more rental income, but they also carry higher running costs. You’ll pay for the utilities, cleaning costs and management fees. And you’ll have to furnish and equip the property before you rent it out. In some markets, you won’t need to furnish long-term rentals and the renter covers the cost of utilities. Plus, you’ll pay a lower property management fee for a long-term rental.
2. Location. It’s always important to buy in the right location. With a rental investment, you need to buy the right property in the right location for your target market.
In cities, you’ll find that certain downtown locations appeal most to short-term renters. You’ll maximize your profit in these locations by buying a one or two-bed condo and renting it to tourists or business executives. But in neighborhoods that appeal to long-term renters you’ll need to buy something bigger than a studio condo.
To get a good overview of the local market, speak with as many real estate agents and property management companies as possible. You can also check out the classified section in newspapers and online rental sites.
3. Competition. You need a market with strong demand for your type of property. You’d like a market with little competition. For short-term rentals, that means a lack of hotel rooms and short-term rental condos. For long-term rentals you should look for areas with a general shortage of rental condos or houses - or a gap in the market. You may find a demand for three-bed houses close to a good school, or a shortage of office space in a city with a growing economy.
Check the current number of hotel rooms and rental units in the market, and check supply in the pipeline. In a slow market where owners can’t sell, many switch to renting. If that slow market has thousands of condos due for completion, and thousands of hotel beds in the pipeline, your rental yield will suffer.
4. Occupancy. Don’t use tourist numbers to figure out your occupancy rate. Tourist numbers include locals returning home, cruise ship passengers, and people visiting friends. They will never rent a property but they can make up half of tourist numbers.
Hotel occupancy rates give you a better handle on the market. But don’t rely on occupancy rates to stay high. Panama City achieved a record hotel occupancy rate of 84.7% in 2007. Today, occupancy in the city hovers around 50%. It’s predicted to fall even more. That’s down to a large increase in the number of new hotel rooms.
5. Market. Widening your market of potential renters will keep your rental yield high. Locations that attract a combination of tourists and business travelers, or domestic and foreign tourists, will keep your property full and your yields strong.
If you’re renting short term, look for places with year-round appeal. It’s harder to make a profit if your high season only lasts for two months. For long-term rental, look for areas where snowbirds want to stay for 3-6 months of the year, or where a growing economy and business opportunities brings in executives for longer periods.
6. Property Management. A good property manager makes all the difference between a so-so rental yield and a great rental yield. And if you’re looking for a hands-off rental property, you’ll need a property manager that covers all the bases - finding tenants, checking them in and out, paying utilities, and dealing with plumbing emergencies at three in the morning.
Ask for the manager’s rates in writing. For short-term, you’ll pay anything from 15%-40% in fees. Make sure that you’re clear on what the management fee covers.
For long-term management, you’ll pay 50%-100% of the first month’s rent if they find you a tenant, and then a low monthly charge of 5%-15%.
Ask how many units your manager currently handles. Find out what systems they have for handling reservations, queries, and reporting problems. Are they an established company with a large client base—or a start-up with no track record?
An established company should give you a clear idea of how much rent you’re likely to get and how much profit that translates to, based on their current listings. Ask them for referrals from clients, and check the data if you can.
Get your attorney to draw up a standard rental contract for you and make sure that your property manager uses it with every tenant.
7. Can you Rent? Get your attorney to check if you can rent your property out. Some countries (Colombia, for example) restrict short-term rentals of 30 days or less in residential buildings.
If you’re buying in a condo building or a private community, check that the bylaws allow you to rent your property out.
8. Taxes. Investigate your tax liabilities. Tax on rental income varies widely from zero in some Caribbean tax havens to 30% in Costa Rica. Find out if you can offset expenses against that tax. Look up property tax rates. And find out if there are any other taxes (wealth tax, luxury tax, or school tax) that apply to your property.
If you plan on sending the rental income back to your home country, ask if you’ll have to pay any extra taxes for those transfers. Remember, you may still have tax obligations in your home country.
To help you calculate your rental yield quickly and easily, click here for a free rental yield calculator.
P.S. Tune in later this week when we’ll bring you a long-term rental opportunity you won’t want to miss.