The obvious answer is to keep the tenants in residence. This incurs the least loss of income and unless the house is really dirty and untidy, a house usually presents better with furniture and household items making it look lived in.

However, there are times when a tenant in residence could be a financially less rewarding scenario. Tenants who do not want to move can put a lot of obstacles in the way of a sale. They can limit and postpone inspection access almost at whim in spite of legally having to provide ‘reasonable access’ (what is ‘reasonable’ to one person may not be ‘reasonable’ to another). By the time this sort of obstacle is sorted out, valuable time has been lost and many purchasers have moved on. If the market is not trending up, this can result in a lower sale price as the market drops before the property can be sold. Furthermore, if the seller is using the money for another financial project, delays in having the money available could cost them the project or render it more expensive if bridging loans are required.

Disgruntled tenants can also highlight the property’s faults in order to put off prospective purchasers and while many owners are happy to absent themselves from the property to allow the agent to show the purchasers around at their leisure and improve their selling prospects, tenants have no such motivation to leave the property and many reasons to stay watchfully present.

Sometimes property owners have no inkling that tenants will behave badly in the event of a sale, but there is a bit of basic research investors can do to try and determine whether their tenants will play ball. Ask your agent how easy it has been for the agent to get access for periodic maintenance inspections or for tradespeople who have been contracted to carry out work on the property. Tenants who have been slow to concede access for activities such as repairs that will benefit them are highly unlikely to come to the party when they think they will ultimately lose their home to a successful purchaser.

The interest rate rises of late 2009 and the predicted rises through 2010 means that investors will be very keen to maximise the rent they achieve throughout 2010. Falling stock levels of properties to rent, particularly family homes has increased competition considerably and will ultimately lead to increases in rent prices. We’ve included below a few tips for investors to maximise their returns this year.

• Ensure your property is attractive to great tenants – if the property needs repainting or recarpeting, do it;
• Adopt the attitude that saving money by not maintaining the property costs you much more in the long term;
• Speak with your accountant or tax adviser about whether there are tax advantages to renovating your property; the answer to this question will depend on your overall financial position and requires specialist advice;
• Have all expenses ie. council, insurance, repairs paid from your funds by your managing agent so that everything shows on your statements and nothing is forgotten at tax time;
• Ensure your property is professionally managed; do they conduct regular routine inspections and provide a written report with pictures? do they assess the rent regularly?;
• Take your agent’s advice on the rent to ask for a vacant property. If you don’t trust their advice they shouldn’t be managing the property for you and getting a tenant today at 5% under what you’d ‘like’ normally beats getting a tenant in a months time.

For professional property management advice please feel free to contact me on 02 4980 4400 or email jane@omeara.com.au

Once they start looking after the property on a day-to-day basis, most investors realise they don’t have the level of expertise required to maximise income and minimise expenses. They realise that they cannot do the work cost-effectively, and that tenancy legislation is best left to the experts. Most novices need to spend a disproportionate amount of time making sure they get it right. Even then they worry that they haven’t thought of everything. Most find it an enormous relief to hand over to an expert who has the up-to-date legal knowledge to prevent problems developing. Most investors report an increase in their net income as well as in their leisure time.

Happily, most people hand over to an agent before things go wrong. They realise that staying up-to-date with week-to-week fluctuations in the rental market is difficult for those not in the business. It takes a lot longer for trends to become apparent to people who are looking after just one or two properties. Do-it-yourself investors do all the work themselves and it may still cost them money in higher vacancies. It’s also very hard to keep a distance from demanding tenants when there is no third party to liaise.

Communication and arbitration is also an area where the objectivity of a third party is essential. Dialogue via a disinterested third party minimises income-reducing anger and personality conflicts. Even negotiating rent is difficult for a landlord, firstly because of the emotional involvement and secondly because of lack of experience.

What is a reasonable rent to set? What are fair and reasonable repairs? How can I make sure the lease covers every contingency?

The answers? Do your homework, find out who are the most professional managing agents in your area and ask them to manage your precious investments.

In most areas there has been a rush on dwellings that fall into the first home buyer category now that governments are offering grants to help first home buyers get into the market. As a result, many investment property owners are thinking of putting their properties on the market for sale while the chances of a high price are looking good.

Is this the best way for them to go?

In fact, selling too soon often delivers the opposite of what investors are hoping for. Every real esate sale incurs costs which eat into the profits, so selling too soon often reduces the overall gain especially if they sell before they have held the property long enough to see serious capital appreciation.

It seems that investors who get itchy feet have lost the sense of deferred gratification that led them to invest in property in the first place. They are tired of making sacrifices to pay the extra mortgage and they expect too much too soon. Maybe they have forgotten that the most effective way to enjoy their increasing wealth is to let capital appreciation and rent increases do their job over time. Holding investment properties long-term means greater wealth when it is needed (usually on retirement when income from work ceases.)

Instead of selling, investors who really want to improve their long-term wealth would be better off increasing their loan and buying a second investment property (provided they bought sensibly in the first place of course!) Astute investors keep buying more properties as their borrowing power increases with the rise in equity that accrues with capital appreciation.

It is true that some short-term self-sacrifice is involved in this strategy. Investors buying their first property are usually stretching themselves just to get a foot on the investment ladder and there is little money left over for luxuries. It is not until their portfolio grows in size that they will be less stretched and more able to increase their lifestyle spending without selling a property to do it.

The best strategy for most investors is to embark on a program of planned property investment at their earliest financial convenience – usually when the equity in their family home reaches a fairly high level and after consulting their accountant.

Then they simply keep adding to their portfolio until they increase their assets to the level that suits their aims and aspirations.

Firstly, ask yourself whether improvements will make your house significantly better than the others in your street. The best-house-in-the-street phenomenon is often an unhappy one as the values of the other houses in the street affect the upgraded one – after all, this is not a street where purchasers will be looking to spend the higher prices the vendor is after. Those who renovate above and beyond the level of surrounding homes are less likely to get good capital appreciation when they sell.

Furthermore, do the changes you are making really improve the home? Many home owners simply increase the cost of their home without necessarily adding to its value, because some alterations don’t improve the standard of the property enough to compensate for their cost. Others leave a mishmash of disparate styles, or serve only to emphasise the datedness of the original house, or are too personal in their application to have wide appeal and so end up worth less than they cost.

It is not even uncommon for home owners to sacrifice one feature to gain another, thereby adding cost but not value. Frequently reported examples of this sort of expenditure include turning a bedroom into a dining room or a garage into a rumpus room.

Ideally, extensions should be seamlessly integrated with the original home. Many three-bedroom homes don’t “work” once a fourth bedroom and family room are added – the original rooms may be too small to balance the extensions. Furthermore, bad design resulting in poor natural light or an inconvenient floor plan will be reflected in the sale price of the property. Many of these problems could be avoided if architects were consulted before the work was undertaken. “Saving” on the cost of an architect is nearly always false economy.

Sometimes renovators over-capitalise by deviating from their budget during the course of their renovations. Many homes and locations don’t justify the top-of-the-range appliances and fittings some renovators choose. And if renovators run out of money before completing the work or have to skimp on the finishing touches, the overall effect can be disappointing and limit the ultimate selling price.

Home owners concerned about investment potential should also think twice before making changes for their own unique needs. Above all, major work should not be carried out if homeowners plan to sell in the near future. Sometimes a homeowner will ask a question such as: “I am planning to sell in a year but the house could do with a new bathroom. Should I undertake the work?” It could be argued that the home owner will get the benefit of using the new bathroom for the year until the property is sold, but unless they are in a location or marketplace or price range where the cost of the bathroom will be easily absorbed in the overall capital increase during the next year, it would be pointless to renovate the bathroom only to sell it. Prospective buyers may want an entirely different bathroom, or a bathroom that is very new might make the kitchen or other areas of the house look as if they need work.

The state of the market can also be an important factor in the overall cost-effectiveness of renovating a property. In a buyers’ market, such as we are currently experiencing in most parts of Australia and New Zealand, it often makes sense to take advantage of someone else’s hard work and expenditure rather than embark on costly and time-consuming renovations of your own, unless you are so attached to the property that you can’t bear to leave it, or unless you live in an area or type of home where there is always strong demand and low supply. Trading up in a buyers’ market should actually produce a financial advantage as you inevitably ’save’ money when you purchase a more expensive house on a slow market. (For example, do your sums and work out why a 10% ‘loss’ on a $500,000 home that you are selling is less than a 10% gain you make on the $750,000 house you are buying which is also ‘losing’ its owner 10%). Trading up makes even more sense in areas where First Home Buyers’ Grants are raising the price of the kind of house you might be selling but not affecting the cost of the home you are planning to purchase.

At the same time, quality of life is also important and the good news is that if people stay in a property long term the cost of idiosyncratic changes will usually be absorbed in most locations experiencing growth. The question of whether they would have made more money by making different choices often simply doesn’t come up.

Homeowners wanting to maximise the investment potential of their homes should consider consulting an estate agent with whom they have a good relationship before making improvements. In many instances, agents aren’t called until the work is nearly completed and it’s too late to choose a different path. Builders can tell you what your renovations will cost but only an experienced, well-referenced estate agent can tell you whether the value is worth the cost sufficiently to justify the expenditure.

It’s understandable that an investor’s most immediate need is maximise income and minimise expenses. Most investors are borrowing money and they and their managers become obsessed with immediate return because it’s often crucial to the ongoing survival of the investment. The worst case scenario, stated simply is: no rent = no income = no loan re-payments = no investment.

For experienced investors, however, income is one part of an overall strategy. Most have three main aims: optimum income, optimum expenses and a focus on capital appreciation. They choose an agent who will optimise their income-to-expenses ratio over the long term and who has expertise to look after the big picture.

For example, when the floor coverings in an investment property need replacing, buying the cheapest carpet will certainly minimise expenses at the time of expenditure; however, if the carpet doesn’t wear well the saving may turn out to be less cost-effective in the long term than a carpet that was a bit more expensive but lasted twice as long.

Capital growth is usually the most important of the investor’s three aims and it is often overlooked by property managers with a narrow focus on management rather than investment. If investors hold their property for any length of time (which most successful investors do) capital growth becomes the most wealth-producing part of the overall investment strategy. Only a good property manager will keep the big picture in view and advise the investor about events impacting on the growth of their investment. When selecting an agent to manage their property, investors should assess whether the agent is qualified to give this kind or advice and make sure the management programme includes regular inspections and written reports (with photos & advice).

Investment income
With prices at the bottom end of the cycle, rental returns are at probably the maximum you’ll see for many years.

Cost of borrowings
With 5 year investor mortgage loans available at around 7% and with rate rises being telegraphed pretty clearly by the Reserve Bank, there is a clear cut path to locking in costs for the next market cycle.

Demand
Continuing population growth, increases in immigration, first home buyer subsidies, historically low mortgage rates, state government stamp duty packages and continuing stock shortages say it all really.

The simplest law of economics states that when demand exceeds supply prices will increase.

Add value and keep control
When I buy shares in BHP Billiton (fine company that it is) I have zero ability to change the way they do business. When I buy a unit or house I know exactly what I have to do to increase both its rental value and ultimately its resale value.

Location
There are libraries full of data about each and every post code in Australia. You have access to council, state and federal government data that may impact the value of your investment. You also know how much each post code averages in both rental yield and capital growth.

Although we seem to be heading towards economic recovery faster than everyone expected, some market commentators are still predicting rough weather in the next few years as many corporate and sovereign debt issues have yet to be resolved.

Either way just keep quietly investing  in quality residential property. You’ll be richer for the experience.