Question Mark

CHASING GAMES GOLD

I’ve heard that accommodation becomes scarce during major events such as the World Cup and the Olympics. I own a warehouse apartment in Richmond, Melbourne, with one bedroom and a study, and my partner owns a three-bedroom cottage in nearby Hawthorn East. We’re prepared to lease them out on a short-term basis during the Commonwealth Games in March. Realistically, what level of rent could we expect?

At the risk of pouring cold water on your enterprising nature, renting out a property to short-term tenants is quite a complex process and the returns may not be as lucrative as you had hoped.

Sam White is deputy chair of the Ray White Group, and ran the Olympic Accommodation Program in Sydney in 2000, which let almost 5,000 properties during the Olympics on behalf of landlords and home owners.

“A lot of people thought they’d make a killing with a steep increase in rental income during the Olympics. Some even had visions of making enough to pay off their mortgage," he says. “The reality was quite a bit different.”

White says that in most cases, property owners were able to ask three-and-a-half to four times the normal market rate. However, the actual return they received varied considerably, depending on whether the property was their family home or a rental property to begin with.

Where the property was already a rental property, owners often found that their current tenants’ lease expired some time before the Games, but not long enough to enter into another standard lease. To guarantee possession to short-term tenants, they had to leave their properties vacant for several weeks or months beforehand. This reduced their real rental return.

Second, because most rental properties are unfurnished, many landlords had to spend money on furnishings, whitegoods, linen, cutlery, crockery and so on. This cost as much as $1,000 a week.

Third, most insurance premiums for residential property don’t cover short-term tenancies, so landlords had to wear the cost of increased premiums.

After all these expenses were taken out, that four-fold rent hike became far less lucrative.

“If you’re a landlord, leasing out your property for such a short time really isn’t worth it,” White says. “You’re better off signing up long-term tenants on a reasonable rent level.”

Short-term renting can be more successful for home owners who are prepared to move out of their homes during the Games. Even though you will still have to sort out the insurance issues (your policy may not cover paying guests), your property is already furnished so you won’t have to spend money on this aspect of the process. And you can live in the property until your tenants arrive, so there’s no need for extended vacancy periods.

You will, however, need a strong screening process in place to weed out unsuitable tenants. You should also keep anything valuable or fragile locked well out of harm’s way.

Good luck with your decision '¦ and Go, Aussie Go!

TIME TO CASH IN?

I bought my mother a house in Manly, Sydney, in 1972. She died 10 years ago and I’ve held the house as a rental property ever since. I plan to retire next year and I have $450,000 in super. I’ve been speaking with a financial planner about my options. He thinks I should sell the property and put the proceeds, along with my super, into an annuity. I’m happy to buy an annuity with my super, but am unsure about the property. I’m cautious about putting all my eggs in one basket. What’s your opinion?

An annuity gives you a guaranteed income stream, payable at regular intervals. The main benefit of an annuity is that the income earned is not taxable. The downside is that the capital value of the annuity is constantly reducing. When the capital value eventually reaches zero, the income stream will stop.

Selling the house and putting the proceeds into the annuity with your super will give the annuity (and therefore your income) a big boost initially, but this will decrease over time.

I see two key benefits in holding the property. First, Manly is a highly sought-after location, so demand will continue to drive up the property’s value. This will offset the ongoing reduction in the value of your annuity. The nature of compound growth means that the longer you hold the asset, the greater the benefit will be. This will give you a considerable source of equity that you can use to further fund your retirement.

Second, because you bought the property before 1985, the capital growth you achieve between now and when you eventually sell, will be free of capital gains tax. I believe that a CGT-free asset is a real gem in anyone’s portfolio, and should only be sold when absolutely necessary.

SHARED PURCHASE

A friend and I have been discussing buying a house together in the Brisbane suburb of Bulimba. Neither of us has the money to buy on our own in this area. My family thinks this is a stupid idea, because friends and money don’t mix. What do you think?

I’m not sure I’m that keen on weighing in on a family argument, but here goes '¦ !

When it’s done properly, pooling resources with someone else to buy an asset can be a good move. When done poorly, it can be a personal and financial disaster.

The first and most important consideration when getting into an investment with someone, is how you’re eventually going to get out of it. Personal circumstances can change (one of you might marry, have children, lose your job, etc), creating a situation where one person wants to sell the asset but the other doesn’t.

This means you must both be clear, from the start, about:

• The purpose of the purchase: income-producing investment or home to live in.
• The holding period: exactly how long you will own the investment.
• The process that will apply should one party agree to buy the other out.

By including these parameters in a written contract, you won’t eliminate the risk of someone reneging on the agreement, but at least both parties clearly understand their commitment.

PROPERTY MANAGERS

I’ve just bought an investment property and I’ve decided to pay a professional property manager to look after it. I’m shopping around for a good manager but I’m not sure how to compare monthly management fees. What sort of fee do you think is reasonable?

Generally speaking, a reasonable property management fee is about 7% of the rental income, plus GST. Agents’ fees are not regulated, so you do have scope to negotiate. Beware though: if the property manager agrees to a substantial discount merely to win your business, you may strike problems later.

Discounting management fees means that the property manager may be forced to take on additional properties to make up for the lost income. A ratio of 170–200 properties to each property manager is generally considered an acceptable standard. There are instances of people managing as many as 300–350 properties.

When you interview potential managers, ask how many properties they manage. If the number is significantly higher than the industry benchmark, the standard of care may suffer. There’s little point saving a small amount on management fees if you can’t get the agent to return your calls, or tenancy and maintenance issues go unresolved!

The property management industry has a high turnover, so it’s a good idea to ask potential managers how many years’ experience they have. Remember that property management fees are tax deductible. Depending on your marginal tax rate, your fees could virtually be halved.