Owning rental properties allows you to earn money while minimising active involvement, providing an excellent opportunity to build wealth through property over time. Here are seven things you do to embark on your path to passive income through rental properties.
1. Choose The Right Property
Before you start investing in rental properties, it’s essential to do your research and understand the market. This includes knowing the demand for rental properties in your area, the cost of properties, and the potential for appreciation. Look for locations with strong rental demand and potential for future growth. Assess property types and locations that align with your investment goals, whether residential, commercial, or vacation rentals. If your objective is passive income you should look for rental units that will produce a good rental yield and are likely to attract good, long-term tenants. Some of the key factors to consider are:
- Focusing on properties located in areas with strong rental demand and desirable amenities.
- Seek out properties that are in good condition and appeal to the target tenant market.
- Conduct thorough market research to determine the average rental rates and vacancy rates in the area.
- Consider factors such as proximity to schools, transportation, and employment centres.
Find out more on our page on How To Choose An Investment Location.
2. Financial Considerations
Evaluating the financial viability of rental properties is paramount. Consider factors such as potential rental income, expenses and cash flow projections. Understanding your financing options and mortgage considerations is also essential. Additionally, understanding the desired rental yield can provide further insights into the investment’s profitability.
How Much Rental Yield Is Good?
Rental yield is the amount of rental income a property produces annually, divided by the purchase value of the property, expressed as a percentage. Properties with high rental yields are typically more desirable for investors. As a general guideline, a rental yield of around 4%-6% is considered good in Australia. A rental yield of 6%-8% is considered high. Bear in mind that rental yields can be influenced by factors like property demand, vacancy rates, and local rental market conditions. It’s important to conduct thorough research and consult with local real-estate professionals to determine the expected rental yield in a specific area.
Our experienced brokers can guide you through the process, ensuring you make informed decisions and secure the most suitable financing options for your property investment.
3. Property Management Strategies
Ensure successful property management by implementing key strategies.
- Screen tenants diligently, using background checks and verifying income and rental references.
- Create clear lease agreements and policies outlining tenant responsibilities and rent payment terms.
- Establish efficient rent collection systems and maintain accurate financial records.
- Conduct regular property inspections and promptly address maintenance issues.
- Foster open communication with tenants and prioritise their satisfaction. Stay updated with local laws and regulations to ensure compliance. Consider professional property management services for a hands-off approach.
4. Setting Rental Rates And Maximising Income
To maximise your passive income, set competitive rents by conducting market research and analysing rental trends and comparable properties. Consider property features and local demand when determining rents. Evaluate the supply and demand dynamics in the rental market to adjust rents accordingly. To continue to command rents that will provide you with an income, maintain a high standard of property management by promptly addressing maintenance issues and providing excellent customer service. Prioritise tenant satisfaction to retain tenants and reduce vacancies.
5. Conduct Regular Property Inspections And Maintenance
Perform routine inspections to identify any maintenance issues or necessary repairs. Promptly address tenant-reported maintenance concerns to maintain the property’s habitability and prevent small issues from escalating into costly problems. Regular property maintenance, such as landscaping, pest control, and exterior upkeep, helps preserve the property’s appeal and value.
6. Legal And Compliance Considerations
Landlords must stay on top of legal and compliance requirements. Familiarise yourself with local rental laws and regulations to ensure full compliance. Create solid lease agreements and contracts to protect your interests. Insurance and liability protection are key parts of a good risk-management plan.
Seven Other Ways to Build Wealth Through Property Investments
After acquiring a property investment, Here are some ways to build wealth – or save on expenses – apart from rental income.
1. Capitalise On Long-Term Property Appreciation
Property values tend to increase over time, allowing you to gain equity and build wealth. Choose properties in areas with strong growth potential and hold onto them for an extended period to benefit from long-term appreciation.
2. Unlock Equity
By tapping into the accumulated equity of your existing property, you can access funds to purchase additional properties and expand your portfolio. This can lead to increased rental income, potential capital appreciation, and tax advantages. However, it’s important to carefully consider market conditions and seek professional advice to ensure this strategy aligns with your financial goals.
Seize the opportunity to unlock equity and boost your investment potential! Contact us at 1300 889 743 or fill out our free online assessment form and let our team of experts guide you through securing an equity loan.
3. Negative And Positive Gearing
A positively geared property is one where the rental income exceeds the expenses associated with the property, such as mortgage repayments, maintenance costs, and property management fees. On the other hand, a negatively geared property is one where the rental income is lower than the total cost of ownership.
Both positive gearing and negative gearing have their advantages and considerations. Positive gearing provides immediate cashflow, while negative gearing can offer tax advantages and help you access potential capital gains in the future.
4. Capitalise On Tax Deductions
There are a number of investment property tax deductions that you can claim in Australia. These can include
- Mortgage interest
- Repairs and maintenance
- Property management fees
- Council rates
- Land tax
- Insurance premiums
The specific deductions that you can claim will depend on your individual circumstances and the type of property you own. For example, if you own a rental property, you can claim deductions for mortgage interest, repairs and maintenance, and depreciation. However, if you own a holiday home, you can only claim deductions for repairs and maintenance. Consult with a tax professional to understand the specific advantages in your jurisdiction.
5. Diversify Your Portfolio
Instead of investing in a single property, consider spreading your investments across various locations and property types to mitigate risks and optimise wealth-building potential. Diversification provides stability and safeguards against market fluctuations.
6. Collaborate Through Joint Ventures And Partnerships
Partnering with other investors can unlock access to larger and more profitable property investments. By pooling resources, knowledge, and skills, you can take on bigger projects and diversify your portfolio effectively.
7. Real Estate Investment Trusts (REITs)
REITs are investment vehicles that allow individuals to invest in real estate without directly owning and managing properties. By investing in REITs, individuals can earn passive income through dividends paid out by these trusts, which typically own and operate income-generating properties. REITs allow individuals to diversify their real-estate investments, access potentially higher returns, and benefit from professional management expertise.
What Passive Income Is Accepted By Lenders?
Thinking about getting a home loan for an investment property? In this section, we explore the passive income streams that lenders typically accept as income for serviceability assessments.
1. Rental Income
This is the most common type of passive income that lenders accept. Lenders will consider your rental income when determining how much you can afford to borrow.
However, it’s important to note that the potential rental income may be reduced when assessing loan eligibility. Most lenders typically consider only 80% of the rental income for this purpose. However, we have a lender in our panel that accepts 95% of the rental income, providing a more favourable option for loan assessment. Lenders will also consider the amount of rent you charge, the property’s condition, and the occupancy rate.
Rental income includes that generated from residential, commercial, or vacation rentals, like Airbnb or holiday homes. To strengthen your loan application, provide documented proof of rental income, such as lease agreements or rental receipts.
2. Income From Silent Partnership Investments
If you are a silent investor or involved in a limited partnership, lenders acknowledge the passive income derived from these business arrangements. However, they will want to see that you have a good track record of generating income from the business. Providing partnership agreements or investment documentation can support your loan application.
3. Interest Generated From A Bond Or Savings Account
Lenders will want to see that you have a history of earning dividends and that your earnings are stable. Dividends are paid out by a stock investment. Lenders will evaluate the consistency and reliability of these dividend payments to determine your capacity to generate passive income.
4. Centrelink Benefits
Centrelink benefits can be used to help pay off a mortgage, and lenders may accept this as a form of passive income. You have to provide documentation of regular payments from Centrelink.
5. Income Protection Payments
Income protection payments are a type of insurance that pays you a monthly income if you are unable to work due to illness or injury. This can help you cover your living expenses while you’re unable to work.
Lenders will want to see that you will receive a sufficient amount of income protection payments to cover your mortgage repayments, that you will receive income protection payments for a long enough period to cover the term of your mortgage, and that your income protection payments are stable and you are not likely to lose them.
6. Workers’ Compensation
When considering a Home Loan for someone with Workers’ Compensation, lenders consider the stability and duration of the workers’ compensation payments. They assess the applicant’s ability to make regular mortgage repayments based on this income source.
Lenders will typically need to verify the payments that you’re receiving with payslips and official letters or statements from your WorkCover provider and employer.
Some lenders require that the documents clearly state that allowance is discretionary and not allocated for specific living expenses or medical costs (depending on your injuries).
It is important to note that not all lenders will accept all forms of passive income. Some lenders may be more restrictive than others. We can help you check if lenders will accept your passive income.
Let Our Mortgage Brokers Source The Best Loan For You!
Ready to unlock your earning potential through rental properties? Our expert mortgage advisers are here to guide you every step of the way. Whether you’re a first-time investor or expanding your portfolio, we’ll help you secure the most suitable financing options for your property investment. Take action now! Contact us today at 1300 889 743 or complete our free online assessment form to start.