As a landlord myself, I’m always focused on charging fair rent. If you charge too much, then you'll end up with reduced cash flow due to high tenant turnover, which in turn causes increased vacancies and marketing costs. On the other hand, if you undercharge then you are undermining the financial performance of your investment. Finding the balance is key - fortunately it's not rocket science.
TIP: You need to have an open, independent mind when valuing. Your property might be special to you but it’s important when determining the rental price not to let your emotional attachment to the property cloud your business judgement. Tenants will see the property for what it is - all properties have good and bad aspects, so being realistic about the strengths and weaknesses of your property is very important.
Remember that NZ tenancy law dictates you can only charge fair market rent for your property. This includes new tenancies and renewals. This law is designed to stop landlords unfairly forcing tenants into high rent. The tribunal has the power to reduce high rent back to fair market. This comes back to the golden rule, you make your money before you buy.
My valuation steps:
Best place to start is to look at current or historical rental prices for the property. Then look at what has changed since then and what the market has done since then. Typically, rental prices are going up about 2-5% per year at the moment, but that could vary in your suburb, town or city. Also, changes to the property can mean a change in rent. A new kitchen or bathroom might mean the rent can be increased. Use this as a starting point, but if you don’t have a figure don’t worry - just move onto the next step.
Look at the average prices for your suburb. The best source is the Tenancy Services data taken from the registration of security bonds. Remember: this is the average for your location so half the properties are above and below that value. 50% of the properties are priced between the lower and upper quartiles. So, unless your property is especially good or bad for your suburb then you are going to be within this range.
Compare the market. The biggest property site in NZ is Trademe.co.nz; the second biggest is Realestate.co.nz. So look at what else is on the market and investigate your competition. Take a look at the photos and read through the listings. If there are 4-5 properties similar to yours then that is going to give you a very strong indication of what the rent should be. This technique is called the Price Comparison Approach and is the main technique used by agents in valuing properties for sale or rent.
Market the property. The only true value is what the market is willing to pay, so until the property is rented valuations are only opinions. Once you have advertised the first indication you are going to get is the response rate. Typically, in a popular city location you should be getting enquires within 1-3 days of the property going on the market. This period might be a few weeks or a few months for quieter locations. If your listing is well presented with good photos and a helpful and accurate description, but you are getting no responses then you might have overpriced your property. If this is the case, go back to step 3 and look at it from the tenant's perspective. Is what you are offering reasonable and desirable vs the competition? Another sign that you might have overvalued the property is if you have lots of viewings but no one is taking the property. This could happen when the advert is much better than reality or if there is a disadvantage to the property which is not revealed in the advert. Also remember to talk to the potential tenants, agents gather a lot of feedback from viewings and open homes and use this to gauge if the valuation is correct and renegotiate with the tenants.
Many people are concerned about valuing their property and think there is some magic involved in valuing property. As a former estate agent, I can tell you there is no magic involved! Realestate agents look at what you are willing to accept, use their experience and knowledge of the area and use comparables. If you use the steps above then you can accurately value your property.
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