Do the arithmetic.. Rental vs Selling selling in the current market
Category Blog
Sellers may well be tempted to hold on to their properties for a while, rather than accept the very low values being offered and therefore, rent them out let for a specific period in the short to medium term. It is a valid consideration.
Nevertheless, consider this: If, as a homeowner, you decide to let the property out, it would signal that you do not have an immediate need for the proceeds (capital) from the sale of the property.
Is there a better investment opportunity
So, before ticking the rental option box, ask yourself this question: Is it wise to leave the cash in the property - or is there a better investment opportunity to grow your asset in the current environment?
Do the arithmetic. Look at the detail. Take a conservative rental price on your property - and deduct the following:
- letting agent's commission and divide by 12
- the outstanding monthly bond payment
- monthly rate and taxes.
- monthly maintenance (annual costs of electrician/plumbing/painting/other call outs...divide by 12)
- monthly pool and/or garden service
- insurance
- monthly security (if the tenant is not paying this - a street contribution to 24/7 etc)
The balance is your monthly return on the rental option. In the event that you chose to tick the selling option, and to compare apples with apples, your monthly return will evolve as follows...
Given the interest rate scenario it should not be too difficult to achieve a reasonably risk free return of 8% plus per annum (and substantially higher if on a managed portfolio) from investing the remaining capital, after the following deductions:
Sale price minus agents commission remaining bond balance cost of compliance certificates (electric fence, electricity and gas) capital gains tax outstanding rates or electricity bills. The balance invested at 8% = per annum return divide by 12 = monthly return. You may well be surprised by the numbers.
Consider that the investment return carries very little risk, and that interest rates are likely to stay at this level in the medium term, improving the monthly return.
Risks and challenges
On the other hand, the rental option confronts the following risks and challenges:
- The possibility of 'no income' months with no tenant.
- Rental market under pressure as tenants are under financial pressure due to the economic conditions.
- Responsibility of managing the lease monthly.
- Deterioration of property as a result of tenant negligence.
- Increasing tenant defaults in the current economy.
- Maintenance
- Economic uncertainty - debt crisis, unemployment and 'Grey status'.
- Property devaluation as a consequence of any further poor sentiment.
The most important step is to pause... Before making a decision... and do the arithmetic!
Author: Ronald Ennik
