Making a fortune through property investment is the goal of many and the achievement of few.  Some swear by renovation, others development, others by passive investment.  All those that are successful swear by capital growth and the right plan.  

The plan is vital as it helps you to see each element in your strategy separately.  Once you have your capital growth properties you can turn your thoughts to optimising other elements.  This article is about increasing rental returns to make it easier to hold. 

The rule of thumb is that if your property has a five percent gross rental return, a five percent interest rate on an interest only loan and you qualify for full depreciation benefits, it is close to cash flow neutral.  

Standard three bed houses in Sydney and Melbourne have lower average rental yields. They are currently about three percent.  Houses in Brisbane are closer to four percent.  Apartments usually have higher rental yields at about four percent for Sydney and Melbourne; and five percent in Brisbane. 

Most of these rental yields are lower and they make properties harder to hold.  You would need to put money in each week.  On top of this Interest rates are forecast to rise needing more cash tops ups from you.  This makes investors look for higher rental returns on their existing properties.  

How can I make my property have a higher rental return? Could Airbnb be the answer?

Airbnb clients want the peak experience like a house on the Hawksbury River or Scotland Island with water access only; or a well placed city apartment with a fabulous view.  Accommodation is rented by the night or the week and occupancy rates drive returns.  You need lots of bookings to make a good return, just like a hotel.  

We stayed in our first Airbnb last weekend.  It was on the 16th floor of an apartment block at a glamorous address in Southbank.  

From the living room we looked into the city past the Eureka building with its distinctive gold cap.  Looking out to the west we could see the shipping in the Bay.  It was stunning.  You could sit there and just watch the clouds and the light change all day.

It had everything we needed, secure free parking, easy accessibility to the freeways, and a supermarket a block away.  Yet I am not sure we will go back.  Why?  The décor was sad, the pillows super soft and there was no welcoming tea bag.  

What would it cost to make a better impression?  Maybe 8 new pillows at about $30 each or $240.  A few pictures chosen for colour and uplift in each bedroom and the living room.  From Kmart is fine at about $80 each or about $400.  A welcoming tea bag would have been great, a single serve sugar and a cap or two of milk.

Do they have so much demand that repeat business is not needed?

My homework on realestate.com uncovered that a standard rental might bring in $560pw.  Airbnb accommodation was about $180pn without the cleaning fee.  It was wintery in Melbourne and very cold.  However, spring and summer are nearly here with their higher demand.  So the rental returns seem to be there.  Why don’t they want me to come back?

It still didn’t make sense to me, so I dug some more.  What I found is it all about the insurance.  Serious investors have insurance for every possibility in a landlord’s policy.  They want cover for lost rent; public liability; theft or burglary; and malicious damage to the property.  Apparently, insurance companies are very reluctant to cover Airbnb rentals with a landlord’s policy.  

Would you rent out a $600,000 apartment at $180pn with no insurance cover?  

Is there some other way you could you manage this risk?  Some apartments ask for a bond.   Not sure if there are laws for how much you can charge, however the bonds on Airbnb were about the value of two night’s accommodation.  That could cover the pillows, the kitchen plates and glasses and a bit of extra mess.

Airbnb sounds like a great way to increase your rental returns and fund your retirement. However, it would only take a big party or two in a year to completely undermine your profits.  For my investment returns certainty is vital and insurance cover is a must.

Author Rosemary Johnston, Client Experience, Forrester Cohen. www.forrestercohen.com.au  If you would like more information or to continue the social commentary, please email rosemary@forrestercohen.com.au

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