Renting system
The rental housing market relies almost entirely on private home owners renting out their properties.
Unlike some countries, there are no government bodies that look after the social housing market and form the basis of the rental market. There is no law around rental prices, it’s all maintained by the supply versus demand principle. In this instance it seems to work, as there is a lot of competition to make the principle be successful.
Why people rent out their house
The main reason for people doing it is an investment. The Australian government figures that the first house is something you will actually use and you should fully pay for the use.
But then, the government wants people to invest and save up money. So they need a way to stimulate that. This is done by making the interest of the mortgage on houses you don’t live in tax deductable. Even if you’re renting yourself and for instance have a house yourself which you renting out, that interest is deductable, as it’s part of an investment.
The simple calculation for profit is this:
+ Rent
- Real estate cut
- Mortgage interest
+ Tax deduction
——————-
Profit
(The profit is taxable again btw)
For example, if someone would rent out their $500.000 home at $400 per week, the rent would be 52 weeks times $400 = $20.800. The real estate agent takes some 10% out of that. Let’s assume the mortgage interest rate is 5%. The annual mortgage interest would be 5% of $500.000 = $25.000. But, this amount is tax deductable, so in the case of our “Someone” paying around 40% tax, the deduction will save him 40% out of the $25.000 = $10.000.
+ 20.800
- 2.080
- 25.000
+ 10.000
——————-
+ 5.720
Per annum this means a profit of 5.720 of which the owner has to pay the maintenance of the property, council taxes and 40% income taxes.
As you can see from the figures, the rent paid by the renter is enough to cover the cost of owning the property and the real Return On Investment comes from the increase in property value. In our example the ROI over 10 years looks like this:
| Year: | Value: | Increase: |
|---|---|---|
| 1 | $500,000 | $15,000 |
| 2 | $515,000 | $15,450 |
| 3 | $530,450 | $15,913 |
| 4 | $546,363 | $16,390 |
| 5 | $562,754 | $16,882 |
| 6 | $579,637 | $17,389 |
| 7 | $597,026 | $17,910 |
| 8 | $614,936 | $18,448 |
| 9 | $633,385 | $19,001 |
| 10 | $652,386 | $19,571 |
As you can see, the increase after three years (Beginning of year 4) is already $46,000 dollars and is much bigger than the profit out of the rent.
The conclusion to take out of this is most landlords don’t care about the profit they make on the rent (Although it’s still money and no one minds more of that stuff) and care much, much more about the profit on the property value increase.
The tax deductibility applies to all residential properties that one does not live in, so it applies for 2nd, 3rd, 4th and any other houses. So the idea is, that if the bank is willing to lend you the money for any additional house, the house will pay for itself and as an owner, you keep the increased property value.
Finding a house / apartment to rent
As said: rentals are generally owned by investors. The actual day to day involvements of the renting is usually outsourced to real estate agents. The procedure of applying for a home (in general terms) is:
- The real estate agent places the ad on internet, the local newspapers, its Email list and/or its own magazine. In the ad they specify when the inspection time will be.
- During the inspection the real estate agent will show all the interested parties the house and it will last about 20-30 minutes, depending on the expected amount of interest.
- During the inspection everyone who’s entering for inspection will be added to the list of candidates and will be given the opportunity to apply for it. Only people who show up during the inspection times are allowed to apply and all the adults who will be living there need to apply!
- The candidates are given an application form, which they will need to fill in. Details include contact information, rental history, income and references.
- During the next couple of days the application forms will be collected by the real estate agent and discussed with the landlord who makes the final decision who will be granted the home.
Depending on the demand for housing, it can be quite hard to find a suitable home. It takes some time to figure out what you preferred typical house is worth and it sometimes makes sense to offer less than the asked value. But sometimes, if there is high demand, that won’t cut it and you keep losing out.
Tip/Trick
In that case, you may want to higher your chances by proposing a rent that exceeds the ask value, or improve your chances by paying the rent in advance.
A typical contract is for a one year period. After the year it may or may not continue on a month to month basis, but that should be stated in the contract. After the contract ends, the landlord will evaluate the rent against the current rental market and increase the rent accordingly.
So even though the landlord likes the fact the his property will be rented, he is not keen on signing for a long term contract as that will eliminate his ability to increase the rent.
Offering to pay rent upfront does improve your chances as it has two benefits:
- It shows you have a financial buffer and the landlord does not have to fear of you not being able to pay the rent.
- The landlord has money he can use in other investment (or just for Holidays or BBQs
).
This trick does improve your chances. In addition, there is fair chance that the real estate agent is unable to cope with the proposal (there financial system cannot handle one-off in advance payments!), so the end result is that they fall back to the usual payment system.
Tip/Trick
The other trick to improve your chances is to get a reference letter from your current/previous landlord. Because one of the requirements in Australia is to have references of previous landlords (checking your payment history), if you prepare this before you migrate, it might give you just that little step ahead!
