How To Find The Potential Rental Income Of A Property (Day 22)
Finding the potential rental income of a property helps you analyse that property and understand how much it is likely to make (or cost) you. Here are 2 easy ways to estimate the potential rental income of a property.
Hi and welcome to the 30 day property journey. Over the next 30 days I’m taking you through a bunch of different activities that you can do to become a smarter investor.
Today we are talking about how to find out the potential rental income of a property. If you are investing in a property you are going to want to find out how much that property is going to rent for so you can do a cash flow analysis and understand whether the property is going to be positively geared or negatively geared and by how much.
The Best Way To Discover Potential Rental Income
There are multiple ways that you can find out the potential rental income of a property but there is one way that I recommend above all else and that is to talk to a real estate agent.
Unfortunately at the time that I record this (2014), computers are not smart enough to accurately estimate the potential rental income of a property. I have not seen a computer calculator that can accurately estimate this figure. There are just too many variables to take into account in terms of what the property has to offer, what condition it is in, what area it is in, etc.
However, real estate agents know their market inside and out because that is what they do. They work with the market and they both sell properties and rent properties. They are going to know down to the dollar exactly how much your property can rent for.
There are two ways I recommend asking real estate agents what the rental income of the property is going to be.
The Easier Way (Not As Accurate)
The first and easiest way is to speak to the agent who is selling the property. Say to them, “I am and investor and I am considering investing in this property what do you think the rental income of this property could be?”
However, always take this figure with a grain of salt because this person has a vested interest in selling you this property. They make a commission when this property is sold so therefore they are more likely to give and an overestimate of how much the property going to rent for.
This figure therefore will be fairly accurate, however and may be slightly above what the property is likely to rent for.
The Slightly Harder But More Accurate Way
The second method you can use is to talk to another real estate agent in the area who doesn’t have an interest in selling this property to you. They might be a competitor of the person who is selling you a property.
You can go to them and say, “I am an investor considering purchasing this property. If I purchase it I’m considering you as a rental manager. I would like to get a rental estimate for this property.”
They should be able to provide you with the rental estimate and this is probably going to be more accurate than the one that the selling real estate agent is going to provide you.
However, you can get both of these estimates and then compare them and maybe take an average of what they say.
Talking to a real estate agent is therefore the absolute best way to get an estimate of what your property is going to rent for.
However, if you are trying to analyse lots of different properties at the same time and you simply can’t be bothered talking to a real estate agent then there are some things that you can do.
Work Out The Average Rental Yield In The Area And Apply It To Your Property
The first thing you can do is find out what the average rental yield of the area is. It might be 5%, 6%, 4%, 3.2%. It varies from area to area.
To find out this information you can purchase a property magazine like Australian Property Investor and go to the back and find the average rental yield in the back of that magazine. There is a lot of awesome data in the back of those magazines. Alternatively, go to www.yourinvestmentpropertymag.com.au, click on the top suburb section, type in your suburb and there will be a table that will give you the median gross rental yield of the area so you can see precisely what it is for that particular area.
You then simply take the purchase price of your property and you multiply it by the gross rental yield percentage and that will give you a rough estimate of what your property is going to rent for. However, properties do vary so depending on what your property is, what condition, what area, etc, etc and this figure is unlikely to be exactly accurate.
Look For Past Rental History
The third method that you can use is to look for past rental history of the property or of similar properties. You can find out past rental history by going to www.oldlistings.com.au and by searching for the suburbs and then the street and then finding your property.
If you can’t find your particular property then it might be worth looking for other properties that are similar to yours in a similar area and see what they have historically rented for and then make an estimate based on that.
Doing this strategy, however is actually probably going to take you a lot longer than simply calling the real estate agent. Nevertheless it can be done and sometimes you can be lucky.
There you have three different ways to find the potential rental income of a property. Again, as I said it’s very important that you find this out so you can understand whether your property is going to be positive cash flow, if it’s going to be negative cash flow or if it’s going to be neutral cash flow which means it doesn’t make money but it doesn’t lose money either.
You can then go ahead and do your cash flow analysis and really work out what kind of profit you’re going to gain from this property.
Your activity for today is to go out find a property and then try and find the potential rental income of that property so that you can go and do a cash flow analysis.
Until tomorrow stay positive!