The Top 3 Mistakes Investors Make When Estimating Rental Return

"Can I do a rental appraisal on a property myself?" is a question commonly asked by investors. There are many ways to obtain an approximate rental estimate on a property you own or are considering purchasing. 

But these methods are not without their shortcomings. In this article we go through the top 3 mistakes investors make when estimating rental return themselves.

1. Mistaking median rent for a rental estimate 

​Sometimes an investor will search for their target property in google and click on search results from the likes of realestate.com.au, domain.com.au, or one of many others. These sites will all generally provide a snapshot of sales history and rental history for a property. 

However, often there is a rental figure presented beside the property image which suggests you are being provided a rental estimate for your specific property. Generally though, the rental amount being shown is the median rent for the suburb. 

This is an important distinction. As a reminder, the median rent is the value separating the higher half of all rents from the lower half i.e. if you lined all the weekly rents for a suburb in order, the number in the middle would be the median. 

This is different to an average, and in the vast majority of instances is different to the actual rental return you could expect for your own target property. 

In summary, be aware of what the figure is you're seeing on-screen or on your reporting, and if it is a median rental return for the suburb, remember this has very little to do with your specific property. 

2. Taking public rental history as gospel

​The major online portals also provide an indication of rental history. In our experience, the data provided on realestate.com.au (which is sourced from CoreLogic) is more complete than domain.com.au. We have seen instances where rental history is present on the former and absent or incomplete on the latter. 

So if you can see the rental history for a property, you could take this as a pretty good appraisal of what the property would rent for now, right? Unfortunately, not always. 

What many people don't know is that the rental figures reported on these services can be subject to incorrect or incomplete reporting by the agency which filled the rental. 

When an agent successfully finds a tenant for a property they had listed, they could do one of the following:

1. Simply remove the property from the market - this provides no record of the property having been successfully rented at all, let alone the weekly rental amount achieved
2. Remove the property from the market and leave the rent amount as it was advertised - this provides an accurate record if the property was successfully rented for the same price as advertised. But if the tenant negotiated a decrease in rent or offered more to secure the property, this would not be reflected in any subsequent reporting
3. Remove the property from the market and record the actual rental amount as leased - this provides an accurate record of rental return, even if the property rented for an amount which was different to what was advertised 

​So, while publicly available rental history is a helpful guide, it is far from providing a complete and accurate picture in every instance. 

3. Failing to consider the current condition of the property

​As seen from the above, any online report is only as good as its input. Property history as seen on the major portals takes no account of the property's current condition. Since the property was last rented, its condition could have deteriorated significantly or improved remarkably through renovation etc. 

For example, you may have seen the property yourself at an inspection and appreciating the renovation work done by the previous owner, but this increase in value would not be reflected in any automated online reporting.

​How do I obtain an accurate rental appraisal?

​For an accurate rental appraisal, you should always contact an expert property manager familiar with the area. They will have knowledge and skill to identify a broader range of comparable properties than you may yourself as well as the experience to navigate the pitfalls outlined in this article. 

If you're wondering what the potential rental return should be for your investment property, even if it's currently listed with another agency, we'd love to help. Contact us for a rental appraisal now.