Total costs to set against income

Add together the annual capital cost and the average annual running costs. Taking the example figures I have used, the total comes to $32,000. You can allow a sum for the capital appreciation of the property to offset these costs. It is not easy to come up with a credible and widely accepted figure for this, as there are too many uncertainties involved. For example, will the property appreciate at all in the long term? Will it deteriorate over the years, or will the market value decline rather than rise? Will an older property absorb an unreasonable amount of money in upkeep?

Despite all these uncertainties, I will assume that a rental home will increase in value by between 6.5% and 7% over inflation each year over the next five years. I think this is realistic. This represents around $16,000 a year on a $240,000 home. This $16,000 nominal increase in the value of the property takes the net costs of ownership down to $16,000 a year, or just under $1,350 per month.

Income targets

With a rough indication of how much it costs to own a rental home, you can consider the level of rental income you will need to offset these costs. You can either estimate the number of weeks of rentals you think you can get, then work out what the rental rate would need to be to cover our costs. Or you can estimate a realistic average weekly rental rate, and calculate how many weeks of rentals you will need at this rate. In either case, take $120 a week off the gross income to cover taxes and the end of rental clean.

Based on rental weeks

The total of weekly paid rentals could be as low as 25, depending on the community, your ability to promote the home, and the quality and features of the home itself. To cover all costs with 25 weeks of rentals would require an average gross rental rate of $760 per week. If you are able to achieve 35 weeks a year you would then need to average just below $580 a week gross. A high profile community like Windsor Hills or Windsor Palms would expect an occupancy rate of 40 weeks or more a year.

Based on average rental rate

Almost every owner has a different idea of a fair rental rate for his or her home. If the bulk of rentals are coming from a management company or from an agency, then it will be they, rather than the owner, who sets the rate, although you should appreciate that you are entitled to argue about it if you want.

Let us take $700 as typical. You need to take off $120, as before, to cover taxes and cleaning, so the remaining $580 per week will require around 35 weeks of bookings to reach break-even point. If the bookings are being generated privately you have more flexibility in what rate you set. Some owners go for a high rate, say $1000 a week for a 4-bedroom home, and accept fewer bookings. Others go for higher capacity at an average of $600 a week. The income from these two different approaches may be quite similar, as the number of bookings is likely to be closely linked to the rental rate offered.

A rate of $1000 a week needs 18 weeks of bookings to cover costs. A typical rental rate for a 3-bedroom pool home, averaged through the year, may be $820 gross ($700 net). The actual rate can of course vary with season, so that an average of $820 may be made up from a few high season weeks at $1000, and a larger number of low season weeks at $650.