No investment is risk free, so the more you know about the less glamorous aspects of being a property owner, the more likely you are to recover if things go wrong.
Blogger: Lisa Indge, managing director, Let's Rent
Understanding how to manage the various risks associated with being a landlord enables you to make the most of your portfolio.
If you’re prepared for all outcomes, small bumps in the road won’t knock you out of the game. Here are some of the most common risks that come with property ownership and how you can manage them.
Empty properties cost you money and reduce your overall returns. As long as your marketing campaign is on target, the supply and demand in the marketplace will determine the rent you receive.
Over the past two years I have received various calls from clients asking us to process rent increases because of changes to the Consumer Price Index (CPI) or an article they have read in the newspaper that said there is a shortage of rental properties.
You should understand there is not one rental market and often you can’t even break it down by ‘inner’ and ‘outer’ suburbs; it is far more complex and layered than that. It’s not the same in Brisbane and Broken Hill. Even in the same suburb the demand for two-bedroom renovated properties might be quite different to the market for un-renovated two-bedroom properties.
Listen to what your property manager advises and base decisions on their expertise. After all, they are the ones dealing with the enquiry and showing your property to prospective tenants.
Your investment property needs to appeal to the broadest market in order to minimise vacancy and achieve the best return. In areas where the demographic is professional couples or highly paid executives, you had better make sure the property is well presented and renovated. It may mean that repainting and recarpeting are required more frequently.
In suburbs or locations where the unemployment rate is higher or there is a high student population, a 15 or 20 year-old kitchen and bathroom would be perfectly acceptable. In this case, value for money is essential to the demographic.
Property wear and tear
Clearly, we would prefer if there was no wear and tear at all! If we didn’t have to spend money on maintenance and upgrading over time, our return would be significantly better. But, back to reality...
Minimising wear and tear by choosing the right tenant is the best way to go. Broadly speaking, the fewer occupants you have, the less wear and tear. With my own properties I am happy achieving a slightly lower rent in order to have the best selection of potential tenants.
Doing reference checks will equip you with the right information to make this decision. If the information provided is sketchy, ask more questions and if satisfactory answers are not provided, do not just take the tenant on because the property is vacant and they are prepared to pay the rent you are asking.
Your property manager can provide all of the necessary information to make your decision, and don’t be afraid to ask their opinion. If this was their property, would they approve this tenant? Not every application is an easy yes or no and you should be able to rely on your property manager to give you an honest assessment.
Damage is one step above and beyond wear and tear, because it often occurs simply because the tenant has not taken appropriate care. The correct choice of tenant is the best way to avoid this – but there are no guarantees.
Understand that if the item has been damaged beyond repair and has been fully depreciated (in accordance with tax office guidelines) you are unlikely to receive enough compensation to cover the value of a new replacement.
Your property manager must use as many tools as possible to protect you. This includes an appropriately completed condition report together with supporting photographs.
I’m sure most of us really don’t have anything against pets, but I can assure you I do not appreciate people who do not clean up after their pets or take responsibility for damage caused by them. My advice is to be extra careful when putting tenants with dogs and cats into your investment property.
Let’s say you have cedar doors at the back of the property and your tenant’s staffordshire terrier has scratched them badly. The only real solution for you is replacement. However, this would not be awarded at tribunal and it is highly unlikely the tenant is going to offer to pay the thousands of dollars for replacement. Best avoided, wouldn’t you say?
Loss of rent/termination of tenancy
Don’t expose yourself to unexpected vacancies. Keep your tenants on a lease if possible, and weigh up the pros and cons of the tenant being on a rolling lease. Your property manager should be ensuring this conversation occurs between you and your tenant well in advance of the lease expiry.
Market conditions and seasonal factors should be considered. As a broad guide, your current tenant vacating around Christmas or Easter will produce the most likely scenario for increased vacancy and possibly even lower rent because of reduced demand.
Whether professionally or self-managed, there is an inherent risk in the management of your asset. Is the property being appropriately inspected to ensure maintenance and care of your investment? When was the last time the rent was reviewed? This should be done at least annually. What about the tenancy itself? Is it working? Is your tenant paying rent on time?
The worst case I have seen was when an owner came to me with a tenant in arrears by $10,000. The tenant, who had been a good tenant for about three years, was paying over $1,000 per week. He just stopped paying and the owner had simply not checked the rent was arriving in her bank account.
Is your tenant on a lease, or are they on a rolling lease that enables them to vacate at any time with fairly short notice?
We all have busy lives and, like the poor landlord who forgot to check her bank account, we assume things will all be okay. Your investment is a valuable asset and you want to get the most out of it and ensure any risks are managed appropriately. This includes all of the paperwork but also having a clear understanding of the legislation and how to best manage situations that may arise. Check with your property manager to see if they have a risk-management program.
Your time is precious and you do not want it taken up by silly, petty or simply annoying issues.
I once had a call from a tenant on a Saturday afternoon to say he had no hot water. He had just picked up the keys that morning and wanted a nice hot shower after the stress of the move. My first question was: have you checked the switch? He said ‘no’.
We thought the problem was solved, but half an hour later he called back to say now he had plenty of hot water but no cold water. So I asked if he’d tried both taps. Bingo! Problem solved.
Equally, who wants to be thinking about repairs and maintenance? Your property manager has the tools to manage these situations quickly, efficiently and professionally. Response time, particularly with emergencies, is crucial in keeping the tenancy on track.
Last year I had a call from a poor tenant whose sewer was backing up on New Year’s Eve as she was trying to get ready for a function that night. Our trusty plumber was out there within the hour to ensure everyone involved could move on and enjoy the night – the client, the tenant and myself! Otherwise I can assure you the tenant would have had to call an emergency plumber and no doubt would have racked up one of those nasty bills that would have to be disputed.
Having an investment property can be a great way to build wealth, and managing the associated risks is this best way to optimise its potential.