This week’s blog topic came to life from some of the conversations I have found myself having with landlords this week and I guess in a way taking those conversations and turning it into something which will help landlord’s gain a better understanding of property investment means that the content we are providing is real and relatable.
Obviously, I speak with landlord’s day in, day out because that’s an important part of my role. We discuss maintenance and lease renewals and all sorts of things but mostly we talk about rent. The one thing I have found is that there is a commonality amongst owners when it comes to understanding rental income which makes me realise that there is a real need for education around this topic.
Owning and investment property does seem like a simple concept, especially when there is a property manager involved. You simply engage the services of a PM of choice and then hand over your keys. They’ll arrange marketing and open homes and then they’ll sign your tenant up and from there the money comes in each month and there’s nothing for you to do until it comes time to renew the lease and review the rent. Sure, something might go amiss in there and you might have to deal with some maintenance but overall it should be pretty smooth sailing, right?
It’s something that is rarely thought about as an investor. When the stars align then yes everything is smooth sailing and for a PM it’s a dream. The rent comes in on time and in full every single month and the tenant takes excellent care of the property and by the third routine inspection we know exactly what to expect and it becomes a pleasurable catch up with the tenant.
The reality is though that a person’s personal circumstances can change in an instant. I’ve discussed this in previous Blogs but realistically your perfect tenant could walk in to work tomorrow and find out that he no longer has a job and things start to go downhill. In the blink of an eye three years of perfect rental history can become a messy state of affairs because there’s no longer an income to sustain the rent and we find ourselves constantly chasing that tenant for arrears.
The process of eviction for rent arrears can be long and complicated, a topic that is a completely different Blog, but it highlights the importance of having a back up plan.
Whilst investing seems easy on paper and your rent should cover majority of your holding costs, sometimes your rental income will even align perfectly with your mortgage repayments and it feels like life can’t get any better, having a contingency plan in place in the event that the rent doesn’t come in is one of the most important lessons in investing in property.
Remember, it is the tenant’s responsibility to pay their rent and it is your responsibility to pay your mortgage. The two should never become intertwined. A non-paying tenant will be dealt with by your PM in line with legislative guidelines, a default on your mortgage in that time can be catastrophic to your financial future. Always be sure to have a surplus of funds available to ensure you are not in a position where the bank is chasing you in the same manner your property manager is chasing your tenant.
And it’s not just rent arrears, there’s so many reasons your rent might be short or late.
Tomorrow morning, without any warning, your PM could call and advise you that your Hot Water Service has burst, the tenant has no hot water at all, and it needs to be replaced as an urgent repair. You give the go ahead and the work gets done but then comes the bill….. Your PM is likely going to enter this in for payment from your next rental income and suddenly that rent you were relying on to meet your mortgage payment is going to the plumber to just supplied and installed a brand-new hot water service.
Having a back up of cash to cover the mortgage whilst your rental income covers the cost of your repairs is absolutely essential. It might not happen today or tomorrow but eventually it is going to happen. Things are going to break down and need replacement eventually and the hardest part is that in this day and age you just never know when. Be prepared now and you won’t have to stress about it when it does happen.
All of this aside the biggest cause of financial strain on landlords, believe it or not, is actually vacancy. If your tenant were to vacate tomorrow would you be able to sustain your financial commitment to the property if it were vacant for a couple of weeks? As agents we do everything in our power to try and minimise vacancy rates like commencing open homes prior to the end of a tenancy but sometimes vacancy is inevitable. Right now, there are some areas experiencing a flooded market. The availability of stock outweighs the demand with some areas having over 800 properties on the market for rent. Agents in these areas are really struggling to fill their vacancies in a highly competitive market and rents are suffering as a result as agents try to fill their vacancies by dropping the rent. So, whilst the vacancy might not hurt the landlord the difference between the previous tenant’s rent and the new tenant’s rent of $20 per week will definitely have an impact.
It’s really important that as a landlord you understand all the risks involved. You need to understand that rent does not always go up at every lease renewal or tenancy change, there are times when you might have no rent, late rent, partial rent and the reasons for this are plentiful but if you understand this from the beginning and you have a plan in place to cover the cash that is needed to meet your financial obligations then you will avoid the stress and frustration if any of those situations arise for you.