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July 2, 2019
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October 7, 2019

Top 10 Mistakes of a First Time Landlord

Let’s be real for a moment, buying and investment property is a big deal!

There’s so much going on all the time and there’s a pile of paperwork to be done, there’s so many forms to sign that by the end you start to question if that’s actually how you spell your name!

When you’ve purchased a brand new house and land investment the anticipation for settlement is almost unbearable – not only do you have to go through all the paperwork and the signing and the bank documents but you’ve got to choose floorplans and colours and wait for developers approval and building permits…not to mention waiting for the house to actually come to life and be built! Over the journey you’ll find yourself chatting away to so many different people who will tell you ‘how it’s all going to work for you’. You’ll talk to sales reps, project managers, mortgage brokers, building supervisors, friends, colleagues and family and everyone will have an opinion of how to structure your investment. They’ll share their experiences and there’ll be no shortage of warnings to heed. By the time you get to your property manager you’ll have all of these opinions, stories and opinions in your mind and you’ll probably miss the most important part of the process when it comes to an investment property – the education your property manager will give to you. It’s an invaluable education in real time based on real experiences so in today’s blog I’m going to give you a snapshot of the top 10 mistakes that first time landlords almost always make – brace yourself, it’s going to be a long one!!

1. The tenant will pay your mortgage.

Wrong. The tenant isn’t there to pay your mortgage. Their responsibility is to pay their rent in line with the legislation and the lease agreement that they sign. They aren’t responsible for making sure your mortgage payment is there on the date your mortgage comes out of your account, nor is the rent always going to cover your repayments.

Don’t forget there’s expenses with an investment property and down the track at some point there is going to be maintenance, this all has to be paid for from somewhere.

What if your tenant moves out? There may be a vacancy period.

What if the tenant fails to pay rent? As much as I would love to say we live in a perfect world and you’re going to always have maximum rents, minimum vacancies and perfect tenancies – the reality is that rent arrears are real, they do happen. They happen for all sorts of reasons and if you read over our blog titled Rental Reality we talk about this in depth.

The point is that you have an agreement with the bank to pay a mortgage each month, you need to ensure that it is paid. Sure, your rent will come in and contribute to cash flow to meet those obligations but the agreement between you and your financer and that between you and your tenant are completely independent of each other.

ALWAYS have a contingency plan and always have surplus funds. If you don’t have at least one month’s worth of mortgage repayments up your sleeve at all times, then you are ill prepared.

2. Tenants are always paid in advance

Wrong. The word ‘advance’ and ‘rent’ should never ever be used in the same sentence and whoever started this trend should be…. Well shot! This is the biggest battle we face as property managers with both landlords and tenants.

Let’s get one thing straight – a tenant does not legally have to be paid in advance- in fact the legislation provides that a tenant must be paid ‘to date’ at any one time.

Leases provide a slightly different expectation which is the cause of much confusion.

I would estimate 8 out of 10 tenants asking me at the end of every tenancy ‘when do we get our month in advance back that we paid at the start’ and about 7 in 10 landlords misinterpreting rent arrears so let’s see if we can clear this up now.

A tenant moves into a property and they pay one month’s rental which is lodged with the RTBA as a bond for the property, this will remain held by the RTBA for the life of the tenancy to be returned at the end to the tenant providing they have a satisfactory final inspection and all rent is paid to the date of vacate.

They then also pay their FIRST month’s rent. Not rent in advance, this is for their first month that they will live in the property. It doesn’t get held in a magic account somewhere that they’ll get back at the end, it’s rent. You don’t eat the cake and pay for it afterwards, so you don’t move in to a house and pay for it later.

So our tenant moves in on the 1st January and they pay their FIRST month’s rent. Once that rent runs out they’re going to pay another month’s rent on 1st February and so on and so forth. The tenant is not always going to be a month ahead, they pay for the month they are about to live there and when that month runs out they will pay for another month the same rings true for weekly and fortnightly payments. The word ‘advance’ in this case implies that you pay, you stay- when that runs out you pay some more.

Please, for the love of God, stop using the word ‘advance’ when you talk about rent, you’re only confusing yourself.

3. The tenant pays all expenses

Wrong. When your tenant signs the lease they are agreeing to make payment of rent as agreed in their tenancy agreement and utilities that they will consume whilst living in the property. This includes gas, power, internet, pay TV and water consumption.

An owner is responsible for water rates, council rates, insurances and annual parks and gardens charges.

4. The builder’s warranty covers everything, forever

Sorry to tell you this, purchasing a brand new property does not mean that the builder will continue to cover everything in the house under the warranty. In fact the only time that the builder covers ‘everything’ is in the first three months after the handover (some builders extend this to 6 months or 180 days) and even then they won’t cover you for things that have happened as a result of misuse, negligence or wear and tear.

The builder will cover structural items for a mandated 7 years from handover.

5. The rent will keep going up

The days of the Consumer Price Index or CPI are gone. They’ve been gone for a very long time.

There is no such thing when we’re talking about residential rental properties. A property is worth what the market is willing to pay for it at any given time, it’s dependent on the availability of stock, the time of year and the location of the property. Sometimes supply outweighs the demand and rental prices plummet as agents and landlords compete with each other for the lowest vacancy rates, other times the demand far outweighs the supply and it creates a situation for landlords and agents to capitalise on the conditions and drive rents up. But nothing lasts forever. No matter which end of the market you start at it’s likely at some point you’ll re-enter the market at the other end of the scale.

6. I am entitled to increase the rent

The most common misconception by landlords is that they are ‘entitled’ to increase the rent at their property at the conclusion of every fixed term lease agreement. As with the above it’s important to realise that rent’s don’t always go up but in even in a strong market increasing the rent is not a right or an entitlement and just because your tenant’s lease is up doesn’t mean you should automatically increase the rent for their next fixed term either. There’s many factors that come into play when looking at rent increases- check out our blog titled The Landlord Game for a more in depth view of rent reviews and increases for tenants continuing on beyond their initial fixed term tenancy.

Consider the bigger picture with every single decision you make or as my mum used to say ‘you’ll end up cutting off your nose to spite your face’.

7. Routine inspections

As a landlord you are most welcome to attend your routine inspections, in fact we encourage landlords who have availability to attend at least one inspection a year – it gives you a chance to stay in the loop and look for any proactive maintenance you might want to do in the near future and a great chance to catch up with your Property Manager and possibly meet your tenants if they’re at home on the day. Here’s the thing though, you need to remember your manners!

You may own the property you are about to enter but you have a tenant who pays good money for the privilege of living in that house, it is their home. Show them the same respect as you would when entering anybody else’s home. You cannot go through their cupboards or their things and you cannot tell them how to live. And the truth is, neither can we.

Under the Residential Tenancies Act a tenant has the right to live in the property they are leasing in peace and they have the right to reside in that property however they wish provided it is not causing damage to the premises and there is no illegal activity. It’s important to remember that we all live differently, we all come from different backgrounds and whilst some tenants live in a permanent show home others may not be so tidy. Provided the property is returned to us at the end of the lease in a clean and tidy condition with no damage how the tenant chooses to live in the interim is completely up to them so please don’t request your PM to send breach notices for dirty dishes and unmade beds.

8. A brand new property will be returned in a brand new state

Let’s go back to my point on CPI for a second and the brand new car – after re-reading that take a second to think about this one… is that realistic? No.

Your tenant will move into a brand new property and everything is freshly painted and shiny and they are going to live in that property for 1, 2, 3 or even 4 years and beyond. They are going to open and close the freshly installed blinds, cook in that brand new oven, shower in that stunning new bathroom and walk on those plush new carpets. They’re going to live in that property just like you or I would live in ours and do you know what’s going to happen? Things are going to get dirty and then cleaned and then dirty again. Walls are going to get marked and fixtures and fittings are going to be subjected to deterioration through normal every day use.

The reality is that as soon as someone moves into that property it’s not going to be new anymore and the expectation that you’ll get it back in a pristine, sparkling brand new condition is pretty ludicrous.

When your tenant leaves the expectation is placed on them that the house will be returned in a clean condition, with no damage and their carpets will be steam cleaned. When it comes to vacating tenants expectation and reality are two very different things.

9. Depreciation

Following on from the above its important to know your rates of depreciation. Those who purchase brand new properties are familiar with the tax depreciation reports that are prepared to maximise the tax benefits associated with purchasing an investment property, right?

Well, we depreciate in rental tenancies as well. I know myself that carpets don’t get replaced every 7 years and you wouldn’t necessarily repaint your house every 5 years. In fact I built my house a little over 10 years ago now and I have only just started to repaint but my carpet is still the same as the day we accepted handover.

When it comes to residential tenancies, we encourage our tenants to care for the landlords fixtures and fittings to ensure that we get the maximum use from it based on depreciation – our carpet care and cleaning guide in our tenant handbook is there for that exact reason.

The reality is that we live in a throw away society, everything is mass produced and cost cutting in every industry means that the quality of products is not what it was 20 or even 10 years ago. Whilst it’s likely that your investment grade carpet is probably going to need to be replaced in about 4 or 5 years we do ask our tenants to take the necessary steps in cleaning and care to get the most longevity out of it.

Just as your tax depreciation schedule shows the value of that carpet decreasing over time the same is true for your tenants – we’re not in the business of new for old replacement. If damage occurs to your fixtures and fittings (whether it be malicious or accidental) at the hands of your tenants the cost of repair and/or replacement will be based on a depreciated amount. For example, if it costs $200 to replace blinds that are 5 years old when the damage occurs then you are only going to be entitled to half of the replacement costs as blinds depreciate over a 10 year period.

It’s also important to note that there is a big difference between fair wear and tear (depreciation) and damage. The rule of thumb is that if something happens through the course of normal every day use then it is ‘fair wear and tear’ if it’s happened as the result of malicious intent, misuse, negligence then it is ‘damage’ – the two are very different and a tenant is not responsible for repairs or replacements that are the result of normal depreciation.

10. Your Property Manager has superpowers!

There’s a lot of focus around Property Managers and their mental health at the moment and to be honest it’s always been one of the most undervalued and under appreciated industries in the world.

The truth is that Property Managers work hard, have a read of my Blog The Property Management Myth and you’ll get a clearer picture of the everyday craziness we experience as PM’s. You may have one or two (or if you’re really luck 5 or 6) investment properties that you constantly worry about but your Property Manager has up to 100 properties that he or she looks after every single day. She takes care of you as an owner and your tenants, she takes care of her trades and the multiple work orders they have been sent and she takes care of the end to end management of that property to ensure that your investment is maximised. To be honest your property manager does have superpowers – superpowers to cope and coordinate the countless tasks that they do on a daily basis to smoothly and effectively manage up to 100 properties on behalf of their clients. What they don’t have the superpowers to do is to ‘make your tenants pay rent’ or to manipulate or change the legislation. The rules are made for us, everything has a process and a procedure and sometimes, as frustrating as this is, these can take time. We don’t make the rules but we are expected to follow them and getting angry and frustrated with your PM because they can’t do what you want them to do because the law forbids them to do so is not going to change the situation. Be guided by your PM, they’re the one with the experience and knowledge to deal with any situation in the best way possible to ensure legal compliance, they are there to help and are probably just as frustrated as you are with the red tape and legislative restrictions.

Remember that your property manager is a person. A person with a family and a life outside of work. A person, who like you, is entitled to take annual leave and days off because they’re sick. So, if your call goes unanswered – leave a message, they will call you back. If you have a question at 9pm at night, send through an email and they’ll get back to you when they’re in the office, don’t call them because it’s a time that suits you. Remember that our jobs take us out on the road constantly, we have to show properties and complete routine inspections, sometimes we meet client’s onsite other times we might be in court representing an owner. Although I know that in today’s world people are accessible 24 hours a day, 7 days a week with mobile phones and emails, it doesn’t mean that they should be. At the end of the day, as passionate as we are, we are people and this is our job, we deserve to enjoy life away from work just as much as anybody else.

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