If you’ve been considering renting out a house you own, or buying a house to rent out, you have things to think about.
While owning a rental can be a good
way to make some extra money, there are concerns that should be taken very seriously.
You need to take a good look at the
pros and cons before making a hasty decision.
At the very least, learn the basics
before making your move.
You already know stories from family
or friends, and things you see on the news.
Tenants will break their lease and
leave before fulfilling their terms.
Others will overstay their welcome
without paying the rent.
Some tenants are willfully destructive,
and
have no respect for your property, punching holes in the wall, or ripping
doors off hinges.
We’ve all heard about the Tenants from
hell that take the appliances, break all the windows or spray graffiti on
the garage.
Although a rental house can be a
good way to earn some extra money, it’s not always the easiest.
If you want to rent it out, it has
to be managed correctly, and mistakes can cost you dearly.
The truth is, there is no sure fire
way to eliminate all the risks, but you can improve the odds of success by
careful screening.
Learning about the most common mistakes
will avoid a lot of headaches.
1)
Make Sure to Document Everything
A written lease is very important.
You need the right rental agreement for your situation and state.
You need to record the condition
of the home before the tenant moves in (we call this a P.I. property inspection
report). Photos of the property are a great idea. List anything that can be
moved, broken or dug up.
You will need to create a document
that covers points that are specific to your property, in detail.
This paper should cover things like
repairs, pets, deposits, late payment charges, utilities (water charges are
a big issue).
Handshakes And Verbal
Contracts/Leases
Verbal contracts and handshakes
for leasing will not stand up in CTTT (Consumer, Trader and Tenancy
Tribunal) at all, especially if you have to clime damages to the property.
Common sense should tell you it’s
best to have a signed lease, just to enforce the rules if nothing else.
You can obtain standard, generic
Residential tenancy agreement online, but they won’t apply to some things
about your property.
Even if a tenant is in a property
under a verbal agreement, they still retain protection under the law.
A casual agreement to rent doesn’t
mean a casual eviction.
The same legal process for eviction
will apply, whether or not a formal lease was contracted.
The courts tend to give the tenant
the benefit of the doubt in disputes over rent and eviction, because he/she
will be losing their home when it’s all done.
This is probably the single biggest
step you can take to protect your property.
2)
Never Fall Into The Discrimination Trap
It’s extremely important that you know the Anti-Discrimination Act.
Understand not only your own
rights, but also those of your tenants.
Figure out if your rental listing
has excluded certain groups, to avoid the appearance of discrimination.
When showing the house to any prospective
tenants, questions about an applicant’s marital status, disabilities or
social behaviour could be seen as discrimination.
Make sure you provide solid support
for any decision you make when rejecting an applicant, based on a background
check and rental history.
Certain law offers protection from
discrimination or harassment due to any of the following factors.
• Race (colour, nationality or
descent)
• Sex (male or female)
• Pregnancy
• Marital status (e.g. singles or unmarried mothers)
• Disability (physical, intellectual or psychiatric disability)
• Homosexuality (both gay and lesbian)
• Age (both young and old)
• Transgender (transsexual)
• Sex (male or female)
• Pregnancy
• Marital status (e.g. singles or unmarried mothers)
• Disability (physical, intellectual or psychiatric disability)
• Homosexuality (both gay and lesbian)
• Age (both young and old)
• Transgender (transsexual)
3)
Insure Yourself Properly
Rental properties are a higher
risk than a home you live in, to an insurance company, and typical
homeowner’s insurance doesn’t cover full-time rentals.
Specialised landlord insurance
policies are available to protect your property from financial loss, damages
and accidents.
Some factors that aren’t usually
covered include malicious damage by a tenant, loss of rent or public liability.
According to NSW Fair Trading, a
landlord can require a tenant take out tenants insurance.
Landlord insurance policies do not
cover a tenant’s possessions.
In general, this does not affect
you as a landlord.
However, tenants insurance can
prevent a suit by a misinformed tenant, who lost his stuff in a fire he
started in the kitchen, and who thinks he can sue you.
So
You Have Landlord Insurance And You Think You’re Ok? THINK AGAIN!
You think you’re covered, well we
still come across landlords that have not looked into their landlords insurance
policy and find out they are not covered, for malicious damage and public
liability (these are not standard features of an insurance policy), crazy
isn’t it!
We recommend TICA insurance that
specialise in landlord insurance.
4)
Be Truthful About Important Information
If you know of problems like lead
paint, asbestos or mould, you may be required by the residential tenancies
act to tell tenants about these hazards.
Failing to do so can expose you to
fines and loss of rent. Anything that is a health and/or safety risk that the
owner is aware of has to be disclosed to the tenant.
It is your job as a property owner
to be aware of the ACT, and to comply with it.
5)
Failing To Screen Your Tenants Carefully
If you think you are a good judge of
character, you’re wrong. The old saying is true in this case. You really
can’t judge a book by its cover.
Just because someone has good manners
and nice clothes doesn’t mean he isn’t spending more than he makes. It might
just mean he’s a good con man.
While it can be a pain to screen tenants
in detail, it’s better than a tenant who doesn’t pay the rent on time, or
doesn’t care for your property. Eviction will be stressful, drawn out and
costly.
That will make the original screening
seem much more worthwhile. It’s well worth the effort to remain patient and
always require a tenant database check.
This is the easiest way to select a
reliable and responsible tenant.
You need to know if someone has been
evicted before, if he’s not telling you about a criminal record and if he can
afford what you are charging for rent.
Industry standard is a monthly
income that is three times the amount of rent.
Keep in mind property managers
have access to tenancy referencing software/data that is not available to
the public and only qualified property managers can access.
Property managers know the residential
tenancies act when it comes to searching an applicant’s background.
The ACT is quite strict when it
comes to personal data; like destroying the data found in a background
check once it is done and shredding documents once an application has been
processed to prevent identity theft.
Your gut feeling still matters, but
it goes along with this type of tool. It doesn’t replace it.
6)
Take Your Rental Business Seriously
One of the biggest mistakes you can
make as a landlord is to treat your rental with a casual attitude.
Though it may seem informal, never
forget that renting out your real estate is a business.
Failure to communicate with your
tenant or the authorities can lead to stiff fines.
Always report your rent proceeds as
income, or you will live to regret it.
It will mean paperwork, but don’t
skip that paperwork.
That will end up costing you penalties
for non-payment, you will have to payback your taxes (nobody wants to do that)
and interest charges.
There are also tax benefits, however.
Documenting your property dealings
will open the door to those benefits.
Deductions for business expenses
are available, such as certain repairs, as well as mortgage interest and
property management fees.
Your insurance company also takes
your rental business seriously.
This is why you need landlord insurance.
A regular homeowner’s policy
doesn’t cover a rental if it burns down.
Liability insurance is to protect
both your property and the people that live there.
There are a lot of laws that protect
tenants from discrimination and hazards in their homes.
If you don’t install a smoke
detector in your own home, that’s one thing. If you do the same thing in a
rental property, you fail to meet a legal responsibility to the safety of
your tenants.
The same is true of sheds or garages
that are unsafe.
While you might be able to get away
with it at the house where you live, it’s another matter when you are charging
rent for that same house.
It’s like parents and children.
You are legally responsible for their safety when it comes to your property.
That means structures, chemical
hazards like asbestos and security.
You have to make sure the property
is up to the Residential Tenancies Act of 2010.
You must respond to tenants who complain
about safety, urgent repairs, and criminal activity reported by neighbours.
Believing Ignorance Is A Legal
Defence, They Will Just Come Down On You Harder!
If you’re going to do it, do it
right. What ever you do don’t enter into a landlord/tenant situation thinking;
A) “She’ll be right mate, it’s easy
money” or
B) “Is common sense, you don’t need
to know anything about it, what could possibly go wrong?” or
There are massive penalties if you
get it wrong.
7)
It’s Not a One Man Show You Need A Team
With all these details to keep track
of, hiring a property manager is a good idea.
Keeping up with Residential Tenancies
Act about property and renting can seem like a full time job.
For some people, it is a full time
job. It can be a great idea to hire some of those people.
Property Managers
A good property manager can free
you from these burdens, and can also schedule and supervise repairs.
Property managers can do the heavy
lifting when it comes to screening and background checks. They can advise
you on fair market prices and handle advertising.
This means a rented house at a
great price and more reliable tenants which ultimately means more time and
money for you.
Accounts
An accountant can do wonders to
keep the ATO at bay.
There is fantastic deductions you
can have as a property owner and you can offset your tax from your income.
An accountant is aware of these
deductions and requirements, and can prevent a costly mistake.
All of these people can be worth far
more than they cost.
8)
Rent And Mortgage Payments Are Not the Same Thing
It may seem logical that the rent
from a property should cover the bank payment/mortgage, but the two things
aren’t figured out the same way.
Your bank payment is figured from
your down payment, the total amount of the loan and your interest payments.
Add into this the market value of
the property when you bought it, and your credit history.
None of this is used to figure
rent.
Unlike a mortgage, which buys you a
permanent house with tax advantages, rent only buys a place to stay for a
while.
To figure out how much to charge,
compare rent values for houses like yours on the local market, or hire a
property manager do a CMA (comparative market analysis) and advise you
on how to get more money for your rental property.
Money from a rental is for extra
monthly income (cash flow), not to secure an investment.
Talk with a qualified financial
advisor or your account to show you the details of how the cash flow works and
they can advise you on how to maximise your current situation.
9)
Pocketing The Bond And Charging More Than 4 Weeks Rent
Never skip a written lease and
never pocket the tenants bond.
A formal lease agreement protects
your rights, and allows you to spell out the rules.
Don’t assume you’ll be getting that
bond once an informal agreement is broken.
After all, where’s your proof a bond
was ever agreed to?
It’s going to be spelled out, in
that written lease.
The law limits your security bond
to four weeks rent.
The written lease lays out payments
to be made for damages, and the bond will cover one month’s lost rent.
You cannot just put the bond money
in an account you have created yourself.
All bonds must be lodged immediately
with Fair Trading NSW and a receipt/record of the payment details are on the
tenancy agreement or you will get in trouble with the law.
Don’t stress you can make a claim
against the bond for certain reasons after the tenancy ends.
Some landlords try to charge more
than 4 weeks rent but legally no more than 4 weeks rent can be taken as a
rental bond.
All too often it may not be enough
to cover really bad tenants, but if you are disturbed about this risk we
would strongly recommend taking out landlord insurance, and a top notch
property manager to reduce the risk.
You must lodge your bonds with Fair
Trading NSW immediately.
Fair Trading records will protect
you if a tenant takes you to court. While the bond and damage payments may
not provide full security, landlord insurance should serve to fill in
the gaps.
10)
Upgrade Your Property And Attend To Urgent Repairs
A lot of landlords think, “she’ll be
right mate the paint peeling off the walls will be fine, I’ve lived with it
for years.” Or “I don’t need to fix the air conditioning, I just don’t use
it, and besides electricity is too expensive anyway”
Well that type or thinking is
costly that can lose you thousands of hard earned dollars and potential
money making opportunities.
A good property manager can show
you what tenants will pay for and what they will not.
It’s a simple fact of life: the
nicer the property, the nicer the tenants.
It may seem a bit counter intuitive
to fix up the property for others but it will pay off big time.
You see it’s worth it in the long
run to use quality taps, paint and appliances (with warranties) for your
rental property, just make sure to do your shopping around first.
Don’t under estimate what a coat of
paint and new stainless steel taps can do to add perceived value.
The extra expense will be made up by
how long they last. A satisfied, responsible tenant will have no reason to
move out, and will pay rent for years to come (as long as you keep up with
repairs).
Anybody who lives in a home they
love and proud of will naturally take care of the property as if it were
his own.
We see it all the time when a property
is run down, the only tenants it will attract, will be people who don’t care
about the property, and they are the type of tenants that take up most of our
time wanting things fixed.
In addition, items needing repair
not only pose a potential liability, but tenants can legally carry out
urgent repairs without your knowledge up to $1000 in NSW or tenants can claim
a rent reduction via Consumer, Trader & Tenancy Tribunal E.G. for an air
conditioner that was not working.
We have also experienced water saving
devices not installed and the landlord had to pay the tenants back so please
contact your local property manager about what upgrades are going to save
you money.
You might as well pay the money up
front when you can, rather than be ambushed by it when you aren’t ready.
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