10 Most Common Critical Mistakes When Leasing Your Property

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.

Here is a new ten­ant check­list that is very help­ful.

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)

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.