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 wilfully 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
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.
Australian law offers protection from discrimination or harassment due to any of the following factors.
• Race (colour, nationality or descent)
• Sex (male or female)
• 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 2010 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.
Asbestos is a key issue around the Seven Hills area as approximately 40% of homes have asbestos and around 10% need some sort of repair to be deemed safe.
To add to all of this, Real Estate Agents are not qualified builders and cannot make decisions whether a wall or a roof is asbestos and if it needs repair.
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.
Australia has two major tenant databases and not all real estate agents have both of them (to do a full check you need both because the tenant maybe flagged as a bad tenant on one of the databases and not the other), the Tenancy Information Centre Australia (TICA) and the Trading Reference Australia (TRA).
TICA is Australia’s largest tenancy history database, and the TRA lets a property manager look at things like photo ID and pictures of damaged houses.
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.
The ATO (Australian Taxation Office) also take a serious view of your rental property.
They consider it a business, and your rent is business income, as far as they are concerned.
You should take it at least as serious as they do.
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.
Others that take your rental business seriously is the CTTT in NSW.
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.
This is the easiest way to select a reliable and responsible tenant.
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
C) “What the ATO and the CTTT don’t know about can’t hurt them”
There are massive penalties if you get it wrong.
To read decisions made by the CTTT against landlords, for not knowing and breaching the Residential Tenancies Act click here it’s a good read.
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.
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.
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 Australians 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.