With a trend towards private building certification and self-assessed development applications, I’m seeing a growing number of investors and developers cutting corners in the development process, based on the principle of ‘non-detection’.
That’s because there’s now no council inspector involved in the process and it’s all handled by your professional, so there isn’t much chance of getting caught out by taking a shortcut.
In a way this has led to a growing trend by owners of investment properties to simply convert carports into garages, garages into bedrooms and to ‘fill-in’ areas in circumstances where there was never any chance of getting formal approval to do so.
So now, as a property investor, you regularly come across houses containing these unlawful conversions.
They’re immediately detectable when, for example, you walk into what appears to be a media room, but the entry involves a step down into the area which was once a garage.
Likewise, too, when you walk into the fourth “bedroom” and the roof seems a lot lower than the hallway that you just stepped in from.
These are all tell-tale sign.
What Does This Mean For You As An Investor?
Can you rent out a property like this and pick up the extra income from the fourth “bedroom”?
What effect does this have on your insurance? What if someone injures themselves by tripping and falling or by colliding with a ceiling fan in full flight?
What liability do you have as a landlord or owner of such a property?
A quick call to your insurer will reveal that the unlawful conversion or addition will usually void your policy and result in them refusing to indemnify you for any such claims.
Confronted with such a situation an investor client of mine, let’s call her Karen, bought a property where all of the downstairs area in the house had been illegally converted into bedrooms.
It wasn’t possible to obtain council approval for the conversion now, as the rooms didn’t comply with the minimum height requirements.
Upstairs contained three bedrooms but the property was so much more attractive to a tenant with the two additional bedrooms downstairs.
My advice to Karen was that if she bought this property she must ensure that any lease of it contained a clause that was crystal clear about what the tenant was renting for habitable purposes so there could be no comeback against Karen as a landlord, and to preserve her insurance over the property.
A suitable clause would be something like the following:
“The tenant acknowledges that only the upstairs part of the home is habitable and that this consists of three bedrooms, two bathrooms, a toilet and a kitchen.
“The tenant acknowledges that the downstairs part of the property is not habitable and in particular acknowledges that the two areas that have been converted to bedrooms cannot lawfully be used as bedrooms.
“The tenant also accepts that the only rooms that can be used downstairs are the laundry, garage and bathroom.
“The tenant agrees that if they use or allow others to use any part of the downstairs area as bedrooms, this will constitute a fundamental breach of this lease by the tenant and will entitle the landlord to terminate the lease with compensation.
“The tenant also indemnifies the landlord in respect of any claim, action, demand or proceedings taken against the landlord by the tenant or any other party including and without limitation any claim or action for personal injuries caused by the use of any of the downstairs areas for habitable purposes.”
SUBSCRIBE & DON'T MISS A SINGLE EPISODE OF MICHAEL YARDNEY'S PODCAST
Hear Michael & a select panel of guest experts discuss property investment, success & money related topics. Subscribe now, whether you're on an Apple or Android handset.
NEED HELP LISTENING TO MICHAEL YARDNEY'S PODCAST FROM YOUR PHONE OR TABLET?
We have created easy to follow instructions for you whether you're on iPhone / iPad or an Android device.
PREFER TO SUBSCRIBE VIA EMAIL?
Join Michael Yardney's inner circle of daily subscribers and get into the head of Australia's best property investment advisor and a wide team of leading property researchers and commentators.