Buying your first investment property can be both exciting and daunting.
You've poured your hard-earned savings and/or equity into an expensive asset, and now you take on the responsibility of being a landlord and the challenges of property management to ensure you maximise the return on your investment property.
Over the years I've seen numerous mistakes made by “learner” landlords who have limited knowledge of managing an investment property.
So to help you avoid these property management mistakes, here is a list of what I would consider the “7 deadly sins” of property management committed by beginning investors and some tips on how you can avoid them.
Investing in property is about facts and figures, but all too often investors make the mistake of becoming emotionally invested in their property search.
Sometimes the best investment is one that you can never imagine living in yourself.
Perhaps it needs minor refurbishment or doesn’t meet your lifestyle, but it's a perfect fit for the primary demographic of the location.
Then there are the landlords who want to stamp their own personal style on their investment property.
This might include loud colours on the walls and garish flooring, but the best rule to follow in order to maximise your property’s rental and resale appeal is to always go neutral with the décor and wherever possible, select durable, hard-wearing finishes.
You would never consider throwing half a million dollars into a new business without a business plan right?
But surprisingly, this is what a lot of investors are starting to outdo.
They jump straight into buying an investment property without first formulating a detailed investment strategy/business plan, even though building a portfolio must be approached as a business endeavour in order to be successful.
Additionally, just as a new business owner must employ the best team to ensure their company takes off, so too must an investor surround themselves with experts who can help them make informed decisions, such as accountants and solicitors.
Far too often people get into property investment as a “hobby” and end up only ever owning one investment (which is just as ineffective as owning none), or up to their eyeballs in debt that they struggle to pay back.
Avoid this trap by replacing emotion with some business savvy.
One of the most frustrating aspects of property management is dealing with new landlords who think the best way to make money is by not spending a cent on the upkeep of their investment property.
They fail to conduct repairs in a timely manner and can’t see the value in a coat of paint, new air conditioner or dishwasher or a kitchen makeover.
The fact is, minor renovations can not only add significant capital value to your investment, it can also increase your rental returns overnight.
General maintenance is also important as it will ensure your property’s value holds up and make it easier to re-let as required.
For this reason and to do the right thing for your tenants, it’s important to attend to repairs in a timely and professional manner.
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While I advocate landlords being nice to their tenants in terms of conducting maintenance as required and ensuring their property is a comfortable and safe environment, one thing I firmly discourage is the direct interaction between the two parties.
All too often though, landlords decide to form a relationship with their tenants and then the problems start.
The tenant thinks that because you’re a friend, you might not mind too much if the rent’s a little late each week.
It’s always best to keep the tenant/landlord relationship on a business level and employ a professional property manager to act as your go-between.
It’s difficult to avoid the above mistake when landlords decide to look after their property without the assistance of a professional property manager.
Many beginning landlords think they can save a bit of money on letting fees, etc by choosing to “cut out the middle man”, but it can cost you quite a bit more in the long run if you take this route.
Not to mention the fact that property management fees are fairly inexpensive anyway…and tax-deductible!
A property manager knows how to effectively market your rental premises to prospective tenants in order to minimise vacancies, they collect the rent on your behalf and will act as your representative at Tribunal should the need ever arise.
They also save valuable time that you could spend searching for your next investment opportunity!
Another important role of a property manager is to conduct regular rent reviews to ensure the landlord is achieving the best possible returns on their investment.
Often landlords don’t have the ability to determine the best market rent for their property at any given time, as they have limited access to necessary research.
Property managers know the area they work in intimately and have an extensive list of comparable rentals in order to calculate the best market rent for your property.
This is critical, as your tenants help to repay your loan. By keeping up with rental increases, you can better manage your debt and minimise the gap between your returns and repayments, particularly if interest rates are going up.
Having a depreciation schedule professionally done can be a Godsend at tax time.
Many landlords think that this is only necessary with a new property though and don’t fully appreciate the concept of depreciation.
There are numerous items in a rental property that can be depreciated at a certain rate, allowing you to claim a tax deduction on them.
I know of some property investors who manage to reduce their debt significantly just by depreciating as much as they can and using their tax refund to pay down their loans.
If you avoid committing these seven sins and instead, seek to understand the rules of the property investment game, your portfolio will generate heavenly capital gains into the long term and put you on a path to successful wealth creation.