10 Biggest mistakes for Investors
1. GOING IT ALONE
Not engaging a property manager as ‘the middle man’ between tenants and yourself may initially seem an obvious way to save money, but it can cost you dearly in time and money and, therefore, money when things start to go wrong.
There are many ‘potential minefields’ for do-it–yourself landlords.
Failing to ask for a bond, not having a lease, failing to complete a condition report, misunderstanding the Residential Tenancies Act and entering a property without giving the correct notice period are the ‘five big traps’.
You mustn’t simply use the cheapest rental manager but one with a history of managing similar properties and low vacancy rates.
Not securing a good property manager or expecting them to do everything for next to nothing can be extremely costly to a landlord. Routine inspections, lease renewals, rent allowed to get into arrears and maintenance issues can all quickly get out of hand.
Remember, property management fees are tax deductible.
2. TREATING RENTAL HOMES LIKE HOBBIES.
Most people who buy a business worth $500,000 treat it seriously, including having resources and systems in place. As such, treat your investment like a business by engaging professionals. Successful landlords usually consult an accountant, a quantity surveyor, a financial advisor, various tradespeople and a property manager, remembering all these costs are tax deductible. Unfortunately too many people buy a property and then treat it like a hobby, rather than the investment business it is. As a result, it fails to achieve its maximum potential. Remember a few dollars spent on managing your business can certainly make you thousands of dollars when you look at the bigger picture.
3. DOING TARDY, CHEAP OR RELUCTANT REPAIRS
A landlord who doesn’t see the value in maintaining their own investment is making a big mistake. Punctual maintenance is critical if a landlord wants to build and keep a positive relationship with a tenant and property manager.
Just as importantly, a small repair is often a precursor to a bigger, costly problem if left unattended. Painting over mould might be a sign of serious waterproofing problems.
You must also understand your legal obligations to undertake urgent repairs and the cost implications of doing so. Many investors don’t set enough money aside for maintenance of their property.
Similarly, landlords who blame a tenant for any maintenance issue and wait for a tenant to fix the problem are also making a big mistake. Under the residential tenancies act 1997, a tenant must return a property in a reasonably clean state with no malicious damage.
The Act takes into account depreciation, wear and tear and the general standard of the property pre-possession. Bond money should not be seen as a general repair kitty.
4. DOING FREESTYLE RENOVATIONS
Going into an investment property renovation with an open cheque book is a recipe for financial loss. Equally risky is attempting a renovation without paying for qualified tradespeople.
While sensible to want to make more rent and add value via market-appropriate improvements to your investment, never try cutting costs by using a property’s on-call handyman to perform electrical, plumbing and/or structural carpentry jobs, unless of course, the person has qualifications. By all means wait until the property is vacant, then roll up your sleeves and do the graft-work yourself to save money i.e. painting, stripping wallpaper, and gutting kitchens and bathrooms.
Remember, only begin a renovation if it has a clearly defined objective and budgeted fully. It needs to be value for money, be it an increase in rent or an increase in value of the property .
Up to 10% of the value of the property should be budgeted over the life cycle of your investment.
5. BEING A SHOESTRING LANDLORD
Always doing things on the cheap isn’t risky if planning a costume party. It is risky when owning a rental property!
There should always be adequate funds so that maintenance can be attended to in a prompt manner.
These funds need to be set aside when first purchasing a property. Up to 1% of the purchase price should be available at call for unexpected and expected issues associated with the property.
Remember, the presentation of a property will dictate the demand as well as the type of tenants it will attract!
6. NOT HAVING A DEPRECIATION SCHEDULE
A depreciation schedule is the inventory of items at a property that can be depreciated at a certain rate to claim a tax deduction.
The reality is that an investment of a few hundred dollars can save many thousands of dollars.
Capital work deductions are for properties built after July 1987, however, significant deductions are still available for properties built before this time. These might include capital works on the property such as renovations, or depreciation of plant and equipment.
Renovators are also eligible for deductions when throwing away or scrapping assets. The residual value of assets thrown into the bin can often help to finance a renovation.
7. DOING SLOPPY CHECKS
Landlords often make the mistakes of not doing due diligence before their purchase. This might extend to sighting body corporate records to not getting building and pest reports done on their property.
Imagine buying a property riddled with termites? Your investment might have just walked out the door, depending on the damage.
8. NOT KNOWING YOUR MARKET
Property managers lament landlords who don’t do any research on what their target market expects and will pay.
The experts agree that treating a property like a business means charging market rent. Pricing a rental property too high will attract less prospective tenants which will reduce the number of good-quality applicants. Conversely, pricing a property too low will negatively impact the financial position of the landlord and not attract your target market.
Your property manager should be on top of comparable properties and managing your rental reviews. Rental increases need to be reasonable and in line with the market.
Remember don’t spend $50,000 on a reno when your target market will only achieve an extra $10/week in rent.
9. THINKING LIKE AN OWNER-OCCUPIER
Selecting a property you would live in or transforming one into something you would like to occupy are the most common mistakes.
Installing the latest finishes will mostly go unnoticed and hurt your hip pocket, especially when you can get the same finish for a fraction of the cost.
Looking at a property with tiled floors because you prefer them, may not be the best option as a carpeted floor will return a greater tax deduction.
10. HAVING INSUFFICENT INSURANCE
Property insurance can be broken into 2 categories, Landlord and Replacement. Many investors underestimate the replacement costs associated in rebuilding their property in today’s climate of compliance and regulations.
Likewise, cash flow is also an important consideration when it comes to Landlord Insurance. It might be just another expense, you can do without, but you need to decide how you’d fare should the worst happen. Can you afford a long vacancy period or a tenant in arrears moving out with a cleaning bill that won’t be covered by the bond? What about malicious damage to the property?
Remember, property managers are not infallible and tenant circumstances can change very rapidly in this economic climate.