Being a landlord for the first time can be a daunting experience. As well as needing to know the legislation inside out, there is a myriad of issues that can arise. Read on to see the top top pitfalls that new landlords can find themselves in and just what they can do about it...
Forming a direct relationship with tenants
Dealing directly with tenants can be rewarding but it can also make it difficult to make the best business decisions. It is human nature for people to unwittingly take advantage of people when we know them. For example, a tenant is more likely to pay rent late if they think you won't mind.
You would need to be a special kind of person to successfully separate your business relationship from your personal one when serving an arrears notice on a tenant with whom you have a close relationship. The same applies to rent increases and bond claims at the end of the tenancy.
Treating property investing as a hobby
Most people who bought a business worth $500,000 would treat it very seriously and have the resources and systems in place to get the best results. Unfortunately, too many people buy a property and then treat it like a hobby and don't achieve its maximum potential.
As in most business ventures, you need to have the right mindset if you are going to be successful. The best investors remain unemotional about their properties. If you are driving past the property each week to check the roses, perhaps you need to consciously distance yourself from the property.
Thinking of a property as their own home
Good investment opportunities can be missed because the investor thinks they would not like to live in the property. You may choose not to live in an apartment with no parking, but one near a university and close to public transport may be a great investment. New landlords often enjoy painting or decorating their property. You might think an orange feature wall looks amazing or that bright blue carpet is very trendy, but you don't have to live with it. The rule is to keep it neutral and make sure that whatever you do appeals to the widest range of tenants.
Not keeping the property in good condition or not doing repairs quickly
One of the things I love most about property investing is that you can increase the value of your asset by making improvements. A coat of paint, removal of a wall or a more elaborate renovation can make a big difference to the value of your property. In addition, the rental yield can be increased substantially by repairs and improvements for which the tenants will pay extra rent.
In an effort to save money, some landlords will not keep the property in good condition which can be a false economy if the property does not lease quickly or achieves a lower rent.
Repairs, particularly with painting and carpets, should always be done quickly and to a professional standard, even if they are minor.
Not having a depreciation schedule
A depreciation schedule is the inventory of items that can be depreciated at a certain rate to claim a tax deduction. It is amazing how many people don't have one or think this is used only with new properties. Too many accountants rely on what their client says rather than encouraging them to have a depreciation schedule professionally prepared by a quantity surveyor.
The reality is that an investment of a few hundred dollars can save many thousands of dollars in tax, even for an old property.
Failing to increase rents regularly
All landlords should regularly review rents to ensure they are at market rates. A small, regular review is much better than a large, infrequent change that shocks the tenant so much they move out. As a new landlord, it might feel daunting to increase the rent for the first time fearing that your tenant may move out. In reality, as long as the increase is reasonable you should have no problems with your tenant.
It is useful to compare your property with others which are similar in the area. Go to open for inspections in the neighbourhood to check market rents. It is also advisable to do a gross yield calculation and compare it with the rental yield table at the back of some property investment magazines. Multiplying the rental yield by the estimated value of your property will guide to the annual rent you should be achieving.
Losing sight of the bigger picture
If you are serious about property investing and truly want to create a better financial future for yourself and your family you need to remain focused on building a portfolio. To do this you need to be able to leverage the equity in your properties. The greater your equity and rental returns, generally the more you can borrow.
To establish the value of your portfolio you bank will use an independent valuer to establish the value of your property. It is crucial you understand what value they have put on the property and compare this with what you think. If the property has been undervalued, follow up this with your bank. Prepare a list of comparable sales, talk these through with your bank and don't feel you have to accept their valuation. If you have a valid argument they will often listen to you.
When people buy their first property they get caught up in all the details and sometimes lose focus of the bigger picture of building a portfolio. Set yourself some objectives around your property investing so you can stay on the track to your personal goals.
Paying down the wrong type of debt first
Most experience investors know that it can be tax effective to pay down non-tax deductible debt (such as loan on your home) before tax deductible investment debt. Most investors have their investment properties in interest only loans until they have eliminated non-tax deductable debt.
Too often people are not maximising their personal tax benefits. The professionals working with them have not helped them to structure their portfolio effectively.
Using the wrong accountant
It is very important to have a business plan and build a good team of people who can help to make the right decisions. A good accountant that truly understands property is worth their weight in gold. Ask your accountants whether they invest in property and how many properties they have.
It is important to consider what tax issues you may be facing during the different stages of your life and to structure your portfolio around your plans.
Failing to use an experienced property manager
One of the most important traits of a successful business person is the ability to delegate and use the expertise of others. This is true of working with a professional property manager. Use of a property manager is inexpensive and tax deductible. For a couple of dollars a day a property manager can save thousand by ensuring your vacancy rate is low and your property obtains the highest possible rent. They also pay the bills and prepare end of month and financial year accounts so your accountant can prepare your tax return efficiently.
I encourage all investors to use a property manager so their time can be spent finding good property deals. This is particularly true for new landlords who can get lots of support and expert advice from their property manager. Using a property manager is particularly important if you are considering renting your property to a friend or family member.