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Reproduced with permission.
Investing in property is like running a small business; be prepared for the bad times e.g. bad debts and tenant hassles but you will also enjoy the good times i.e. capital growth and in the long term, good cash flow.
It’s not all beer and skittles owning investment property. One of your main grievances will probably be with tenants. It doesn’t have to be the “tenant from hell” that causes you grief. There are a number of different reasons you might have hassles with your tenant. These issues can range from tenants being noisy and disturbing neighbours, continually calling you/ your property manager about relatively minor issues or frequently being late in paying the rent.
The other common problem with tenants is non-payment of rent. Despite your best efforts or those of your property manager, the tenant falls behind in their rent and in the end “does a runner” and vacates your property owing you rent. Depending on the state you live in and the residential tenancy laws that apply, you can take rent owing from the bond that tenants should have lodged but you might need to go through a mediation/tribunal process first. Debt collection and court action are also possibilities but rarely used.
There is no guarantee that you can avoid all tenant problems but you can help yourself to minimise these hassles:
• Engage a truly professional property manager.
• If you have the time and knowledge, manage the property yourself.
• Whether you are managing the property or you have placed it in the hands of a property manager, the application and selection process are critical. Every prospective tenant should be required to fill in an application form which asks enough relevant questions so that you have a very good idea of who the applicant is. Always ask for references and employer details. In my opinion, the two most critical calls you’ll make are to their boss, to verify their employment details and to the previous landlord.
• Take out appropriate insurance e.g. building and contents, public liability, landlord insurance, etc.
Don’t fall into the trap of putting in a tenant that you aren’t completely satisfied with because you’re desperate for the rent. In my opinion, no tenant is better than a bad tenant.
Enough of the negatives. What about the positives? Why do most people invest in property? If you were to ask yourself this question, your answer would probably either be for long term capital growth or cash flow.
Where else could you wisely invest $400,000 and be quietly confident that in ten year’s time, the property doubles in value and is worth $800,000? In 20 years time, it should be worth $1,600,000. Even if you only had an interest only loan and paid out the original $400,000 mortgage at the end of the 20 years, you’d still have over $1,000,000! Don’t believe me? Do some research or ask around at what the average price was for houses in 1992. I can’t guarantee that all property will grow at this rate but in most areas around Australia, well located property has quadrupled in the last 20 years, as it did in the 20 years leading up to 1972, as it did in the 20 years leading up to 1952.
All this growth with little (not zero) risk!
Once you have paid off your property, you should have very good cash flow as your biggest rental expense, loan interest, is no longer an issue. You can use this money to improve your lifestyle, work part-time or retire richer.
If you had two or three debt-free investment properties, you could lead a very nice lifestyle or seriously consider retirement!
Investing in property is not easy. If it was, everyone would be doing it. If you can get over some of the short term pain with tenant problems and bad debts, you should be able to experience the long term gains.
Happy House Hunting!
Written by Peter Koulizos, university lecturer, author and buyers advocate.