Top landlord fears, how to tackle them and are we at a turning point in the property cycle? (Ep.66)

In this week’s episode, Dave, Cate and Pete take you through:

  1. The property market dipping. CoreLogic capital city data shows that 5 out of the 8 cities have started growing in value or remained at the same level, while Melbourne and Sydney have dropped slightly further. It appears that we are now at an inflection point. Contrary to the property doomsayers, we haven’t yet seen a gross drop of 5%, which has been our central case since April.
  2. Tenants claiming COVID financial distress. Anecdotally we’ve seen 8% to 14% of tenants looking for reductions in rent, as a result of loss of income due to COVID. There are also areas that have seen a much lower percentage of tenants claiming COVID financial distress – due to location demographics and property features that may attract a particular quality of tenant. Careful tenant selection is critical.
  3. Debt and cash flow management. Treat your investment property like a business! That means understanding how to manage your risk and selecting an appropriate repayment strategy and buffer. Letting your money goals drive strategy and price point will mean that you are prepared and comfortable, when income ebbs and flows.
  4. Repairs and maintenance – does your buffer cover rainy days (and leaks)? Unexpected repairs can burn deep holes in your pockets, but an appropriate risk management strategy will avoid the financial stress of having to carry out major repairs on your property.
  5. Building and pest inspection. Do your due diligence and get a building and pest inspection done before you purchase. This will help guide your negotiations if you know there are maintenance issues lurking.
  6. Tenants from hell. From non-payment of rent to trashing properties, a tenant from hell can be a landlord’s worst nightmare. Starting with a good property manager and selection process can help you avoid a painful tenant. Listen to episode 41 “Tenants from hell” for more education on how to select a quality tenant and property manager.
  7. Protecting yourself with insurance. It is critical to know the difference between accidental, deliberate and malicious damage and how your insurance policy covers you in these situation – it can be difference between a successful claim or not!
  8. And of course, our ‘gold nuggets’

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Show notes

  • CoreLogic – all capital cities data, 5 of 8 have started growing in value or remained at the same level. Sydney and Melbourne have dropped further – it appears that we could be reaching an inflection point. We haven’t seen even a gross drop of 5% – which has been our central case since April. 
  • CBA new revised forecast – originally saying 10% drop in the market and now revised to 6%.  
  • Tenant claiming COVID financial distress and landlord being forced to reduce rent 
  • Anything in the media will make people really fearful – we saw tenants being stood down, losing jobs, insufficient hours. When I polled the impact – it seemed about 10% give or take people who were affected. 
  • Once the dust settled, the phone calls stopped. Property managers have confirmed – 8% to 14% of tenants have requested to re-negotiate rent- in some cases it was as low as 2% – it depends what the demographic is. 
  • The eviction moratorium has been extended out now until March 2021. 
  • Tenants cannot just say that they can’t pay – it must be voiced with supporting documentation. They must demonstrate they’ve made attempts to get assistance from the government. 
  • Commercial property is a different story and is struggling. 
  • In Melbourne, the only way you can buy property is to make a purchase decision off a video. So, what we’re seeing is an increase in demand for a rental property, because renting from a video is not as permanent as buying. 
  • Put on your thinking cap and come up with something fair.  
  • Tenants from Hell 
  • All about tenant selection and quality property manager selection, intersects with the quality of property you’ve purchased. If you’ve picked a winner, the job becomes easier because it attracts a better quality of tenant.  
  • Trashing a property – malicious damage – this will be sorted out by a tribunal. But the happy tenants do not need to go to tribunals, if you get things fixed and respect the property, you will also get a tenant who respects the property.  
  • Get through the property yourself – Cate doesn’t do this. If you have a good tenant and a good property manager, you should be keeping an eye on the property – every two years, walk through.  
  • First time investor or first time with a new property manager – you want to make sure that you’ve aligned your needs and how you work with your manager. 
  • If you have a property manager that is not reporting property issues, you find out that your tenants are unhappy because you haven’t been responsive to things you didn’t know about.  
  • Think of yourself as a business owner and your property manager is similar to an employee, make sure that they are serving your best interests in the manner that you would like them to.  
  • Insurance for damage:  
    • Accidental – unexpected and unintended loss or damage e.g. wine spilled on carpets or hot pots left on the kitchen bench 
    • Deliberate – damage caused on purpose by the tenant e.g. placing hooks in the walls for hanging pictures, repainting walls or DIY renovations  
    • Malicious – caused with malicious intent to damage the property (and requires a police report) e.g. holes punched in walls and graffiti. 
  • Insurers treat damage types differently and knowing the variances can mean the difference between adequate cover and a successful claim – or not! 
  • Major repairs 
  • Knee jerk reactions of wanting to sell the property, but not everything can be foreseen.  
  • You must have buffers, risk management strategy and plan for these kind of things occurring.  
  • Mitigation – building and pest inspection – even if the builder is happy to talk off the record, what could be the next significant expenses or big-ticket items. It could be rewiring or re-plumbing, unravelling illegal works.  
  • Do the due diligence before you sign the contract. You need to get multiple people to review the works that need to be done and the cost of reparation. With David’s townhouse, there were quotes varying between $60,000 to $10,000.  
  • Body corporate – read the minutes of the AGM meeting and speak with the Owners Corp manager to see if there are any likely expenses up and coming that will need a special levy. 
  • But there are things that building inspectors can’t see.  
  • Minor – must provision for things that come up, there are things that have shelf lives (water heater, bathroom may need to be touched up, heater stops working.  
  • Build into your buffer, 1 to 1.5% on contingencies.  
  • Obligations 
  • The landlord has to: make sure your rented home is “maintained in good repair”. This includes anything in the home and any shared areas they own or manage. And it means they cannot refuse to do repairs if there is a real need for them. 
  • The tenant has to: tell the landlord if anything needs repair. Tell them as soon as possible, especially if not fixing the problem could cause more damage. It’s best to tell them in writing and keep a copy. 
  • Normal repairs 
    • VIC – 14 days to fix 
    • ACT/Tas – 28 days to fix 
    • NSW/NT – no timeframe 
    • QLD/SA – within a ‘reasonable time’ 
    • WA – “suitable time” 
  • Urgent repairs 
    • a burst water service 
    • a blocked or broken toilet 
    • a serious roof leak 
    • a gas leak 
    • a dangerous electrical fault 
    • flooding or serious flood damage 
    • serious storm or fire damage 
    • a failure or breakdown of any essential service or appliance provided for water, hot water, cooking, heating or doing laundry 
    • a failure or breakdown in any appliance or fitting supplied by the landlord that will result in a large amount of water being wasted 
    • a failure or breakdown of the gas, electricity or water supply 
    • a serious fault in a lift or staircase 
    • any fault or damage that makes the premises unsafe or not secure 
  • Debt and cash flow management 
  • Understand the difference between good debt and bad debt – debt is an enabler.  
  • We do need to borrow money to invest in property – it’s such a large outlay. 
  • Understand how to manage your risk, so that you set up your repayment strategy and buffers so that you feel comfortable with your obligations and level of savings going forward.  
  • Business owners’ provision for rainy days, be prepared for the ebb and flow. 
  • Set your plan out – we assume property are not rented for 4 weeks of the year, holding costs.  
  • Set your money goals – how much money do you want in the bank after you settle and surplus cash flow per month, this determines price point, which then determines strategy and location.  

Cate Bakos – The Property Buyer’s Golden nugget: if people are worried about cash flow management and that’s what’s holding you back from purchasing an investment property, you need to be really careful at the start what you want your desired cash flow to be and reverse engineer it to find out what kind of rental yield you are looking for. You cannot rely on anyone except an independent property manager to tell you what rent you’re going to get. 

Peter Koulizos – The Property Professor’s Golden nugget: What would it be if he was here? The selection of a really good property manager is critical to picking a fabulous tenant. Because if you’ve got a good manager in place, you won’t run into many of these issues.  

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