Common Precautions Landlords Take With Their Investments.June 02 2022
"If you're a landlord or thinking about becoming one, these tips can really help." - Miguel Nitorreda, Data Analyst
Here are seven common financial mistakes landlords should avoid making.
To err is human, and landlords are no exceptions.
Landlords – especially those who are just rookies to the investment property ownership game – are vulnerable to a few mistakes. But on the upside, landlords who are quick on the uptake and learn from the error of their ways eventually improve how they manage their rental properties.
But this doesn’t mean landlords should be complacent and try to take everything in stride. While some mistakes are easy to bounce back from, there are several financial traps that can drastically turn your stable income stream into a financial sinkhole.
Like any investment, landlords should keep a close eye on their rental properties to ensure that their financial foundations are solid. In this article, we round up the common traps landlords fall into financially, so you can avoid them.
Here are seven common financial mistakes landlords should avoid making.
- Not having insurance
The journey to owning an investment property is no easy feat, so it’s sensible to protect that asset.
By having landlord insurance, you will cover not only the building and contents of your property but also the financial position of your investment. It helps you safeguard your income so you can keep paying off that mortgage even if the property becomes vacant or a tenant doesn’t pay rent.
“Landlord insurance has a range of benefits and can cover you for any malicious or accidental damage caused by the tenants, any legal liability for occurrences on the property that cause death or bodily injury and loss of rental income as a result of property damage or a tenant absconding,” Carolyn Parrella from Terri Scheer Insurance explained.
Take note that while landlord’s insurance shields investors against some of the risks associated with owning a rental property, some vulnerabilities are not covered by standard building and contents insurance policies. So it’s worth having a look into your options.
Insurance providers would love to say that landlord insurance covers every possible risk an investment property may face.
Unfortunately, they can’t, or the costs of insurance would skyrocket well beyond reach for most property owners. Here’s an expert’s guide on what you should look for before taking up a landlord’s insurance.
2. Not setting the rent in step with the local market
It may be tempting to set your rent low when there’s stiff competition for tenants or to set an exuberant weekly rate when there’s a shortage of rental properties in your local area. However, experts say landlords should always base their rent in line with the local market level.
“Before purchasing an investment property, carry out research to help determine an appropriate rental price,” Ms Parella said.
If you set the rent too high, there may be limited interest from prospective tenants, which could lead to financial loss if your property remains empty for an extended period of time.
On the one hand, setting the rent too low will put you under financial pressure, reduce your rental income and can even attract tenants who are unsuitable.
The best way to set your price is by knowing your local market, as this will give you a guide on the rental market in that area. Find out what similar properties are leased for and look at your property objectively.
If you are working with a property manager, they should be able to provide you with pertinent information on comparable properties and advise an appropriate rent range for your rental property.
Additionally, remember that it is not always about your property’s aesthetics or amenities.
For example, you may be boasting a newly renovated unit that is complete with the newest appliances, but your neighbour may have an older unit with floorboards, better light and bonus built-ins that may be more attractive to other potential tenants.
Take note that your property’s location and demographic may decide the competitiveness of your home in this instance. With that, consider multiple factors when comparing prices.
3. Not being up to date with regulations
Being in the know about your state’s rental regulations and your lease legalities is tedious and time-consuming, but it’s crucial work.
It’s also important to work trustworthy and reliable lawyer to ensure that you’re following the proper courses.
4. Not getting a good tax specialist
If you’re a first-time property investor, you will need all hands on deck when tax season comes around. That’s why it’s recommended to get a good tax specialist on board when it’s time to lodge your tax returns.
A good tax specialist will know what to claim and when, what records you will need and how you need to file them. They are also handy when dealing with more complicated tax matters, such as negative gearing.
Without a good accountant, you could also be missing out on massive savings and earnings.
But if you’re more of a do-it-yourself type of investor, you should know the tax deductions you can claim on your investment property.
5. Not staying on top of maintenance
Not doing regular upkeep of your rental property is a financial trap that most landlords overlook. Property maintenance is typically cumulative, in that it can snowball if not attended to efficiently and effectively.
Additionally, rental properties are legally required to be safe and liveable for tenants, which means landlords must respond to maintenance and repairs promptly.
If you fail to do so, not only would it be a breach of the tenancy agreement, but you could also be legally liable for any tenant injuries.
Are you worried maintenance expenses will hurt your pockets? Here are seven ways to keep your property maintenance costs down.
6. Failing to keep tabs on rental arrears
Another financial mistake landlords make is not keeping up with rental arrears. If a tenant falls behind in their rent, it can be a very tedious (not to mention expensive) issue to resolve and could leave you considerably out of pocket.
“An overdue payment could be a mistake, so it helps both the landlord and tenant to keep tabs on arrears to resolve issues sooner and mitigate any financial loss for either party,” Mr Parrella said.
If the tenant fails to pay on a due date, landlords can issue a notice. Then you should keep a regular check on your accounts until the rental payment comes in. If after a certain number of days it’s still unpaid, landlords can issue a breach notice.
Experts recommend diarising the dates that your tenant’s rental payments are due and checking your bank account on those days.
In the event that your tenant doesn’t (or refused) to pay on the due date, monitor your bank account daily. If they fall into arrears, a breach notice should be sent for non-payment of rent.
Remember that number of days in rental arrears before a termination notice can be sent, and the time between presenting the notice and requesting vacation varies across Australia, so it is important to be familiar with your local tenancy laws.
7. Investing too much or too little
We’re not talking about the purchase price of the rental property, but rather the cost of renovations and marketing.
While some investors can be seen as spending too much to make their property more attractive to tenants, this is constant risk landlords face when renovating.
For instance, consider whether potential tenants in your local rental market are likely to want all the bells and whistles, such as aircon, floorboards and dishwashers, or if they would rather have a more basic living space for a good price.
On the other hand, if you renovate and choose the cheapest of everything, this can be a faulty long-term plan. You may not attract the right tenants, and your property may not be the top choice for those who are ready to spend more for good quality.
Another area to consider is marketing. While a premium market will absolutely demand this calibre of advertising, other markets may be content with standard imagery.
Source: Smart Property Investment
Torrazo, Z. M. (2022, June 2). Landlords beware: 7 common financial traps to avoid. Smart Property Investment - By investors for investors. https://www.smartpropertyinvestment.com.au/property-management/23804-landlords-beware-7-common-financial-traps-to-avoid