Having the option to own assets that produce income is a highly desirable financial strategy. If you own a house or apartment, you know there are taxes, interest, utilities, and a multitude of other expenses that come with it. However, if it was possible to own a house or apartment to rent out and generate income and potential positive cash flow, would you want to?
Being a landlord isn’t for everyone, but in today’s market, it can be a smart way to grow your wealth. The demand for rental units continues to be strong due to the failure of wages keeping up with rising housing costs and an increased desire for flexibility among younger generations.
However, it should not be mistaken for a way to get rich quick. It’s a long-term investment that needs to be approached carefully and thoughtfully. Real estate expert John Gilmovich specialises in property ownership and investing with a skilled background in management of rental property. We asked John some common questions surrounding rental returns and investment properties.
What areas can a landlord contract to outside sources?
John Gilmovich: It’s ideal that a property investor thinks through exactly how they will manage the day to day management of their property portfolio. There are obligations galore to meet, and these include tenancy obligations, property compliance, and financial reporting.
In most cases, all of these processes can be 100% outsourced, but it comes at a cost. The investor would forfeit some of their return income to the cost of outsourcing. The decision to outsource is made by the landlord. Will an investor have the time, knowledge, and expertise to handle important management procedures? This has to be thoroughly thought through before they become a landlord.
Your time is a commodity, and trading it for professional services may be more beneficial that DIY projects.
How do I know I’m getting adequate rental income?
JG: Never assume the rent you’re getting now is at current market levels. Some tenancies can go on for years without a rent review, as both landlord and/or their agent have been complacent about it due to the tenant’s longevity in the unit.
It’s best to do your own research and look at the data to determine if the current rent is fair and reasonable. There are many online data searches available that are free. One of the best is the Rental Bond Board postcode search. SQM Research offers weekly rental and yield searches by post code and is another great free resource. And of course check the rental listings online through sites like realestate.com.au and domain.com.au which also give you postcode and dwelling type rent value results.
How do I know if I have enough rental income for my investment cost to be neutral?
JG: Neutral cash flow property investments are a great way to hold multiple rental income properties. Ensure you know your cash flow position prior to purchase and can make educated assumptions about the actual outgoing numbers (expenses) versus income (rent), which will give an indication of whether the property is likely to be positive, neutral, or negatively geared.
As a landlord, am I required to pay for utilities?
JG: Depending on the strategy and set up of the rental agreement and whether you are doing short term letting versus long term, utility costs can vary. In the majority of cases, investors who are entering into standard residential tenancy agreements with their tenants in strata complexes will be required to cover the costs of water and council rates, but tenants cover their gas and electricity.
If renting out a separate house, tenants can be billed for water consumption, and landlords can recoup water consumption charges if their house is made water-efficient. In short term letting arrangements, like Airbnb, the expectation is that the nightly charge includes all utilities and that there are no hidden extras.
Am I required to accommodate disabled tenants?
JG: Special needs tenants have requirements that some modifications be required to the property. These modifications will fall under the “Alterations of Premises” rules which are state-based laws.
Any modifications a tenant requires should generally be negotiated prior to signing an agreement, but there are instances where during the tenancy the occupant will have special needs. For example, if a current tenant sustains a personal injury and extra hand rails are required in bathrooms for added support. Such alterations are seen by the law as being reasonable, providing that the tenant has agreed to re-instate any additions/alterations back to their original condition upon leaving.
A landlord cannot deny what is a reasonable request; however, costs do now have to be met by the landlord, but rather the tenant.
Are landlords allowed to conduct any types of screenings prior to renting a property out to a tenant?
JG: Yes! Conducting tenancy background checks is a crucial risk management process. As a property investor, who you allow to reside within your property can make or break your investment in a financial sense.
Conducting background checks can be tricky, as it requires paid subscriptions to access certain data. Providing the tenant has signed a written consent disclaimer giving the landlord permission to do searches, there are many checks that can be obtained and verified. Some of these include, but are not limited to:
• Rental history and breaches
• Salary/income verification
• Identification and passport/visa status
• Financial defaults, such as bankruptcy
• Personal references
The majority of tenants is willing and able to provide references and documentations to fast track their applications and will be transparent about it, and of course there are tenants that won’t be. Watch out for those.
What if a renter doesn’t comply with property rules, fails to pay rent, or damages something?
JG: All tenancy agreements tenants enter into with landlords come with rules surrounding each party’s obligations. If there is a fundamental breach of tenancy, such as frequent and serious non-payment or rent or serious property damage, malicious or not, the tenancy agreement can be terminated by the landlord, who also has the right to seek financial compensation for any loss that has occurred as a result of that breach. This can be done directly with the tenant or via a tenancy tribunal if both parties cannot come to settlement on costs.