There are traps for new landlords that can turn a property investment from a ‘good earner’ to a financial nightmare. If you are new to property investment (or maybe you need a refresher) here are eight things you need to know when renting out a property...
Aussies have a long-standing love affair with property. From the time of European settlement, the ‘Great Australian Dream’ has been homeownership. Today, property investment is front-and-centre in many people’s financial strategies for wealth creation and for good reason. Historically, property has been a sound investment with good returns.
But while ‘bricks and mortar’ can prove to be a good investment if you get it right; if you get it wrong, it can be a financial money pit.
Assuming you’ve bought the right property, in the right location, for the right price – it’s when you take up the role of ‘landlord’ that your decisions can have a profound impact on investment success or failure.
Why is a landlord insurance provider offering up advice on becoming a landlord? Because the choices you make and the actions you take (or don’t take) can have insurance implications. So here are eight tips for how to be a landlord:
Get the right landlord insurance
When you’ve poured hundreds of thousands of dollars into buying an investment property, it makes sense to protect it with insurance. While many first-time landlords think about building and contents cover, more often than not, the reason landlords need to claim on their insurance actually stems from tenant-related issues (loss of rent and tenant damage) – and these aren’t typically covered by standard building insurance.
Building and contents insurance may cover the physical structure and what’s inside the property (including contents owned by the landlord but not the tenant) if damage or loss occurs as a result of an insured event like theft, fire, storm or flood. But one of the most common misconceptions among new landlords is the assumption that their building insurance will cover them in the event of tenant damage or loss of rent. However, it is unlikely to. So if your tenants, their pets or guests, damage the property by accident or on purpose, chances are you won’t be able to claim to recoup the repair/replacement costs. If your tenants fail to pay their rent, you also won’t be compensated. It’s only by taking out the right landlord insurance that you can ensure you are covered for tenant-related claims.
It’s important to have landlord insurance to cover tenant-related claims (tenant damage and loss of rent account for the majority of claims EBM RentCover policyholders submit) but it’s just as important to choose the right policy. There are different policies for the different types of property (e.g. houses or apartments, unfurnished or fully-furnished) and the way they are leased (fixed-term or short-term). The policies cover different eventualities because the risks in each situation are different, so make sure you take out the right type of policy for your rental situation.
Engage a property manager
While some landlords choose to self-manage their investment property, putting the rental in the hands of a professional makes sense. If you’re going to manage the property yourself, it’s important to know what you can and can’t do and, just as importantly, what to do when things go wrong. That can be quite a lot of responsibility to take on if being a landlord isn’t your full-time gig!
Not only will using an agent free up your time in handling the day-to-day concerns of managing your rental (lease agreements, entry and exit reports, routine inspections, bond matters, rent collection, vetting tenants, organising repairs and maintenance, submitting insurance claims), they’ll also ensure you comply with all the relevant legislation.
No-one wants to run foul of the law but it can be surprisingly easy to do. Keeping up with the myriad of legislation, regulations, requirements, protocols and procedures can be onerous for a landlord, but it’s part of an agent’s job – and crucial for them to retain their licensing. If you legally slip up, for example fail to install smoke detectors or unlawfully evict a tenant, it can have serious ramifications, from fines and bans to public shaming and even prison time. You could also jeopardise your insurance cover if you don’t meet your legal obligations.
Understand your duty of care
As a landlord, you have a duty of care to your tenants (and anyone else who is legally on the premises). This duty means you have an obligation to take reasonable care to avoid foreseeable harm to another person on your property.
At a practical level, it is your responsibility to guarantee the safety of your rental property, including:
• ensuring installations such as gas, electricity and heating are working;
• ensuring appliances provided are installed and maintained safely;
• treating potentially health-threatening issues such as rising damp;
• maintaining the structure and exterior of the house; plus
• any other matter that is detailed in the tenancy agreement.
If you fail in your duty of care and your tenant’s are injured or their possessions are damaged, you can be sued for compensation. You could be found liable if your tenant’s loss or injury results from a dangerous condition or state of disrepair at your rental:
• which had not been identified because you or your agent failed to conduct regular inspections; or
• which you or your agent were warned of but failed to properly rectify within a reasonable time.
You should check your landlord insurance policy includes cover for legal liability and make sure you are aware of any exclusions.
Properly vet your tenants
Every landlord wants a tenant who pays their rent and looks after the property as if it were their own. The right tenant can make being landlord a dream, while the wrong tenant can be a nightmare. With bad tenants comes greater risk of property damage and loss of rent, increasing the likelihood that you will need to claim on your landlord insurance.
Though not infallible – sometimes things beyond your tenant’s control can result in damage (e.g. domestic violence) or rent default (e.g. loss of job, partner death, illness) – selecting the right tenant in the first place is a good way to stack the odds in your favour. So you, or your agent, need to properly screen prospective applicants. Don’t scrimp on the income, reference, employment and credit checks, always speak to previous landlords or agents about the tenant, verify their ID and search tenancy databases. Even if you put the vetting in the hands of an agent, it pays to meet a prospective tenant yourself. When you ‘eye-ball’ someone, you can often get a ‘feel’ for whether they are the right fit for your property or not.
Collect a bond
It is important to collect a bond from your tenants as a form of security (that’s why it’s sometimes called a security deposit) in case they breach their rental agreement and you are left out-of-pocket. If your tenant causes minor damage or doesn’t pay their rent for a week or so, the bond is a way for you to recoup your losses. Of course, if the tenant causes substantial damage or doesn’t pay their rent for more than four weeks, then the bond collected will not cover your losses. This is where having landlord insurance comes in to cover the shortfall. If you have landlord insurance, you still need to collect a bond. It is usually a requirement in the policy that you collect a bond from tenants before the loss of rent and tenant-damage provisions in the insurance become effective. Any insurance payout will also be less the bond amount so make sure you collect an adequate bond to ensure your policy is valid when it comes to claim time.
Be aware of tax obligations
Your rental is an investment and owning and managing it affects your taxable income. Whether your rental is generating an income or not, you need to be aware of tax implications. You need to know what income to declare to the ATO (including from short-term letting), the expenses you may be able to deduct (including your landlord insurance premium) and the documentation you need to keep and how the tax rules apply (including capital gains). Seek professional advice on tax matters and check if your landlord insurance policy offers cover in the event you are subject to a taxation audit (most EBM RentCover landlord policies provide up to $1,000 to cover the costs of a taxation audit in connection with ownership of the insured property).
Keep up repairs and maintenance
The upkeep of your property is not only directly linked to your tenants’ legal rights for a safe environment, it is also important when it comes to your landlord insurance.
Urgent and emergency repairs have legislated timeframes for attention, while failing to attend to routine repairs and maintenance could be a breach of the tenancy agreement. There is also a condition in practically all building insurance policies that relate to adequately maintaining the premises. If you fail to keep up with the upkeep (in insurance speak, neglect to protect and maintain the property), you could void your insurance cover.
Know your rights and responsibilities
It may be your property, but when you rent it you can’t simply do whatever you like. If you use a property manager, they can advise you on your rights and responsibilities on matters like lease agreements, tenant discrimination, accessing the property, rent arrears, inspecting the premises, issuing breach notices, giving notice, collecting/returning a bond, what are ‘urgent’ repairs, maintenance obligations, lawfully evicting tenants, increasing rent, locks and security, privacy, council/strata by-laws, who pays for utilities, court/tribunal appearances… If you are going it alone, you’ll need to make sure you are up to speed with your state/territory legislation and consult Fair Trading/Consumer Affairs or obtain professional advice to ensure any action you take won’t land you in trouble – which has repercussions for your insurance cover too.
Every investor wants a secure investment and reliable tenants. But not everything always goes to plan. And some events cannot be controlled. What can be controlled is whether you have landlord insurance.
*While we have taken care to ensure the information above is true and correct at the time of publication, changes in circumstances and legislation after the displayed date may impact the accuracy of this article. If you need us we are there, contact 1800 954 374 if you have any questions.
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