Respect Your Tenants

Respect Your Tenants teaser

Respect your tenants - don'y be tight for your own good!

Property owners need to be discerning when spending money. No one wants to overcapitalize. But some landlords cross into the unwise territory of being “penny wise, pound foolish”.

The vast majority of landlords realize they’ll need to put money into their investment over time to look after it properly. But there are exceptions. 

•    A small percentage of landlords are so focused on saving a few dollars that they end up costing themselves a lot more in the long run.
•     Other landlords may not be stingy by nature, but genuinely didn’t anticipate how much it may cost to hold an investment property.
•    Then there are those who experience a tough financial patch and need to cut back expenses where possible. 

To help with any of these scenarios, we’ve come up with some budget guidelines. 

First, a quick explanation for those who are new to investing.  

While rent comes into your bank account regularly, money will also leave your account as you pay all the expenses involved in owning a property. 

In many cases you’ll have less money coming in than is going out (negative cash flow). You need to make up the shortfall from other income or savings you have. 
Its one thing to budget for likely expenses, but a more valuable exercise is to calculate your likely cash flow – which reflects both money in and money out.

It’s hard to anticipate with 100 per cent accuracy what your cash flow will be when you purchase a property, but you absolutely must make some conservative estimates, or you can come unstuck.

If you can’t cover ongoing expenses, you might end up with a bigger bill down the track - as is commonly the case when maintenance issues aren’t attended to properly.Or you might be forced to sell your property at an inopportune time and you may end up losing a lot of money on your investment. 

You need to budget for the following holding costs for a residential property investment: 
•    Interest / loan repayments
•    Insurance (landlord’s insurance, building insurance, income protection insurance)
•    Council rates
•    Water rates
•    Property management fees (including re – letting fees and advertising for tenants)
•    Body corporate fees (a.k.a. strata levies if you own in a strata complex)
•    Cleaning
•    Repairs
•    Lawn and garden
•    Pest control (ongoing inspections and treatments)
•    Legal fees (for example if you have a dispute with a tenant)
•    Accounting fees
•    Quantity surveyor’s report (if you haven’t already done this at the time of purchase)
•    Land tax (where applicable)
•    Tax on rental income (where applicable)
•    Travel to inspect the property
•    Computer and stationery

When calculating your cash flow, speak to your accountant to find out which of these holding costs will be tax deductible. Also factor in any depreciation benefits. 

Also consider lodging a PAYG (pay as you go) Income Tax Withholding Variation form with the Australian Taxation Office (ATO). If you would be entitled to a large tax return in relation to a negatively geared property, you can arrange to receive that refund in instalments through your weekly pay rather than waiting until you lodge your tax return. This makes cash flow throughout the year a bit more manageable. In other words, you’ll have more money at your disposal to pay for your ongoing expenses.


DON’T SKIMP ON MAINTENANCE
Maintenance has to be attended to, or it tends to cost you more money over time. 

Some maintenance issues are non-negotiable. Emergencies, safety issues and legislative issues absolutely cannot be ignored. Electrical problems, pool fences, blind cords, smoke alarms and many plumbing issues fall in these categories, to name a few. 

Landlords also can’t ignore upkeep of items which were in working order when the tenant took on the lease. “For example, if it’s an air conditioner and it stopped working, the landlord can’t ignore it, because the rent was commensurate with that facility. 


THE MOST COMMONLY FORGOTTEN COSTS


•    Accounting fees, which increase when you own an investment property.
•    Strata levies, which might be set at a particular rate when you buy into a new development, but “a few years later levies can sky rocket because the building is no longer covered by warranties”. 
•    If you invest in a property with facilities like gyms, pools, saunas and landscaped gardens, you need to expect your levies to go up over time as these things are expensive to maintain.
•    You need to have a yearly pest inspection. 
•    Land tax (a state tax) doesn’t apply to every investor but don’t get caught out, search online for your state laws to see if it applies to you.
•    In addition to property management fees, don’t forget advertising costs and re – letting fees. (Also ask your property manager about any other costs you’ll be charged).
•    Periods of vacancy.
 
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Level 1, 22 Gibberd Road, Balcatta, WA 6021

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Telephone: +61 8 62416200