And by that I mean, “Professional!” Don’t let the red lettering fool you.
Are you thinking of buying an investment property to rent out but you don’t know the gab? You are not alone. You see, property management seems like a secret little society until you break into the industry with a wallet full of cash ( or is it an empty wallet you are hoping to fill up with cash). Sometimes landlords, (that’s the future you!) can be seen as either an annoyance to an already overworked manager or a godsend to a quiet and loyal underdog.
Well, you are in luck! I’ve just done the dirt on my local town Ballarat and I am HANDING you this little guide, pretty much on a silver platter. As an ex-property manager myself, you can be sure you are getting the up-skirt difference to this secret little world of property management.
Getting An Appraisal – The First Step – How much can I rent this out for?
This is the most important step of all! Seriously. If you haven’t bought an investment property yet but you are going for the loan, ask for a ‘rental appraisal’ from the selling agent for investment loan purposes. The bank will love to know how much the rent is expected to be in order to assess whether or not to approve your loan. Why? Because 80% of the rental and 30% of your JOB income is included in the debt serviceability ratio (DSR) in order to calculate whether the loan is feasible.
After you have purchased the property, clear out the schedule of one day (yes, I do mean take a day off) and book in about 5 or 6 property managers. You are going to have to interview them to find out who is best to manage your property and who suits your needs. Let’s face it, if you don’t like or trust your agent, it’s not going to be much fun.
The agent should know exactly what they want to rent your property for after the meeting and they calculate this by comparing other properties in their rent roll and what’s currently on the market. Don’t push a figure to the agent because the agent deals with 150 properties on average and knows the market. If you want $350 but the agent says $320, the buck stops with them. Forcing a higher rate may delay a leasing tenant for months or inevitably, until you drop the advertised rent to the market value. It is commonly charged to the tenant on the 1st or 15th of the month and it is calculated at a per calendar month rate. So, if your property is rented at $320 p/w, they will pay $1386.66. (That’s $320 x 52 (weeks in a year) / by 12 (months in a year).
Appraisal’s are free. Rule out any agent who doesn’t give you the time of day because they are probably overworked and underpaid which = not going to look after your property.
Signing an Agreement
When you decide on a property manager, you are asked to sign an “Exclusive Leasing and Managing Authority” and the “Agent’s Fee Schedule”. They are pretty straight forward documents of a few pages. They denote what services you are agreeing to with the agent and their fees. Once you sign this, the agent can legally start representing you. They last 30 days so if you are not happy, you can change after this date.
Leasing Fee
A leasing fee is charged once a tenant is sourced and their lease begins. This fee varies but it is commonly either one weeks rent plus GST or a percentage of the annual rent plus GST. Commonly, if using the annual percentage calculation, this can be around 3% in Ballarat. Leases are commonly offered at 12 or 24 months.
Re-Lease Fee
When an existing tenant re-leases, you are normally charged 1/2 a weeks rent plus GST. If you have a great tenant, you obviously want to try everything possible to keep them. Having them re-sign a lease after their initial 12 month lease lapses gives you the ability to hold them to the end of the lease term if they try to vacate half way. It gives a tenant an option of rental price security.
Advertising
Some agents charge nothing for advertising but more commonly, they charge a small fee between $45-55. This covers the time it takes to write the advert and compile the photographs basically. Ads are normally placed on a few online websites like, domain.com.au, realestate.com.au and realestateview.com.au plus the agent’s own website and on their internal printed rental list. Paper advertising is not essential anymore as costs are additional and can vary quite a lot. I’ve seen up to $250 and it’s really not necessary.
Commission
For managing your property, the agency charges a commission. This is their bread and butter. It covers EVERYTHING, from inspections, landlord advice and communication, coordinating repairs and maintenance, looking after the tenant etc basically the entire management service. Currently, the prices in Ballarat fall between 5-9% but more common it’s around 8.8% including GST. It is calculated normally on a monthly basis like this: Rent collected is $1260 p/m, lease fee is 8.8% so that’s $110.88 including 10.08 GST. (So, you’ll be charged $110.88 per month).
Rent Increases and CPI
Around once a year, the agency looks at the CPI (Consumer Price Index) which is published by the Australian Bureau of Statistics quarterly and broadcasts to REIV (Real Estate Institute of Victoria) and other bodies, to determine whether a rent increase is valid. A great site to determine whether your property is due for an increase is here. Normally rent increases between $5-15 per week, every year or two as the CPI is usually around 1-3% per year. Just because there is a CPI increase though, doesn’t mean you have to increase the rent. If you have a good tenant, you will scare them away putting the rent up every 6 months and your property may become quickly unaffordable to them. The last thing you want is a vacating tenant because you are too CPI trigger happy! The loss of $1200 rent, the new leasing fee and advertising is much more expensive than losing $5 a week!
Repairs and Maintenance
A landlord must have their investment property in good repair. It keeps the rent stable, looks after your long term investment and encourages the best in tenants. You never know when an emergency is going to happen like the hot water service blows ($800-2200 depending on type), an electricity fault ($500-3000) or the tenant accidentally floods the lounge room carpets ($2000). That’s just emergencies! Think about all the repairs and maintenance you would do normally if you were living there? Think about replacing door handles, painting, installing power points, changing light fittings, re-grouting the bathroom and replacing the dishwasher (common one! They don’t last long!). I suggest a back up of at least $2000 in a separate account. Ideally $5000 would be fantastic! Repairs are all tax deductable so be prepared for those maintenance request lists. Doing repairs quickly keeps your tenants happy and your investment dollars rolling.
Often, in the Leasing and Managing Authority, the agent will ask for an amount that can be spent on urgent repairs without calling you or if they are unable to contact you (as urgent repairs have to be done within 3 days). This is normally $1000-$2000.
Bond
The tenant pays at the start of their lease normally one months calendar rent in bond or security. This is held in trust by the RTBA (Residential Tenancies Bond Authority) and is used soley for when the tenant vacates (by any method) to claw back either loss of rent, if they defaulted upon exiting, cleaning or repairs for damage not made good by the tenant. It is in the tenant’s best interest to not damage the property otherwise their Bond is taken and they risk being blacklisted by being registered on the blacklist database called TICA.
Inspections
Routine inspections are often completed at the first 3 month mark and then 6 monthly after that. The initial inspection is great for checking out how the tenant is looking after your property and if the agent chose the right tenant. Sometimes, there are some surprises but often if anything is amiss, the 3 month mark is a good time to fix anything before it gets out of hand. For instance, the tenant may be accidentally causing a fire hazard by plugging in their super dooper 10 plug entertainment system into a GPO only holding 4! Or they now have a dog! As a landlord, this means it’s a good idea to add an extra GPO in the lounge room and lay down some rules for the dog and what happens in the event the dog scratches a hole in the back door.
A thorough report is the best report and your should expect either a twin page report or a copy of the initial condition report with extra long comments. A maintenance request list is often received by the agent at this point for anything found to be not working as expected. A better report has property improvement suggestions from the agent and photographs. I suggest you attend with the agent once a year or every two years to make sure nothing is going amiss because you are ultimately responsible for the success of your investment.
Insurance and Rates
This is a NO BRAINER! Get some landlord’s insurance! It covers you for damage by the tenant, storm damage, fire, theft, tenant rental defaults as well as liability for falls and accidents. Get a quote here. Tenant’s can take out insurance for their contents as well. NOTE: You will still pay for the land rates and water rates on the property where the tenants just pay for the utilities they use.
Tax Deductions
As a sweetener, you will find that,
most fees, repairs etc are actually TAX DEDUCTABLE!!
That’s right. So all this money we are talking about and you are thinking “How am I going to afford this?” you can claim it back baby! Check out this beautifully comprehensive list here.
Want more information? Consumer Affairs Victoria has some great online resources including the infamous guide which is given to landlords and tenants. You can download a softcopy here. It has everything you ever need to know. I call it the Tenancy BIBLE. It’s short of purchasing the Residential Tenancy Act 1997 which is very long winded. Don’t go there. It will do your head in.
I hope you enjoyed this guide. It’s full of lots of tips and links so why not bookmark it and then share it around! Will you be the next property tycoon?