Late rent, no rent, noise complaints, malicious damage, prohibited pets or too many tenants: it takes just one of these problems to turn a happily humming investment into a serious concern.
Approximately 60,000 residential tenancy dispute applications are filed each year with the Victorian Civil & Administrative Tribunal alone, which represents about 15% of all residential tenancies in the state. Of these applications, around 60% are from landlords.
It’s much the same across the board, with a whopping 26,989 out of a total 34,223 tenancy hearing applications being brought by landlords in the state of NSW in 2008.
The processes involved in resolving tenancy disputes can be costly and time-consuming, never mind the costs associated with property vacancy; so choosing the right tenant can save landlords a lot of headaches later on.
Tracking top tenants
Carrying out a few extra checks at the time of tenant selection can make all the difference when it comes to separating the good eggs from the bad. A little extra effort goes a long way – and may save you a lot of time and money in the long run.
Terri Scheer Insurance general manager Carolyn Majda suggests that a well-presented property is the first step to attracting quality tenants.
“Tenants are more likely to take pride in a well-presented property and treat it as if it were their own,” she explains. “Simple gestures such as a fresh coat of paint or gardening assistance can help to attract good calibre tenants and ensure the property remains well cared for.”
Your Investment Property’s Investor of the Year award-winner 2009, Prue Muirhead, agrees: “Presentation is the key. Between each tenant I paint or touch-up paint the properties to encourage clean tenants.”
A strict screening process is the best defence against a bad tenant. Tenancy application forms give the landlord a chance to ensure the applicant is a safe choice before signing on the dotted line.
“Applications can be challenging,” says Muirhead. “I always look for income stability first – simply a job that the applicant has held for a long period of time – or, in my cheaper homes, it could include government study allowances, trusting they hold previous references.”
Muirhead suggests checking for secondary factors, such as whether the applicant’s work or study location is close to the property, if their parents live close by, and whether or not they have pets.
“These secondary factors can indicate how long the tenant will stay in my property, because the longer they stay, the less vacancies I have, which cost me money.”
Janine Campo, director and manager of Medium Density Management, says the standard Real Estate Institute application form is comprehensive, but that a landlord should also obtain phone numbers of personal references in case of abandonment of the property. Try to find listed landline numbers where possible to avoid fraudsters giving false references.
The tenancy application should give you a reasonable idea whether the applicant is capable of paying the rent and keeping the property in good condition.
Some landlords may choose to pass the responsibility on to an expert and hire a property manager. “Property managers have experience in screening prospective tenants and know which questions to ask them,” explains Majda. They can also access online tenancy databases to ensure the applicant has a clean slate.
NSW-based property investor Michelle Sahu-Khan recommends landlords appoint a reliable property manager to take the stress out of ownership. “A good agent makes a big difference,” she explains. “You know that they’ve got your property in mind and you’re not just another number.”
The Real Estate Institute of Australia recommends you complete a thorough check and ask many questions before engaging a property manager, including what training they have, how long they’ve worked in the role, and their policy in regards to managing rent arrears.
Investing in the relationship
The key to a successful landlord-tenant relationship is developing mutual respect and trust. If you show your tenants you care, they’re more likely to look after your property. Maintain an open channel of communication and keep all records and receipts.
Muirhead’s hot tip is to begin the relationship with a token gift, such as a bottle of champagne or movie tickets, with your business card attached. “On choosing the tenant, I always have a welcome gift because they now pay me money, so I guess they could almost be called my employer. I realised a long time ago that I need to respect that part of the relationship,” she explains.
“I’ve always felt this starts a strong relationship from the beginning because I’m aware that most other landlords simply wouldn’t bother. I also look them straight in the eye at the signing of the lease and say: ‘I’m a really nice person but if you don’t pay your rent, I will kick you out.’ So they recognise there’s another side to our relationship.”
Landlord’s insurance is another way property owners can protect their investment in the case of bad tenants. “Landlords should choose a comprehensive and secure policy that covers them against malicious and accidental damage, as well as loss of rental income if the tenant absconds or leaves a property unable to be re-let while damages are repaired,” Majda says.
“The policy should also provide cover if a court orders a tenant’s eviction or terminates the rental agreement due to tenant hardship.”
Muirhead found that her experience with a bad tenant was actually a blessing in disguise, thanks to her landlord’s insurance.
“One of my tenants left without notice during their lease,” she explains. “Within one week of the property being vacant, an arsonist kicked in the back door and set fire to a lounge suite.
“There was about $80,000 of damages because the property was completely gutted. During the repair I was receiving a regular rental income from the insurance company as part of my policy and once the property was completed, it had a new kitchen, paint, doors, skirts, ceiling and window dressings.
“So the interesting part was that my property manager was able to charge a higher rent because the property was completely renovated and I now have additional equity I can also access to purchase more future properties,” she says.
The property condition report is another important safeguard to protect your property, as tenants are required to leave the property in relatively the same condition as when they moved in. Landlords or property managers should conduct routine property inspections every three to six months so they can spot potential issues early and remedy the situation.
“If a tenant is causing damage to a property and regular inspections aren’t being held, the damage may go unnoticed and be more costly to fix later on,” explains Majda.
Muirhead advises that landlords should always respond to tenants’ maintenance requests. “I repair anything that needs attention immediately and sometimes even when I’m not required to help,” she says.
“One month ago, I had one of my tenants call and ask if I’d provide a front screen door. I knew that this would be an advantage because ... it may make the difference for them to sign on for another period of six or 12 months after their lease expires.
“It only cost me $360 – to which I can depreciate – and it may keep my tenants for a longer term, therefore lower vacancy rates. If they were to move out and the property was vacant for a week, this would cost me $350 in rental loss.
“I’ve always considered the vacancy rate when making decisions like a screen door. It seems like a no brainer when the cost is so minimal,” Muirhead explains.
When the cracks begin to show
The tenancy agreement and legislation should provide a safety net for your investment, meaning that a bad tenant will be required to compensate you for losses incurred or damage done. The agreement is a legally binding contract and should stipulate the processes for either party breaking the lease.
Sometimes, however, despite careful screening and tenant management, problems do arise.
The Residential Tenancies Authority (RTA) advises parties to attempt to resolve non-urgent disputes among themselves first by discussing concerns with the aid of information about rights and responsibilities. Settling issues out of a tribunal will save everyone time and money. It’s important to record any agreements in writing and ensure they comply with the relevant legislation in your state or territory.
During the negotiation process, it’s also important to remember that sometimes a good tenant may suffer from genuine financial hardship, so don’t immediately write them off as a bad choice. Attempt to negotiate a reasonable solution.
The legal processes involved in settling residential tenancy disputes vary across the country, with states and territories employing different legislation and regulatory bodies.
Tribunals in some states, for example NSW and ACT, offer conciliation prior to a hearing. Queensland goes so far as to require all matters to go to the free RTA Dispute Resolution Service before progressing to a tribunal hearing.
It’s time to go
When tenancy disputes can’t be resolved, the only solution may be eviction. As with most tenancy related procedures, the rules governing eviction differ between states.
Evicting tenants can be difficult for landlords, particularly when emotions come into play, as they did for Sahu-Khan. “It was frustrating and then it was really sad – it had all of the emotions,” she says.
A long-term, elderly tenant had been renting Sahu-Khan’s Crows Nest investment property for seven years and had developed a good relationship with his landlord. He had always taken good care of the property and paid his rent on time, so when he began to fall behind in payments, Sahu-Khan gave him the benefit of the doubt and let it slide.
After several months of arrears, however, the property investor enlisted the help of property manager Kieran Woo from RUN Property’s St Leonards office.
The tenant continued to make false promises he couldn’t keep until finally Sahu-Khan took the matter to the NSW Consumer, Trader & Tenancy Tribunal. “I found it a bit daunting; all the onus was actually on me to prove everything [at the hearing],” she explains. “But at the end of the day, it was all black and white.”
Following eviction of a tenant, it’s important to minimise turnaround time and find a replacement as soon as possible. Sahu-Khan has since found a new tenant and is happy with the current situation.
Can you afford to buy in this suburb? Find out how much you can borrow