Attracting good tenants and keeping them happy is one of the best investments a landlord can make, while attracting the wrong type of tenant may leave investors out of pocket.
Many investors are in such a hurry to place someone – anyone – in their property to start generating an income that they rush through the essential step of qualifying the people who are about to move into their home, and this can lead to expensive mistakes.
Most will only make this profit-crunching mistake once, because the long-term impacts of a dodgy tenant – think property damage, complaints from the neighbours and more – can far outweigh the benefits of an extra week or two in rental impact.
It’s little wonder that Carolyn Parrella, executive manager of landlord insurance specialist Terri Scheer Insurance, suggests that finding a suitable tenant from the outset can help landlords come out on top in the long run.
“It’s important to take the time to properly screen potential tenants to help minimise the risk of malicious damage and loss of rental income,” she says.
There are certainly some areas where the demographic of the neighbourhood can influence the type of tenant you’re likely to attract – and in this respect, Terri Scheer has noticed certain patterns. There are a number of suburbs that experience a higher-than-usual number of rental defaults (see boxout), which is why it’s so important for would-be landlords to approach every potential investment from a place of thorough and extensive due diligence.
Parrella offers the following tips to minimise risks by attracting suitable tenants from the outset.
Red-hot renter tip 1: Know your target tenant
The process of attracting a good tenant begins before you’ve even purchased your rental property.
When choosing an investment property, consider the type of tenant who may be interested in the kind of property you are looking at. For example, an apartment in the city close to university campuses may appeal to students, whereas a three-bedroom home in the suburbs may be more attractive to young families.
Poorly maintained properties may be less desirable to your target tenants, and in turn attract a smaller pool of appropriate tenants.
Established, well-appointed properties that are close to good schools, shops and public transport are usually the most sought after and are likely to give you the largest pool of prospective tenants from which to select.
Red-hot renter tip 2: Maintain the property well
Presenting a well-maintained rental property may help landlords broaden their pool of prospective tenants, reduce time and money spent on advertising, and decrease the number of days their property remains unoccupied between or prior to tenancies.
A property that is poorly presented by a landlord is likely to be poorly cared for by a tenant. No one wants to live in a property that has stained carpets and marked walls. Presenting a clean, tidy and well cared for property will encourage tenants to keep to this standard.
Red-hot renter tip 3: Gather the right information up front
When taking applications from potential tenants, it’s important to accrue relevant information that will help you decide whether or not the tenant is suitable.
You should confirm their current employer, or source of income, as well as their previous employment history. If the tenant isn’t currently employed or doesn’t have a history of regular employment, they may be less able to keep up with the rent.
Red-hot renter tip 4: Screen prospective tenants – thoroughly
It’s important to thoroughly screen rental applications as this can help filter out potential troublemakers and minimise the risk of future issues.
This may involve speaking to previous landlords or property managers and asking whether they have had any issues with the tenants being reviewed, including late or missed rental payments and any incidences of malicious or accidental damage.
Contact information for previous landlords should be included, along with previous addresses, frequency of rental payments made, and any reasons for vacating a property. Any discrepancies should be thoroughly investigated as they may suggest that underlying issues are not being disclosed.
Red-hot renter tip 5: Follow your gut instincts
Be cautious of tenants who are willing to pay rent months in advance or are happy to pay cash. This may be their way of keeping their landlord ‘off their backs’ and leaving no paper trail for authorities.
It may also suggest illegal activity is planned for your rental property, such as drug manufacturing. If it sounds too good to be true, it probably is.
Source: Terri Scheer Insurance. Top 3 suburbs for each state/territory for number of rental default claims. (Where there are four listed, the third and fourth state had the same number.) Correct as at July 2016.
*Data not available for ACT and Tasmania.
HOW TO MAXIMISE YOUR INSURANCE CLAIM
Stuck in a situation where a tenant has done the wrong thing by you?
Landlords who suffer malicious damage to their rental properties, stop receiving rental payments, or are sued by their tenants face financially and emotionally devastating consequences.
While much heartache and financial stress can be avoided with appropriate insurance, Carolyn Parrella from Terri Scheer Insurance says that sometimes landlords think they’re covered when they’re not.
“In some cases a landlord’s insurance claim may be invalidated or reduced if the correct inspection, notices and tenancy bond procedures have not been followed,” she says.
To ensure your landlord’s insurance claim isn’t compromised she offers these tips.
• Always lodge entry condition reports
Claims for malicious or accidental damage to a rental property can be delayed or even rejected if the landlord has not lodged an entry condition report, Parrella warns.
“When purchasing a new property, and/or at the time a landlord takes
out insurance, a thorough inspection should be undertaken to establish the property’s condition. If a rental property is damaged and an inspection has not been carried out at the time insurance cover was placed – or the inspection has not been appropriately documented – it may be difficult to prove when the damage occurred,” she explains.
“Photos are a great source of proof of the property condition prior to occupancy and after. As part of the entry condition inspection, it is prudent for landlords to complete an inventory, including all household items left for the tenant to use. This may help to substantiate any future insurance claims, particularly if theft has occurred.”
• Don’t wait to make a claim
If a landlord identifies damage to or theft from a rental property, they should lodge their insurance claim immediately. “Payment of an insurance claim may be jeopardised if there is no evidence of the damage occurring, so it’s important that claims are lodged prior to goods being replaced or damages repaired,” Parrella advises.
• Provide as much evidence and detail for claims as possible
There are no two ways about it: insurance claims for malicious or accidental damage to a property should be accompanied by labelled photographic evidence.
“These should be as comprehensive as possible, covering each room in which damage has occurred and repair work is required,” Parrella says.
“For example, if a landlord is claiming for damage to carpet throughout their property, photos should be taken of every room in which the carpet is laid. Photos should be accompanied by detailed labels that correspond with information about the claim. If the insurer doesn’t know which rooms or damage they are looking at in the photographs, there are likely to be delays as the insurer will need to go back to the landlord for further details.”
• Lodge police reports
“Theft and malicious damage are criminal acts and should be reported to the police,” Parrella says.
“Many landlord insurance policies stipulate that theft and malicious damage claims must be accompanied by a copy of the police report or the name of the police station where the report was made.”
• Serve the right notices
A significant proportion of landlord insurance claims paid for loss of rent involve defaulting or absconding tenants. However, these claims can be invalidated or reduced if the landlord has not taken the appropriate steps after tenants have fallen behind in their rent, Parrella says.
“Each state has different legal requirements for issuing notices to tenants who have fallen into arrears. In order not to compromise a landlord’s insurance claim, they must understand and act in accordance with the timeframes set out in their state or territory,” she says.
“If a landlord fails to issue the tenant with the correct notices within the specified timeframe, an insurance claim could be reduced, as a landlord’s insurer needs to see that the correct process is carried out and that attempts are made to obtain the unpaid rent.”
She adds, “Some landlords will let tenants remain in a property indefinitely while unpaid rent accrues. It is important to be aware that in this situation landlord insurance claims might not be paid.”
• Provide proof of advertising
When a landlord makes a loss of rent claim, they may be covered for a certain level of reletting expenses to secure a new tenant for the property. In this case they must be able to show that they are making every reasonable effort to find new tenants for the property.
“In particular, they need to be able to demonstrate that they have advertised the property for rent, for example through the local newspaper or a real estate website,” she advises. “This shows the insurer that the landlord is taking a proactive approach to minimising loss by reletting the property as soon as possible.”
• Spot the difference between ‘damage’ and ‘wear and tear’
“Landlord insurance is designed to cover accidental damage, but does not cover natural ‘wear and tear’ that occurs over time,” Parrella says.
“Accidental damage is defined as being caused by a sudden and unexpected event, such as a broken window or a carpet stain caused by spilt red wine. In contrast, wear and tear accumulates over time. This means that landlord insurance will not cover the expenses associated with carpet cleaning, gardening or repainting of scuffed walls before a property is relet.”
Landlords should understand that it’s like living in your own home, she says: “Over time, there will be signs you have lived there, but this generally cannot be claimed on insurance.”
• Retain the bond
If a tenant causes loss or damage to a property, subject to legal requirements, the bond should not be returned to the tenant until any corresponding insurance claim by the landlord is resolved.
“While requirements will differ between insurers, claims are generally calculated on the basis that a four-week bond is available and will be used to minimise any loss of rent or repair costs,” Parrella adds.
Red-hot renter tip 6: Appoint a good property manager
Contracting a property manager can take the stress out of managing your investment property. They have access to the National Tenancy Database, which provides access to historical tenancy information, including tenant checks, individual public record checks, identity verification and visa verification. Self-managed landlords cannot access this resource.
A property manager can also take responsibility for conducting regular
property inspections and can alert you to potential issues with the tenant or their lifestyle before they escalate.
"Be cautious of tenants who are willing to pay rent months in advance or are happy to pay cash"
Property managers can form professional relationships with your tenants that will span the life of the lease. The time and effort they can save landlords may be well worth the money paid for their services.
Red-hot renter tip 7: Cover yourself financially
You can check a tenant’s past but you can’t predict their future. Despite a landlord’s best efforts, there are still risks associated with owning a rental property as even the best tenant can accidentally damage a property or lose their job and become unable to pay rent.
Every landlord should consider a tailored landlord insurance policy that provides cover for both malicious and accidental damage, their legal liability and the loss of rental income. This should include insurance for the building as well as the contents.
Keep in mind that a standard building and contents insurance policy won’t cover landlords for many of these risks.
Disclaimer: The information contained in this article is intended to be of a general nature only. Terri Scheer does not accept any legal responsibility for any loss incurred as a result of reliance upon it. Contact Terri Scheer Insurance for further information.
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