There are a number of reasons why a person may want to invest in property, but they never actually get around to it.
They have all the best intentions and they really, truly want to take action.
They do the research.
They attend the seminars and the courses.
They get educated, they learn what’s possible, they discover the strategies that could make them wealthy and generate an income that matches (or outweighs) their current income in retirement.
And then… they don’t do anything further.
It could be lack of a deposit, a fear of making the wrong decision and ending up with a dud property, or even a partner who isn’t on the same page and discourages you from investing that stops you from becoming an investment property owner.
These are all common reasons why people don't invest in real estate, even though the evidence of property as an asset class that grows in value is overwhelmingly positive.
However, there is one primary reason why people don’t take the plunge…
It’s everyone’s “biggest fear” about becoming a landlord.
The biggest fear for many property investors is threefold, and it all relates to tenants:
- finding a good one in the first place;
- avoiding vacancies between tenancies; and
- receiving ongoing cash flow from tenants who actually pay the rent.
It makes sense to be thinking about these aspects of becoming a landlord.
In fact, it’s prudent.
If you buy a property and the expected rental return is $500 per week, and you have an extended vacancy or a tenant who doesn’t pay the rent – well, $500 a week quickly adds up.
I can understand why investors get concerned.
What I don’t understand, however, is why they let their fear of a non-paying tenant (or a gap between tenants) stop them from investing in the first place.
Why? Because there are some very simple, tried and test strategies for minimising the risk of these things happening in the first place.
Having been a property investor for over 4 decades I can attest to the fact that only a very small minority of tenants do not pay the rent.
In the overwhelming majority of cases, tenants do the right thing.
After all, the accommodation they are living in, provided by you as their landlord, is their home.
A good tenant will treat the property as if it’s there’s, and they’ll grow connected to the home and wish to stay on as long as it suits their needs.
Five ways to minimise your risks
When you make the decision to become a landlord, there are a number of ways to minimise your risks. These include:
1. Tailoring your investment to the ideal tenant.
There are two types of tenants in the world:
- Those who choose to rent for lifestyle, who are reasonably comfortable financially and who are living in a rental home because it suits them, and
- Those who are renting because they are struggling financially, and they live with only 1 or 2 weeks living expenses in the bank – meaning they are always just one small emergency away from being broke.
Choose locations and type of properties that appeal to tenants in category #1.
These tend to be the more affluent established inner and middle ring suburbs of our capital cities.
2. Taking note of supply and demand.
Supply and demand is important – and I don’t just mean supply and demand of rental properties.
Aim to buy in suburbs that are dominated by owner occupiers, as it’s homeowners (not investors) who become emotionally and attached to homes – and that plays a bigger role in driving prices up.
Also, avoid locations where there are many new apartment complexes going up.
They’re often largely owned by investors, which means they flood the market with rental stock, which can impact the return on your (older) property.
3. Buying properties with “owner occupier” appeal.
Buy the type of property that would appeal to owner occupiers – this way, you’ll have a greater change of experiencing capital growth and the tenants will love the features.
The way I view “investment grade properties” is that they should have all of the amenities and features that an owner occupier or quality tenant would desire.
This is very different to “investment stock”, which is generally cookie-cutter style properties that all look the same, offer the same style of living, and have very little potential for strong growth.
4. Getting the right support.
Get a proficient, proactive property manager to manage your property – don’t scrimp and get a cheap property manager because you get what you pay for.
A “cheap” property manager who cuts corners, doesn’t conduct thorough background checks and doesn’t communicate clearly will make the prospect of owning an investment property harder, not easier.
Also, don’t even consider self-management.
The few dollars you save will never make up for the nightmares you’ll experience.
Do you really want your tenant calling you at 11pm on a Sunday night because a water pipe has burst in their bathroom?
Find a good agent and outsource the problem – you won’t regret it.
5. Becoming “investment ready”
No one should invest in property unless they’re ready to take on the full responsibility of doing so.
This means having a cash flow buffer in place for a rainy day.
For instance, if there’s an urgent repair that costs $500 to fix, you want to be in a comfortable financial position to be able to accommodate this.
If finding $500 in an emergency would put you under financial pressure, then you’re perhaps not ready to become a landlord.
Four tips to minimise vacancies
Apart from the suggestions I’ve made above, here are a number of other ways of minimising your risk of vacancies…
- Buy in more affluent areas with a robust rental population. Now this doesn’t mean a high number of renters, but a balance of around 30% of locals being tenants and the remainder owner occupiers. This ensures a steady stream of potential tenants between leases.
- Hire a property manager to professionally screen your potential new tenants. They should carry out reference checks on your behalf to minimise the risk of a dodgy tenant moving in.
- Set a fair market rent. Your property manager can advise a reasonable rent in your suburb. Depending on current market conditions in the area, you may be willing to offer one week’s free rent or a slight discount or incentive to encourage a longer-term lease.
- Consider Pets. I own plenty of pet-friendly accommodation because these tenants often get discriminated against and are willing to pay 10-15% more to stay in a home where they can keep their four-legged family member.
Shifting from small to big thinking
Of course the fears of vacancies and no rent are are very normal.
But when people let fears like this get in their way, it’s what I refer to as “small thinking”.
You’re getting bogged down in the small, less significant “what ifs” and you focus on the potential problems – rather than being a proactive, big picture person who looks for solutions.
As I said, it’s a good thing to consider the potential risks.
But you should also balance that out by considering the potential upsides, too!
When you’re investing in a property, it’s smart to think about what type of tenant the property would attract and the risk profile and demand from that market segment.
Whilst this is important, it’s even more important to buy a property than will increase in value over time – this is the type of property that is more likely to increase in rent over time, too.
Meanwhile, your increased equity will help you buy the next property, so you can build a portfolio that sets you up for a wealthy retirement.
You see, cash flow keeps you in the property game – and capital growth gets you out of the rat race.
Michael Yardney is CEO of Metropole Property Strategists, which creates wealth for its clients through independent, unbiased property advice and advocacy. He is a best-selling author, one of Australia’s leading experts in wealth creation through property and writes the Property Update blog.
To read more articles by Michael Yardney, click here