Rob Farmer tackles some of the most difficult tenant issues that landlords face and reveals practical steps on how to deal with them.
1. Tenant is always late with their rent
It seems one of the most frustrating issues for a landlord is tenants who are consistently late with their rent and/or pay their rent in a number of payments throughout the month.
Different types of properties and different locations can quite significantly impact the types of issues you may experience in relation to paying rent on time and in full. For example, higher rental areas with executive-style tenants tend to have much lower rental arrears than areas with higher vacancy rates and lower rents. Across a well-run rent roll, the percentage of tenants in arrears greater than seven days should be no greater than 1%.
As with many things in life, prevention is better than a cure. It is really important that you or your agent select and reference check your tenant carefully, checking previous payment history and ensuring employment records are also checked. You also need to ensure wherever possible your tenant is on direct debit so your property manager deducts the money on the day it is due. You are much more likely to have a tenant in arrears when they are paying their rent via cheque or BPAY as they decide when they initiate the payment.
If your tenant has not paid their rent, it is extremely important to take action early. Don’t let your tenant get into the habit of thinking it is OK to pay rent late or in part payments.
Ensure your property manager sends a reminder as soon as rent is overdue. Start taking action as soon as it is detected that rent isn’t paid; this lets the tenant know that you take the issue seriously and rent should always be paid on time.
If your tenant is more than around seven days late (this legislation and process varies in each state), you need to ensure you use the correct documentation to advise the tenant of their rental arrears and send it at the correct intervals. If you don’t, it may impact your success if it goes to the Tribunal and, in some cases, your landlord’s insurance should you need to claim.
I often speak to people who have never invested in property because they believe that getting tenants to pay their rent is too much trouble. The number of serious issues associated with the late payment of rent is very low and if handled correctly should not turn into a nightmare – certainly this shouldn’t be a reason not to start building a portfolio!
2. Tenant wants to break the lease
From time to time, people’s life circumstances change and tenants may be in a situation where they need to break their lease. Again, you need to check the legislation in your state or territory but generally speaking, the tenant will find a suitable replacement tenant and pay any associated costs. The tenant will normally continue to pay rent until a new tenant takes over the lease.
Personally, I prefer my agent to find the new tenant, as they have much better resources to ensure I find a good one.
There are some circumstances where you may like to consider agreeing to terminating the lease. For example, if you feel you are not getting enough rent this may be a good opportunity to advertise the property at a higher rent and take benefit of the situation. Keep in mind in this scenario you will be responsible for finding the replacement tenant and paying any expenses involved.
3. Tenant wants to go on a month-by-month basis instead of a fixed term
Many people have the preconceived idea that you must have your tenant on a fixed-term lease.
There are definitely pros and cons of your decision on this one, but generally my view is one that depends on the type of rental market you are in. If you are in a section of the market that has very low vacancy rates and increasing rents, I am more inclined to stay on a month-by-month agreement that allows me the flexibility to increase rents at regular intervals or conduct improvements on the property should I choose.
In a market that has steady rents and higher vacancy rates, I would be much more inclined to stay on a fixed-term agreement. This provides me with the benefit of knowing what income I will receive for the period of the lease.
The other benefit of staying on a fixed-term lease is that I can time the lease-end date correctly. You may not be aware but most areas have a point in time where tenant rental enquiries are higher and it is easier to find a tenant. For example, everyone wants to live in Bondi, Sydney over summer so it is preferably not to have your lease end in the middle of winter, when there are fewer takers.
While we are on the topic of talking about timing your lease-end dates, if you have purchased in a new development it is really worthwhile thinking about creating a shorter or longer lease term than the norm. Usually when a development is completed there can be many landlords looking for tenants at the same time. The problem with this is that everyone signs their tenant on a 12-month contract, so down the track properties become vacant at the same time! I would encourage you to talk to your agent about signing your first tenant on a 10 or 14-month lease so you are not competing for tenants with everyone else.
4. Renovating before the lease ends
One of the considerations when looking at renovations or improvements is whether or not you should end your lease agreement actively or wait until the tenant provides you notice. The answer to this for me is purely a mathematical equation. You need to calculate how much additional rent you believe you are missing out on each month subtracting the additional costs you will incur from the improvements.
Even if I decide to wait until the tenant gives notice, I still like to have a very clear plan of what I want to do with the property. I will even have quotes completed so I can do my numbers and decide exactly what I will do with the property. As soon as my tenant gives notice, my agent swings into action. If you are not prepared, often it becomes all too difficult and the works get delayed which can cost you money.
5. Tenant death
It is an obvious fact of life that people die and unfortunately quite a number of people die in rental properties each year. The most common situation is that there are relatives involved who deal with the management of the situation, including the payment of rent and management of the deceased’s belongings.
Sadly, there are circumstances where a tenant does not have any family or close friends and you or your agent needs to manage the situation.
If a tenant dies you can usually apply to terminate the lease, in Victoria, giving 28 days’ notice. You may also apply to have the bond released in advance to pay the rent for this period. This would not normally apply if there was a surviving tenant, in which case they would take over the full lease.
It is very important that the deceased’s belongings are managed correctly. I would encourage you to speak with Consumer Affairs in your state or territory who will assist you with this process. They may also come and inspect the goods, valuing and logging belongings. They can also guide you on how the goods should be handled.
If the goods are not claimed by the deceased’s estate, they will need to be stored for a period of time and then sold. Again, Consumer Affairs will provide you guidance on how this should be handled.
If this situation does happen to you, make sure you get the correct advice relevant in your state or territory as there is a lot to consider. This is definitely an area where an experienced property manager is worth their weight in gold.
Rob Farmer is CEO of Australia’s largest property management group, RUN Property. RUN manages over $10bn of property assets, for in excess of 40,000 customers. For more information, visit www.run.com.au