What are the most common blunders new landlords commit when starting out their investment journey? Rob Farmer, CEO of RUN Property, explains.
1. Not treating property investing as a business
The number 1 mistake is not treating your property investing as a business. If we were to go out and buy a business worth $500,000, most people would treat it very seriously and have the appropriate resources and systems in place to get the best results. Unfortunately, too many people go out and buy a property and then treat it like a hobby and subsequently don’t achieve its maximum potential.
It is really important to have a business plan and build a good team around you of people who can assist you make the right decisions.
2. Forming a direct relationship with the tenant
Another trap for first time investors is forming a direct relationship with tenants. Although certain aspects of this can be very rewarding it can sometimes make it difficult to make the right business decisions.
It is human nature for people to unwittingly take advantage of people when we know them. For instance a tenant is more likely to be late paying the rent if they know you and perhaps think you won’t mind. In this case you would need to be a special kind of person to successfully separate your business relationship from your personal one when serving that arrears notice! The same applies in situations such as rent increases and bond claims at the end of the tenancy agreement.
3. Thinking of the property as your own home
A common trap for new landlords is thinking of their investment property as they do their own home. Good investment opportunities can be missed because the investor cannot imagine living there themselves. You may not choose to live in an apartment with no parking, but near a university close to public transport this may be a great investment.
Another common example of this is in relation to the interior decorating of your property. Often new landlords will enjoy painting or decorating their property once they have taken possession. You might think an orange feature wall looks amazing or that bright blue carpet is very trendy but you don’t have to live with it. The rule is keep it neutral and make sure whatever you do appeals to the widest selection of tenants possible.
4. Not keeping the property in good condition/conducting repairs quickly
A simple coat of paint, removal of a wall or a more elaborate renovation can make a big difference to the value of your asset. In addition to the capital improvement your yield can be increased substantially by repairs and improvements that tenants will pay extra rent for.
Sometimes new landlords in an attempt to save money will not keep the property in good condition which can be a false economy if your property doesn’t lease quickly or achieves a lower rent.
My view is you should always conduct repairs quickly and to a professional standard, even if they are only minor and maintain the property to a high standard in particular painting and carpets.
5. No depreciation schedule
A depreciation schedule is the schedule of items that can be depreciated at a certain rate allowing you to claim a tax deduction against your taxable income. It is amazing how many people don’t have one or only think this is useful with new properties. Too many accountants just rely on what the client tells them rather than encouraging their clients to get one professionally done.
The reality is that an investment of a few hundred dollars can literally save you many thousands of dollars in tax, even for an older property you have just purchased.
6. Not increasing rents regularly
You should regularly review your rents and ensure they are at market levels. A small regular review is much better than an infrequent review where the increase is so high that it shocks the tenant and they move out of the property.
As a new landlord it might feel daunting to increase the rent for the first time fearing that your tenant may not like it and move out. The reality is, as long as the increase is reasonable you should have no problems with your tenant.
It is useful to keep in contact with what other properties similar to yours are renting for. It is a great idea to go and look at some open for inspections and see how the property compares to yours. The other exercise to do is a gross yield calculation and compare it to the rental yields in your suburb. If you multiply the rental yield by the estimated value of your property it will give you the annual rent you should be achieving. This can be useful as a guide.
7. Losing focus on the bigger picture
If you are serious about your property investing and truly want to create a better financial future for yourself and your family you need to remain focused on building a portfolio.In order to do this you need to be able to leverage the equity you have in your portfolio. The higher your equity and rental returns, generally the more you can borrow.
In order to establish the value of your portfolio your bank will use an independent valuer who will establish the value of your property. It is crucial you understand what the value they have put on your property and compare this to what you think. If they have under-valued it substantially, you should follow up on this with your bank. Prepare a list of sales comparables and talk these through with your bank and don’t feel you have to just accept whatever value they put on it. If you have a valid argument they will often listen to you.
8. Paying down tax-deductible debt before non-deductible
Most experienced investors will know that it can be tax effective to pay down non-tax deductible debt before tax deductible, such as your home. Most investors will have their investment properties on an interest only arrangement until they have eliminated non-deductible debt.
9. Not using a good accountant who understand property
A good accountant is extremely valuable, and an accountant that truly understands property is worth their weight in gold! Use an accountant who really understands property. Ask your accountant if they invest in property and if so, how many properties do they have?
10. Not using an experienced property manager
OK, so you expected me to say this! One of the most important traits of a successful business person is the ability to delegate and use the expertise of others. In the case of using a property manager this remains true.
A property manager is inexpensive and of course is a tax deduction. For a couple of dollars a day, your property manager can save you thousands by ensuring your vacancy rates are low and your property obtains the right rent. They also pay the bills and prepare end of your monthly and of financial year accounts so your accountant can prepare your tax return cost effectively.
I encourage all investors to use a property manager so their time can be spend focused on continuing to find good property deals.