Renting out a property might seem like a simple venture, but it could work out to be more complicated than people think.
Investing in property is often thought of as the ‘less risky’ investment choice, so it’s no surprise that it’s the go-to for many savvy investors ready to make their money work for them. Recent figures show there are currently more than 2.2 million property investors in Australia. This means roughly 10% of the population owns an investment property. Of these property owners, 71% have one investment property, and the remaining 29% have two or more houses under their belts. Most of these investors are more than likely renting out their properties, either positively geared or negatively geared.
Renting out a property might seem pretty straightforward - just find tenants and get them to pay rent, right? But after thinking about landlord insurance, property management, and potential renovations, you might realise that there’s more involved than you’d think. And that’s before tenants even move in.
In this article, we’ll discuss:
The world of property investing
Before we get into the process of renting out an investment property, let’s discuss the world of investing for a moment. There are considered to be four main types of investment: shares, property, cash, and fixed interest.
Let’s lay out the basics for our current investment-of-choice: property. There are a few notable pros and cons of investing in property according to Moneysmart.
Not only are there pros and cons, ongoing costs associated with owning an investment property should also be weighed up. Depending on whether you own a house or townhouse/unit, fees could include:
We’ll get into landlord insurance and property management fees later on, which could pile onto the already-long list of considerations.
Feeling overwhelmed already? There’s really no need to be. Basically, investing in property can be less risky, but it’s considered to be more of a ‘long game’. If you invest in shares or cash, it’s relatively easy to enter and exit the market as you please, with minimal transaction costs involved. Investing in property is usually only beneficial if you’re going to own the property for several years. Otherwise, the costs of entering and exiting the market could outweigh any potential benefits you’ll see.
Is it worth renovating a rental?
Let’s say that you’ve already purchased an investment property that you intend on renting out. If it’s an older property that’s in need of a bit of TLC, you might want to do some renovations before finding tenants to move in.
There are some notable benefits to renovating a property, even if you’re just renting it out. After all, it is still your property - improving it should make it more valuable or desirable.
With its value increasing, you’ll be able to rent it out for a higher weekly amount. Meaning, you’ll have more income in your back pocket, and hopefully, a higher calibre of tenant living in your prized asset.
Now, 'renovating' doesn’t mean knocking down walls and starting from scratch. Something as simple as a fresh paint job can sometimes make the difference and give the property the spice it needs.
Here are some easy examples of superficial, as well as some more extreme, renovations that can yield higher rental returns:
As well as more rental income, home renovations can generate capital growth that would not occur with regular inflation over time. This means you’ll have more home equity, or simply put, more more. Home equity is the difference between the home’s current market value and the balance of any outstanding debt (e.g. your mortgage).
When renovating an investment property, it’s important to keep the demographic of renters you’re trying to attract in mind. Is it a four-bedroom house with a big yard located close to a school? Or is it a small, two-bedroom apartment close to the city? These two property types are likely to attract different types of tenants, which means alterations you could consider making to one might not suit the other.
All in all, using some common sense when going about renovating goes a long way. It might be worth just focusing on key areas, like the kitchen or the bathroom, before doing a full-scale property revamp.
Ask yourself: is this renovation task really going to be worth it? If forking out $20,000 gutting and redesigning the bathroom, only to yield an extra $20 weekly rent, might not be worth the money spent.
To insure or not to insure
If the property is ready to rent, another question that pops up is about landlord insurance. In a nutshell, landlord insurance acts as a layer of protection in the event of financial loss, and it’s slightly different from normal home insurance.
Landlord insurance is a type of home insurance, but as well as covering building and/or contents, it covers the situations unique to a landlord. Essentially, it also provides you with ‘tenants insurance’, wherein any problems that arise as a result of the tenants (damages, loss of rent, legal expenses, etc.) are covered by your insurance.
While landlord insurance is a personal purchasing decision, one bonus is that landlord insurance policies are usually tax deductible.
Landlord insurance can cover you in the event of rental loss. However, this isn’t just when the property is vacant. Rental loss means if the property is damaged by an event, and is uninhabitable for a period of time, your insurance will cover the rental income you would have been receiving during this time.
If you discover you’ve had a less-than-ideal tenant living in your property, landlord insurance can come in handy. Say they’ve decided to stop paying rent or seemingly disappear off the face of the Earth, your policy can cover your financial losses. Plus, if the tenant stole things on their way out, you can be reimbursed by your insurance provider.
Normal wear-and-tear is completely reasonable, so your insurance probably won’t cover this. However, malicious damage, like holes in the walls or burns to the carpets, can be covered by landlord insurance. Tenants would be required to cover the cost of repairs, but if they can’t/won’t, landlord insurance is a good backup to save having to pay for it yourself.
While hopefully you’ll never need to appear in court, especially with a good property manager, some policies cover legal expenses involved remedying issues with a tenant. Coverage could include expenses incurred by attending a tribunal hearing or even retaining legal counsel.
Public liability cover is extremely important. It basically insures you if a death or injury occurs on your property, and someone tries to sue you in being liable. Most insurance plans will cover you for up to $20 million, but it could be worth double checking the policy. So in the unfortunate event that a tenant or visitor is injured on your property, and they try to take legal action against you, public liability cover will have your back.
Professional property management vs self-management
When it comes down to the day-to-day management of your investment property, you have two main options: you can either do it yourself, or you can employ a professional (property manager) to do it for you.
The majority of property owners opt for the second option, because managing even just one tenanted property can be like a full time job.
Some people don’t have the time to do this, or they simply don’t want to. Either way, self-management is still an option you might choose to consider, as it does cost money to employ property managers.
There are a few key factors you’ll need to consider when tossing up between the two options: legal responsibility, time management, finding a tenant, and other administrative duties.
If you decide to self-manage, you’ll need to understand the relevant laws, legislation, and obligations you’ll be faced with as the property manager. This might include complying with the relevant governing body, as well as building safety, strata, and short-term accommodation laws that affect your property. Failure to be aware of and comply with all the legal obligations can lead to trouble.
Ignorance is not bliss, or a defense, when it comes to obeying rental laws.
You’ll also need to know how to complete all the paperwork involved in bringing on a tenant. This will include the lease agreement, rental bond lodgement, entry condition reports, inspection reports, vacate documents, and more. Each state and territory has its own tribunal and applicable lease documents, so you’ll need to do your own research into what applies to you.
When you’re managing a rental property, you need to be available to fix things that will inevitably go wrong, all the time. So if your tenant reports that their air con isn’t working, you’ll need to find an electrician (who is fully qualified and covered by insurance), organise a time that works to complete the work, make sure it's done correctly, and pay the invoice. Not to mention, you’ll need to be available for general inspections, other requests from the tenants, chasing up late rent payments or other bills (if applicable), organising and keeping on top of mandatory checks (e.g. smoke alarms), and more.
Arguably, the most important part of owning an investment property is finding the right tenant/s to move in. Ideally, these are people that are clean, respectful, law-abiding, and will treat the property with the same care and attentiveness as they would if it were their own. While it might seem like a piece of cake, there could be more steps involved than you’d think.
To give you a general idea of the steps involved in finding a tenant, these are some things you’ll need to do:
By going through a property manager, you won’t need to handle any of this logistical stuff yourself. Leasing agents are not only efficient and knowledgeable when it comes to finding the right tenant, they’re usually pretty good at picking the good eggs from the bad ones. This might just come with experience, because they’ve dealt with enough tenants in their time to know what to look for. Regardless, it is still possible to find a tenant yourself.
Managing a rental property is no joke. There's a lot involved in day-to-day part of owning an investment property, i.e. dealing with tenants can be a lot of work. If you’d rather not have to worry about your tenants, hiring a property manager to take care of it is typically quite affordable. Commission fees can range from 4 to 7% of weekly rental income, but this can vary. Other fees might apply, for example, when a lease renewal is coming up, but everything will be laid out to you before you sign the dotted line. Property management fees are also tax deductible, just like landlord insurance.
Advice from the property experts
It might seem like a lot of information to take in at once - because it is. Renting out an investment property might be the ‘safer’ way to invest, but that doesn’t mean there isn’t still a lot of work involved in entering the market. Despite this, many people still choose to invest in property, and are extremely successful in doing so.
For more on how to invest in property and how to do it right, Savings.com.au reached out to some experts in the field for their expert opinions and advice for new property investors.Lloyd Edge from Aus Property Professionals. Image Supplied
Mr Edge said that one of the most important questions to ask yourself, as a new property investor, is what you’re trying to achieve: whether you’re investing for a cash flow, or for capital growth.
“Depending on your income, this can be quite a determining factor. If you're on a lower income, getting a property with better cash flow is actually going to help you more, and also help you get a loan,” he told Savings.com.au.
“If you're on a higher income, then you might might be able to service a larger debt, because you might want to claim the difference on tax, so you can negatively gear it. So that's sort of a strategy in itself.
“Apart from that, I think what's really important is location for property,” he said.
“One of the things you really need to look at is is where you buy. Get an understanding of where the government is spending money, where the infrastructure's going, where the population is moving to, and the employment rate.”
He said it’s important to understand these factors, as well as the demographics, so that you’re buying an investment in an area where there’s demand for tenants.
When asked whether there are any differences between investing in houses versus townhouses and units, he said that it depends on the area, and that that you “need to buy to the demographic”.
“If you're in an outer suburb, for example, or family occupied suburb, then it's it's important to invest in what people are living in. So if most of the properties in the area are four to five bedroom homes that are occupied by a family, then units are not the right investment,” Mr Edge said.
“If you're closer to the city or the interesting parts of the city, units and townhouses would be good options because that's what the demographic wants.”
Regarding the comparison between self-management and property management, Mr Edge said he doesn’t recommend self-managing because it can “cause quite a lot of headaches”.
“You generally need to be close to the property if you’re going to self manage. You might need to go around and organise repairs, and if the tenants don't pay rent, then you've got to actually deal with that. A property manager deals with everything on your behalf. And it’s tax deductible,” he said.
In terms of finding the right property managers, Mr Edge recommends choosing a company that specifically deals with rentals, rather than a larger real estate agency that’s predominantly sales-based, to get the best service.Scott Aggett from Hello Haus. Image Supplied
When discussing why fees vary between agencies, Mr Aggett said that it comes down to location, as well as the level of service required to manage the property.
“There are extremes, of course, in terms of set and forget properties that require little monitoring right through to un-renovated properties requiring constant upkeep or with tenants falling behind with rent,” he said.
According to Mr Aggett, high value inner city rentals usually command far lower fees when compared to some suburban and regional areas. He said that property management fees in inner city locations can range from 4.5 to 5%, all the way up to 7% in smaller cities.
When asked what is responsible for driving lower prices, he said that it ultimately comes down to competition. Mr Aggett gave his five tips for property investment and choosing a property manager:
“With a small amount of homework, you can save yourself thousands of dollars in property management fees.”
While Mr Aggett said it shouldn’t be all about who offers the lowest fees, investors could be pleasantly surprised by how motivated agents can be to get your business when they know they’re competing for it.
As a final tip, he provided Savings.com.au with a script to use when calling your leading option to negotiate a lower price.
“We have reviewed the market and we think you’ll be the right fit to manage our investment, however, you are not competitive on fees. We will sign with you if you can do it for “$X”.
He said that the 'X' number should be 10% lower than the cheapest rate you were quoted.
Mr Aggett also explained why shopping around is worth the hassle.
“On a weekly investment property rental of $500 per week, the difference between 5.5% and 7.7% is $572 per year. With the average rental investment being held for around 10 years in Australia, that’s nearly $6,000 of savings,” he said.
Cate Bakos from Real Estate Buyers Agents Association. Image Supplied
Cate Bakos gave her input on what landlords should consider when renting out an investment property.
When discussing rental returns investors can expect, she said that recent, comparable leases should be used as a baseline, as well as the opinion of an experienced, local property manager.
“Rent cycles can occur seasonally in a lot of locations, so being prepared to accept when the conditions are not conducive to stronger rents is just as important, because a landlord can face vacancy periods if they are unrealistic or refusing to meet the market,” Ms Bakos told Savings.com.au.
She said investors should be familiar with the legislative compliance relevant in their state. According to Ms Bakos, property owners can face “serious repercussions if anything goes wrong for the tenant and the owner is found to be at fault”.
Regarding landlord insurance, she stressed that being adequately insured is highly important. Things like waiting periods, excesses, limitations of cover, and third party coverage are some things she suggested discussing with your property manager.
“One of the most valuable questions a landlord can ask their property manager relates to adequate insurance cover,” Ms Bakos said.
“Understanding the protection and coverage of any given policy is vital, as is any conditions that are applied by the policy.”
Lastly, before handing over the keys, Ms Bakos said that the owner should ensure the property feels welcoming and clean.
“The investor should get in quickly and do all of the little things they had planned to do before handing over the keys, so that their tenant can enjoy a peaceful, uninterrupted tenure. This includes arranging maintenance visits, trade upgrades, landscaping/gardening, and any bank valuer visits and quantity surveyor jobs,” she said.
“A welcome message is a lovely touch. Landlords need to always remember that their tenant is their customer, and the property is their customer’s home.”
Saving.com.au’s two cents
Clearly, renting out a property isn’t as simple as buy house = make profit. There are a number of things you’ll likely need to sort out before you start reaping the benefits of owning an investment property. From minor renovations to finding the right property manager, chances are, you could be busy for a while before tenants come into play. But buying and renting out property is clearly a highly popular choice made by many Australians, and quite a few see that the benefits outweigh the drawbacks.
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