Landlord Disasters: How to make sure this doesn’t happen to you and your investment property

“Owning an investment property is a huge undertaking. It must be taken seriously. As a property investor you are exposed to a large number of risks. Disaster is often just around the corner. The best way to avoid or minimise the risk of disaster happening to you is to be prepared. I have written this report to help you minimise the chance of disaster happening to you. I want you to be prepared. I want you to stay safe in what is often the dangerous world of property investing.”.

– Neil Jenman
Author

Take a glimpse inside…

1. Choosing The Wrong Agent

9-landlord-disasters-blog-300x169Choose the wrong agent to look after your investment property and you’re in trouble from the start. Most agents seem okay if things are going okay.

If they are lucky enough to choose a good tenant, if the tenant pays the rent on time, if nothing goes wrong with the property, a bad agent can go undetected for years. But it’s when things go wrong that an agent is really tested. If the tenant falls behind with the rent, how quickly does the agent act? If there’s damage to the property, what does the agent do?

Choosing an agent to manage your investment property is just as important as choosing a tenant to rent your investment property. And, just as you check out a tenant, so should you check out an agent.Insist on seeing references from other landlords on whose behalf the agency acts. If the agency can’t (or won’t) supply references, then don’t choose the agent. Always try to meet the agent in person. Visit the agent’s office. What does the office look like? Neat, professional and well organised? Or shabby and chaotic. Just as you get a feel for a tenant, so do you get a feel for an agent. Always try to interview several agents. And be careful selecting the cheapest agents. Cheap agents are often dodgy agents. You’ve got an investment property worth hundreds of thousands of dollars. Be prepared to pay well for someone to look after it well.

2. Rogue Tenants

A rogue tenant can make your life a misery. A rogue tenant can wipe tens of thousands of dollars off the value of your property. You cannot be too careful about whom you allow to rent your valuable investment property.

Always check and double check tenancy applications. Check the tenancy black list registers. Check their past rental histories. If possible visit the property that your prospective tenant is currently renting. Is it neat and tidy? Or is it shabby and dirty? Look at the tenants themselves – are they clean and tidy? Look at the car they drive. You can be almost certain that people who keep their cars chronically filthy will also keep their place of residence filthy.

While it is against the law to discriminate on the grounds of race, religion, sex or marital status, it is not against the law to refuse to rent your investment property to people who have a history of trashing properties. Do NOT be in a hurry to rent your property. One of the biggest reasons that rogue tenants get selected is because agents get pressured by landlords to ‘hurry up and rent my property’.

Consequently, agents take short cuts with tenancy checks and rogue tenants slip through. Better to have an empty property for a few extra weeks than a rogue tenant who pays no rent and trashes your property. Finally, remember this: When you find a good tenant, treat them like royalty. Don’t greedily increase the rent too much. They are your valued customers looking after your valuable property.

3. Insurance Disaster

Not having the right insurance coverage on your investment property can be a major disaster. You need insurance to cover everything from third party property claim to landlords’ insurance, to malicious and accidental damage insurance.   If your tenant is injured because of a defect on your property and it is deemed to be your fault, you could be liable for many thousands of dollars in damages.If visitors come on to your property and injure themselves, you could be liable for damages. You need to be covered in case tradespeople are working on your property and injure themselves.

A common mistake made by landlords is to under-insure their properties. For example, the replacement value of the property may be two hundred thousand dollars but the landlord may have it insured for only one hundred and fifty thousand dollars. The insurance company will therefore be able to ‘short-pay’ any claim. This could cost you thousands of dollars from your own pocket. A complete disaster for you.  As the recent floods have shown, many landlords were not aware that many insurance companies have many different definitions for the word ‘flood’.

Sure, you might think that some insurance companies are sneaky or unethical but that’s the reality of the insurance industry. You have to understand how to play their game and be absolutely sure you are adequately and safely covered. Insurance can be a complex minefield. The best advice is to get expert advice from a reputable insurance broker.

4. Lack of Vigilance

There’s an old-fashioned property investment rule that seems to have been forgotten in the hurly-burly world of twenty-first century wealth creation – you should always be able to drive past your investment property.

That’s right – who’s keeping an eye on your property for you? The agent? Well, you hope so. Agents, the good ones,are supposed to make regular inspections of your property. How do you know that your lovely investment home is not being used as a hydroponic drug manufacturing centre? Ora brothel?

What about that nice young couple who told yout hey had one elderly dachshund that always stayed outdoors  and now they’ve got seven pitbulls that roam the home? Or those parties that the neighbours have started to complain about?   You’ve got to keep an eagle eye on your home.

Long gone are those good old days where the good old agent used to drop by and collect the rent. These days agents (and owners) can go months (even years) without setting eyes on the tenants.

This  can be a costly mistake. You must insist on those regular inspections being done. Your lease agreement stipulates that you (and/or your agent) are allowed a certain number of internal inspections per year. Always do these inspections, no matter how nice and secure the tenants seem to be. Also,always be sure to do some ‘drive-by’ inspections. There’s an old saying in business management: ‘What gets inspected, gets respected’.

The same is true in property investment. If your tenants know that you’re vigilant with your valuable property, they’re far more likely to take better care of it.

5. Conned By A Sob Story

As hard as this may seem, when you own an investment property you own a business. You are in the business of exchanging accommodation for money. It costs you money to provide that accommodation.

You have rates and taxes to pay on your property. You probably have finance costs to pay in the form of interest on a loan to a lender. If something goes wrong in your life, you still have to pay your expenses.

The same applies to your tenants. If something goes wrong in the tenants’ life, the tenants are still liable to pay their rent. Sometimes,   however, some tenants will approach the owners of properties with some heart-wrenching stories. They will offer compelling reasons why they cannot pay their rent. You must not be swayed. You are not a charity. It is not your job to provide welfare for your tenant. If the tenant gets into financial difficulties – for whatever reason – the tenant should seek help from sources other than the landlord. Too often too many landlords get ‘taken in’ by sob stories.

Some landlords get conned out of several weeks rent before they realise that the sob story was just a ruse not to pay rent. So, remember, as a property investor, you are a business person. You are not cold hearted, just realistic and sensible.

6. Sudden Captial Loss

Most property investors fail to make financial allowances in their budgets for capital costs. Suddenly, they need a new roof on their property which costs several thousand dollars. Where are they going to find the money?

When you buy an investment property, you should always make an allowance for the expenditure of capital costs during the life of the property. Many investors make the mistake of thinking that capital costs can be claimed under insurance. Insurance only covers loss or damage, not wear and tear. If the gutters rust out, the cost of new guttering is a capital cost. While it is usually tax depreciable, it’s not tax deductible and the money needs to be found immediately.

To soften the blow of sudden capital costs (and prevent them from becoming a disaster) try and set aside a certain amount of the rent in a special account set up to provide for capital costs. If you don’t have enough money from the rent to cover capital costs, at least set up a budget for a future date so that you know when these capital costs are likely to occur. If you are considering buying a property, that’s the best time to analyse your likely future capital costs.

The older the property the more likely the chance of larger capital costs happening sooner. The newer the property, the better. Of course, you are going to have to pay a higher purchase price for a newer property. Just remember, though, it can often be false economy to buy some ‘cheapie’ investment properties. Capital costs can be disasters.

7. Failing to Learn

You’re going to make a lot of mistakes as a property investor. Just be sure that each mistake is seen as a learning experience. Don’t make the same mistake twice. The worst types of property investors, those who are prone to the most disasters, are those who fail to learn from their mistakes.

Be careful of so-called ‘property experts’, those people who claim to be able to teach you the ‘secrets’ of property investing. There are no secrets and anyone who tries to sell you “secrets” is probably a crook.

Property investing is quite simple. You buy a good property in an area with good growth prospects; you check your finances and make sure that you can comfortably afford the property; you find a good agent who finds a good tenant who looks after the property for you. You check with your accountant and lawyer to make sure that you are safe financially and legally. You check with your local agent to make sure that your property can be rented for a good return.

All the time you learn as much as possible about the investment process. You never stop learning. If you’ve bought the wrong sort of property in the wrong area, then don’t let this turn you off property investing. Learn from your mistake. Get it right next time.

8. Investment Disaster

Okay, so you got conned. You bought a property off-the-plan and when it came time to settle, the property was worth a hundred thousand dollars less than you paid for it. A disaster. You bought a property with a ‘rental guarantee’ and when the guarantee ran out, the rent dropped by five hundred dollars a month. A disaster.

The property industry is riddled with property spruikers. Thousands of investors have been caught. They have bought properties that are worth far less than the price they paid for them. In most of these cases, investors pay around 30 – 50 thousand dollars too much for their investment properties. In addition, investors also fork out around 10 – 20 thousand dollars in legal and purchase fees. This means they are instantly facing a loss of close to a hundred thousand dollars. These days, many accountants and financial planners are selling properties on behalf of developers. In almost all such cases, these properties are grossly over-priced and investors are buying an investment disaster.

If you are approached by any company that claims to be a property ‘expert’ or a property ‘club’, be very careful. You are almost certainly being set-up to buy a property from a property developer at an over-inflated price. An investment disaster.

The best and safest property investment you can often make these days is to go to your local real estate office and look at the selection of local real estate available in a local area. Real estate agents usually sell real estate at fair market value. They are rarely involved in the notorious practice of ‘two-tier’ marketing where investors are sold properties at inflated prices. Investment properties bought from local estate agents are seldom investment disasters.

9. Sell Out At A Loss

Sometimes, with some investors, their property disaster is so bad, they feel they have no choice – they are forced to sell out at a loss. There are few things worse than buying a property for $630,000 and selling it for $390,000 (a true case of someone who bought through a ‘club’).

It can turn you off property investing for life. But don’t let one disaster ruin what can be a lucrative investment for you. If you invest in the right place at the right time in the right property, you can do very well with property investing. So, if you sell out at a loss, try to tell yourself that, one day, you will invest again, but do it properly. You will do your research, you will check property prices with local agents, you will interview local agents about rental returns. In short, you will almost become an expert before you buy. Yes, if you are forced to sell out at a loss, you will vow to buy back later and make a profit.

Of course, you can always try and hold on and see if today’s disaster will improve tomorrow. Be careful, though, because bad property investments rarely become good property investments. Most times, when you are faced with the fact that you have got yourself stuck with a dud property, the best thing you can do is cut your losses. Lick your wounds. And then come back and fight again another day.