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If you find the right property manager and tenants, you can sit back and watch the cash roll in

When you become a property investor, you also become a landlord. It is important to understand your responsibilities as a landlord, as this knowledge will help you avoid costly mistakes, maximise your returns and protect your investment.

STEP 1: Buy a property

It’s no secret that you should buy and develop your own property in a great location set for capital growth, with low vacancy rates and high-quality tenants.

No investment property should sit on the market for weeks unrented if it’s in a good area. When you’re buying or building in an area where vacancies are tight, and where there’s high demand for properties like yours, then it’s easy to get them rented out. You can expect to earn rent and cash flow from day one.

STEP 2: Understand the legislation

There are general responsibilities you take on as a landlord, as set out at the state or territory level of government. It’s important to familiarise yourself with the specific rental legislation and regulations in the state or territory you’re buying and/or developing property in.

STEP 3: Appoint a manager

People ask me, “How can you maintain so many properties? It must be really stressful!” Now they are landlords themselves, how are they to manage their properties? What do they do if they get bad tenants? What if a tap leaks or the air-conditioning breaks down?

I tell them, “You’re not going to be managing the properties yourself. That’s what you hire a property manager for.”

I have never spent any time managing or maintaining a property because I’ve had management in place from the minute I rented out my first property. It’s up to you whether you choose to go it alone or use a buyer’s agent when buying a property, but I firmly believe that everyone should use property managers to manage their properties if they want to build a portfolio.

Managing your own property can easily become a full-time job. If you do it yourself, you’ve got to be on call all the time. If there’s a plumbing problem, you’ve got to organise a plumber or go there and fix it yourself. If you’re in Sydney and a major problem crops up in your property in Tasmania, you’ll have to fly down there and sort it out.

As long as you appoint the right property managers and you buy properties in the right locations, then you can be a truly passive landlord. That said, I don’t recommend being a passive property investor. I’m all about equity creation, which is not passive – you should

be refinancing equity whenever the bank allows you to. You need to run your property portfolio like a business.

As a landlord I receive 16 rate notices for my properties – well, in fact I don’t get any. They go to the property manager to pay on my behalf. When you set it up properly, it’s entirely stress free. It’s like setting up a business then leaving the day-to-day operations to a competent manager.

What do property managers do?

1. They source your tenants.

2. They open your property for inspections.

3. They check whether your prospective tenants are blacklisted from rental.

4. They check tenant references to make sure they have always paid their rent in the past.

5. They collect rent.

6. They pay your bills, including council, water and strata rates, from your rental monies.

7. They pay you the balance of the rental income each month.

8. They conduct routine inspections on your behalf and send you reports.

9. They organise any repairs and maintenance that is required.

10. They deal with tenant concerns.

11. They chase overdue rent.

12. They can represent you at a tribunal if you have any issues with your tenants.

How much do you need to pay a manager?

The fee is based on a percentage of the amount of rent that’s coming in. The amount varies, and may be anywhere between 4% and 10%. In a place like Sydney, you can get a property manager for as low as 4% plus GST. But even in regional areas, you should never have to pay more than 7% or 8%. In Brisbane, for example, the going rate is 8.8%, but I’ve negotiated most of the property managers I work with, and who work for my clients, down to about 6% or 7%, which is where it should be.

Some people think they can save money by not having a property manager. But time is money, and if you need to conduct open inspections on a week day, or if you’ve got a tenant who is constantly firing off emails or calling you with complaints, or if repairs are needed that require letting tradespeople in and out, a property manager will take care of all of that. It’s money well spent, and it’s tax deductible. Just be sure you have the right property manager in place.

How do you find the right person?

Your property manager is a vital member of your “dream team”, yet they are often seen as the poor cousins of real estate agents. This is why it’s good to deal with an agency that specialises in property management because, to state the obvious, while real estate agents know about selling property, managers know about managing it.

Big-name real estate agencies that offer both services typically delegate the job to staff members who are working their way up to a job in sales. So you might have someone for six or 12 months, then someone else steps in for a while, until they too get promoted to sales. So you want someone who is a dedicated property manager.

Finding the right manager is as important as finding the right tenants. Every property manager works in a slightly different way, so it’s important that you interview a few operators in the local area so you can compare their approaches and identify which will be the best fit for you and your investment.

If you’re not located in the same town as your investment property, simply call them or jump on a video chat to go through the screening process. This will also help you to determine how they communicate with people. An important part of their job, after all, is to create and maintain constructive relationships with your tenants.

What do you need to ask a prospective property manager?

Many landlords jump straight to the question “How much do you charge?” and just go with the cheapest option, but there’s so much more to consider. You need to understand what level of service you’re getting and what is included in the property manager’s fee structure.

Some managers charge extra for providing monthly statements, for example, on top of their management fees. Some are more thorough and conscientious than others, and their tenant-screening process can be much more comprehensive. So it’s crucial that you ask a prospective property manager the right questions.

Questions we ask prospective property managers include:

1. How many properties does your office manage and how many property managers do you have?

2. How many routine inspections do you carry out per year?

3. Do you charge extra fees to organise repairs or pay rates on my behalf?

4. How often do you disburse payments to your landlords?

5. What is your tenant-screening process?

6. What action do you take if a tenant doesn’t pay their rent on time?

7. How often do you review the rent, and will you discuss this with me?

8. What are the average days on market for the properties your office manages?

Jumping online and checking out property managers’ reviews on Google and social media can give you some insight into what their current clients – landlords and tenants – are experiencing.

STEP 4: Find quality tenants

Having the right tenants can make all the difference when it comes to how successful (or unsuccessful) your investment is, and the screening process plays an important role in this.

So how do you screen a tenant?

It’s important for your property manager to collect as much information as possible from the applicants. How many people will move in? Do they have a stable source of income (check their employment history)? Are they likely to be short-term or long-term tenants (check their past tenancies)? Why are they looking to relocate? Do they have any pets? And so on.

Also run a credit check on the applicants; check their employment history; contact their references; do a background check; get full details of their rental history; and interview them.

Questions to ask a prospective tenant include:

• Do you plan on getting any roommates in the future?

• Do you work night shifts or odd hours?

• Do you smoke? Indoors or outside?

• Do you have lots of friends who often come over at night?

• Do you have any pets?

STEP 5: Sign a lease

Laws around lease agreements vary slightly in each state and territory. Your property manager will talk you through the ins and outs of these.

The lease agreement is a legally binding contract between the tenant and the landlord (the owner of the property). It includes the weekly rent your tenant will pay, when it is due, the deposit required and whether pets are permitted.

The deposit, which is compulsory for all tenants, is usually a bond of four weeks’ rent plus two weeks’ rent in advance. The bond is held by the Residential Tenancies Authority (in Queensland) or its equivalent, and is used to cover any damage to the property or unpaid rent.

How do you decide on a rent?

You need to make sure your property is priced correctly, so unless you are a property expert yourself, take advice from your property manager on this, because they are the experts in the field.

I always recommend renting at fair market value. Don’t try to rent your property cheaply, thinking it’s going to get you a tenant faster, because if you’re in a good area a “market rent” will get you a good tenant.

Don’t list your property for more than market rent either, because then it might stay vacant for a while. A vacant property’s no good; you’re better off getting $10 less per week than having your property lie vacant, earning $400 less a week because you’ve got no tenant at all.

I also recommend that you review the rent every six months and see what the market’s doing. Look at increasing your rent by about $10 a week every 12 months, depending on the market. If you’re in a market that’s a bit soft and hasn’t moved, you might want to leave it unchanged.

There are plenty of examples of people letting their properties sit there for years at the same rent, until they find out the rents in the area are $100 higher than they were when they set it. Again, property managers should alert you to that and let you know when it’s time to review your rent.

I recommend a 12-month lease unless there’s a good reason for doing a shorter one – say, because you’re planning to live in the property or to sell it. Some landlords think offering a six-month lease gives them the opportunity to raise the rent after that period. This strategy could work if you are renting in winter and the markets seem a bit down but you are confident you will get more for your property in the warmer months. If they sign for 12 months, it gives you a bit of comfort knowing you’re guaranteed tenants for the next year.

If you want to increase the rent after six months, you can insert a clause in the contract for the 12-month lease stipulating that the rent will increase by $5 in six months.

Should I allow pets?

I generally allow pets in my properties, though I’m not saying everyone should. You may be worried about the risk of damage, but allowing pets in your rental property can be a savvy strategy for a wise investor.

Allowing pets in your rental property can give you:

• A point of difference. It can open the market a little more to good tenants who feel locked out of most properties.

• Reduced turnover. Pet owners can be less transient than most tenants, because it can be difficult to find pet-friendly properties.

• Increased rental returns. Advertising your property as pet-friendly can increase demand, allowing you to ask for more rent. Or if a tenant requests permission to have a pet, you can make a slight rental increase as a condition.

You can include specific clauses in your lease agreement pertaining to pet ownership, stipulating that the tenant will be liable for any damage caused by the animal and that they must fumigate the property when they vacate. You can also specify in your rental agreement the types of animals you’ll allow; for example, you could stipulate that cats are permitted but that dogs are not, or enforce an age and weight limit, or say that only cats or small dogs are allowed.

Discuss additional safeguards around pets with your property manager and ensure the rental agreement includes the details of any pets to be kept at the property, including every animal’s microchip number, in case you have to file an insurance claim for damage.

Your property manager should also conduct regular inspections to ensure the tenants are abiding by the terms set out in the rental agreement, and to identify any damage before it gets worse.

The tenant’s personal circumstances are also an important factor, such as whether they live alone and go to work, leaving their pet at home all day. When in doubt, I suggest asking your property manager to request written references from past tenancies about their pets.

If you suspect your tenant is keeping unauthorised pets, ask your property manager to inspect the property and discuss the situation with the tenants. It is important, as the landlord, to hear out the tenant’s case and fully understand the circumstances around the pet(s). In most cases, the tenant probably didn’t realise they had to seek permission (to home additional animals).

STEP 6: Maintain the property

It’s important to look after good tenants. If they complain about a leaking tap or that the air-conditioner’s making a noise, attend to it straightaway. Don’t just ignore it and think, oh, it’s just a whingeing tenant. You really need to get onto that and keep them happy. They are paying you for a service, which is a working property. All those repairs and maintenance jobs are tax deductible anyway.

There’s a lot of confusion around who should pay for what when it comes to repairs and maintenance, so it’s important for your property manager to be familiar with the current legislation. They should also make your tenant aware of their responsibilities at the beginning of the lease to avoid any confusion and neglect to the property.

The regulations vary from state to state but in NSW, for instance, if the property requires general pest control after the tenant has been in the property for more than three months, it’s the tenant’s responsibility to arrange and

pay for this. However, if the tenant has just moved in and there’s a pest infestation immediately, it’s the landlord’s responsibility to resolve the problem. Landlord responsibilities usually include:

• General maintenance of the building (for example, a leaking roof).

• Water rates service fees. However, if your property has a separate water meter you can charge your tenants for water usage, which is the amount of water they have used during that period. If you want the property manager to enforce this, your property must comply with any water-efficiency measures mandated by your state or territory.

• Smoke alarms. Make sure you replace the batteries in any smoke alarms before any tenants move in. During the tenancy, it is the tenant’s responsibility to replace any low or spent batteries. If the smoke alarm is faulty, however, it is the responsibility of the landlord to have this repaired or replaced.