25 – Insurance for Landlords

insuranceAs we move progressively closer to the “launch” of our first investment property, our handler at Open Wealth noted we should start looking at insurance options. I seem to write a lot about insurance!

For our family home, we have building insurance because the bank requires it and this is the same for an investment property, of course. Although the building itself is a depreciating asset, it’s what allows us to generate revenue on the land (an appreciating asset) and would be expensive to repair or rebuild in the event of fire, flood, impact from space debris (!), etc, etc.

We also have contents insurance to cover the things inside the house like the furniture, clothing, pots and pans, and the TV. Notably, our insurance company classifies window and floor coverings under the banner of contents insurance.

As landlords we have a few more things to consider, such as malicious damage by a tenant and lost rental income for reasons like the tenant not paying rent. We also need public liability insurance to cover things like a tenant injuring himself because he tripped over a crack in our driveway, for example. In general, these things come under the heading of “landlord insurance”.

When I initially started comparing insurance products, I assumed we’d need standard building (and possibly contents) cover and then bolt on a landlord insurance product through the same insurer or another insurer. I was surprised to find that many insurers selling landlord insurance already bundle building and landlord under the heading of Landlord Insurance, and typically include public liability insurance as part of that offering. These products also tend to cover window and floor coverings too—either through the building component of the policy or through a modest contents component.

As usual, the pricing and inclusions for insurance from the various providers varies widely. I’ve received quotes ranging in cost from $600 to nearly $2000 for our 4x2 single storey IP. Some insurers will include removal of rubbish and motor burnout while others do not. Some insurers include theft by a tenant while others list it as optional. Most insurers will deduct the bond from any claim payment for themselves—but not all. Some insurers will insure you only if the property is managed by a licensed property manager and has a fixed term lease in place—i.e. not a periodic lease; others offer flexibility on these points. The only way to get to the point of a like for like comparison is to read the (lengthy—and boring) product disclosure statements for each product you may be considering. Needless to say, the last few evenings at our house have been painfully dry!

I’ve also investigated having a broker recommend a suitable insurance product and thus far Queensland Insurance Services has supplied me with a few quotes after I submitted a fact finder document to them.

One nice feature offered by some insurers like Allianz and CGU is the option to pay monthly, instead of annually, at no extra cost. Normally I’d prefer the convenience (and cost savings) of paying annually for personal bills but when it comes to an investment property I’m thinking more about cashflow—especially in these early days when the property will be negatively geared.

In terms of paying for running costs like these, we’ve got a few options. The easiest would be to have the property manager deduct the payment amount from rents collected and then make the payment on our behalf. I haven’t set this up yet but likely will once I’ve got a grip on it all. An alternative would be to pay costs from the line of credit account we have associated with this property—and into which rental income and tax variations are paid.

I’m still in the process of exploring insurance companies in Queensland. As we’re insured through GIO in Western Australia, I’d hoped to insure this property in Queensland with them as well to obtain a multi-policy discount. Unfortunately GIO don’t offer insurance in Queensland—despite the fact their parent company, Suncorp—does. Which is frustrating.

Mortgage Choice referred me to Allianz and they’ve come back with a strong quote; I’d initially written them off because their online quote system told me they don’t insure for flood but the rep I spoke to following the Mortgage Choice referral was able to add flood cover. I’ve also had a look at RACQ but they don’t offer landlord insurance.

Suncorp seems to be very similar to GIO here but they are a little pricey. I’ve also looked at Commbank, Terri Sheer (owned by Suncorp—also a little expensive but recommended to me by our newly-appointed property manager, who gets a $22 kickback if we sign up), CGU (very cheap but offering a strong insurance product as far as I can tell), and QBE.

As I do with all of my insurance purchases, I’ll increase the basic excess to at least $1000. I’m not sure if this is a wise move or not for the small cost savings. That’s the unfortunate thing about tenants: they’re largely outside of your control in your house (er, investment property)!

One final aspect to consider when selecting an insurer is how likely they’ll be to pay a claim. This will likely come down to experience and anecdotal evidence from jaded (or maybe the odd happy) customers who post about their experience online.

Insurance, despite being awkward and boring, is one of those things required to manage risk. You pay the premium in the hope you’ll never need to make a claim.

I suppose a disclaimer is also worth posting: I'm just a guy, I'm not an accountant, lawyer, solicitor, tax agent, mortgage broker, banker, financial adviser, insurance agent, land developer, builder, government agent, or anything else so I disclaim your application of anything I write here is to be applied at your own risk. What I write may be incorrect and you are best to seek your own professional advice (tax, legal, financial, and otherwise) before entering into contracts or spending your money. Your situation is unique to you and what I write here reflects my experience only. This content is not professional advice and is not tailored to your situation. I'm learning too and expect to make many, many mistakes along the way.

Enjoy,

Michael

24 – Teaching the Kids About Money

Kids_money_lemonadeI grew up watching my mother balancing the cheque book (manually) at the kitchen table. She worked as a bank teller before she had us kids and she’d regularly fret about being out by a penny or a few cents. I’ve written previously about some of the key financial nuggets my mom implanted in my mind—mainly the old line “every penny counts!” and the idea that you can call up and challenge the banks if they’re not being helpful.

My father was an economist working for the Canadian federal government and although he did not regale us with the highs and lows of economic social policy, he was an educated man with a lot of common sense. My dad was a newspaper subscriber and we had the Ottawa Citizen delivered daily, which of course contained a business section which I’d infrequently leaf through.

Every night over dinner we’d talk about school and friends and some news but we’d also talk about family. Specifically, both of my parents were open, in simple terms, with us about the family’s financial situation. Money was never a “dirty” subject within the confines of our immediate family and we always received an honest answer when we curiously put up the question “how much money do you make, dad?”

My sister and I both received a modest allowance and when we were older we were also paid to mow the lawn—a sweaty, two-hour job in the Canadian summer humidity and blackflies! We had piggy banks and bank accounts from an early age and would occasionally buy a few savings bonds. Our parents covered our basic needs in terms of clothing, shelter, and food but if we wanted something special, we were encouraged to save our money until we could afford it. We also had to buy our lunch at school one day a week and did so from a young age—I remember buying my lunch in second grade.

My first allowance was a quarter: 25c.

Beyond those basics, the financial education I received at home was minimal. Some of these core tenets I’ve noted today form the foundation of my financial sensibility but I plan to raise the benchmark considerably with my children.

Growing up, for example, I knew my dad earned a “salary” of x dollars and my parents had a mortgage on the family home. I knew my paternal grandmother gave my parents a chunk of money when she downsized and I knew our family home (land and house) was bought and built for $60k in the early 70’s. I was also vaguely aware the inheritance received following the death of my maternal grandmother allowed my parents to pay off the mortgage. I was told we were a middle class family and my mom returned to work when my sister and I were older because she wanted to not because she had to. Beyond that, I was not taught about the relationship between income (salary) and expenses (mortgage, cars, and other costs). I knew my parents were cautious and somewhat frugal—definitely not flashy in their spending—but I didn’t know why; I always assumed it was because we were balancing on the knife-edge of affordability.

With our kids—the newborn and a clever toddler—I’m starting them young. Both kids have their own bank account (high interest accounts at 5% interest currently with deposit/withdrawal limitations imposed by the bank). Interest is paid monthly and I make a point to take a moment on the first day of every month to show our eldest her bank account and note how much interest she’s earned “for doing nothing” (as I put it!).

I pay each child, despite being very young, a weekly allowance (currently paid monthly into each account and rounded up slightly to $25/month). Although I don’t want to train her that working is the only way to earn money, I remind her that she needs to her earn her allowance by helping me vacuum, for instance (with her toy vacuum). We also receive the occasional cheque from family in Canada for birthdays and Christmas and that money typically goes into accounts. My 3yo already has a fair chunk of money to her name and earns monthly interest of about $10 (which stays in the account to earn interest).

I’ll note here I typically wouldn’t recommend an adult save their money in a bank account or even a high interest savings account. Although the risk is theoretically low, the interest rates are typically low too and the interest earned is counted as taxable income. And then inflation quietly takes most of whatever gain is left. In the kid’s case, the interest rate at 5% is higher than our mortgage interest rate, for example, and there are no bank fees or income tax. At the end of the day, this is an accessible learning exercise for the kids; if they eventually have the savings to fund a house deposit (possibly as a team) I’d encourage them to go that route but they may opt to travel or study or start a business instead.

I also talk to our oldest child about money. My goal is to create in her a clever, shrewd consumer able to work the system to her advantage, rather than be taken advantage. I typically take her grocery shopping with me each week and I explain to her how I compare prices. I’ve taken her to the accountant in the past and she’s sat beside me when the mobile mortgage broker has come out to the house (she colours…). She comes with me to the bank to deposit cheques and when we opened her brother’s bank account. She can count to ten and I’m slowly teaching her to add.

The core message I’ll be teaching our children is money can set you free but you have to be prudent and sensible in your financial dealings. This may work for us—will it make us wealthy? I can’t say but my hope is it won’t leave us poor. In either case, I hope our children will learn from our successes and our mistakes and my intention is to be as generally transparent on the subject of money as I am other subjects. Instead being taught to be a worker/consumer, my intention is to teach my children to think and behave wisely about money.

I suppose a disclaimer is also worth posting: I'm just a guy, I'm not an accountant, lawyer, solicitor, tax agent, mortgage broker, banker, financial adviser, insurance agent, land developer, builder, government agent, or anything else so I disclaim your application of anything I write here is to be applied at your own risk. What I write may be incorrect and you are best to seek your own professional advice (tax, legal, financial, and otherwise) before entering into contracts or spending your money. Your situation is unique to you and what I write here reflects my experience only. This content is not professional advice and is not tailored to your situation. I'm learning too and expect to make many, many mistakes along the way.

Enjoy,

Michael

23 – Progress Update: Fixing Stage Complete

fixing 2On Monday came the “enclosed” invoice for a not-insignificant chunk of cash; today the “fixing” stage invoice arrived for about half that amount again. Apparently the builder was hanging on to invoices around the end of financial year period.

If nothing else, it seems like progress is moving quickly now (quicker than it really is!). In either case, we’re now nearing the end of the construction phase with “practical completion” the last outstanding invoice.

Stacey, our Client Liason Manager at Open Wealth, called this morning to let me know the fixing stage invoice would be sent through and we also spoke briefly about inspections, insurance, and property management. Notably, the real estate agency recommended by Open Wealth will send us an updated rental appraisal. The initial appraisal we received late last year was (a conservative) $380/week and I’m curious to see whether this has moved up or down (Open Wealth suggested the actual rental income on many of their builds in this estate is closer to the $410/week mark—I based my forecasts on the $380 figure). As more new product becomes available in this estate, and on the back the health of the national economy, I’ll be interested to see where we land—hopefully above the $380 benchmark and also in relation to the higher $410 figure.

It’s hard to believe we’re already nearing the point when a tenant will move in and the property will become income generating. Although I’d obviously prefer to be on the ground supervising the details of the build and feeling in-tune with this aspect of the process, I’m also comfortable knowing we don’t need to be there—that we’ve put our trust in Open Wealth and paid them to stand in our place while we undertake more productive activities.

Fixing 1fixing 3fixing 4

With this stage complete, items like the plastering, tiling, kitchen, and laundry have been ticked off. With the next milestone, tap ware, sinks, shower screen, light fittings, air conditioners, blinds, and kitchen appliances go in, the carpet will be laid and the house painted, feature walls will be rendered and the driveway poured, the letterbox will be built, and the house will be cleaned.

Meanwhile, the property manager will be rounding up potential tenants for short-listing by Open Wealth and, ultimately, selection by us. The builder will have two weeks to address any issues found during inspection (following the practical completion milestone) and it may be possible (I’d guess likely—given the rental guarantee) there will be a few pre-handover inspections before any formal open for inspections take place after handover.

I suppose a disclaimer is also worth posting: I'm just a guy, I'm not an accountant, lawyer, solicitor, tax agent, mortgage broker, banker, financial adviser, insurance agent, land developer, builder, government agent, or anything else so I disclaim your application of anything I write here is to be applied at your own risk. What I write may be incorrect and you are best to seek your own professional advice (tax, legal, financial, and otherwise) before entering into contracts or spending your money. Your situation is unique to you and what I write here reflects my experience only. This content is not professional advice and is not tailored to your situation. I'm learning too and expect to make many, many mistakes along the way.

Enjoy,

Michael

22 – Progress Update: Enclosed Stage Complete

enclosed 2We recently hit the 50% mark with construction of our first investment property and are now at the “enclosed” (aka “lockup”) stage. This milestone also brought with it the largest invoice of nearly $80,000 so it’s definitely starting to feel real now.

Without a doubt it will be a great sense of accomplishment to have a tenant installed (hopefully) within the next few months. It will also be a relief knowing the rental income will cover the majority of the holding costs—especially while we’re negatively geared in the early years.

As “enclosed”, the roof is on, the windows and doors have been installed, and the external cladding is on—so the outer shell is in place. During the next phase (“fixing”), the internal plaster will go up, the internal doors will be hung, the kitchen, laundry, and bathroom fixtures will be installed, and the wet areas will be tiled. I outlined the various stage milestones in my previous progress update, if you need some context.

Open Wealth supplied us with these exterior photos. I’d love to see more of the rough interior to get a better sense of the space but those pictures will come in due course.

When we built our family home I snapped hundreds of photos in my excitement and to document the process for family overseas. I also snapped what I thought might be important areas of the construction that would eventually be covered over by brickwork and plaster, etc (for example the bulkhead in our lounge room covers the edge of a drain from the shower upstairs—it’s an extensive bulkhead that’s largely empty, which may have come in handy for an air conditioning unit if it had been 10mm deeper).

enclosed 4enclosed 6

Now I need to follow up that bank error from the last milestone…

I suppose a disclaimer is also worth posting: I'm just a guy, I'm not an accountant, lawyer, solicitor, tax agent, mortgage broker, banker, financial adviser, insurance agent, land developer, builder, government agent, or anything else so I disclaim your application of anything I write here is to be applied at your own risk. What I write may be incorrect and you are best to seek your own professional advice (tax, legal, financial, and otherwise) before entering into contracts or spending your money. Your situation is unique to you and what I write here reflects my experience only. This content is not professional advice and is not tailored to your situation. I'm learning too and expect to make many, many mistakes along the way.

Enjoy,

Michael

21 – Tax Time

PAPERWORK 040317 AFR PHOTO BY VIRGINIA STAR Generic pic of an income tax assessment form for year ending  30 june , tax return , wages , taxes , tax office , ATO , tax file number , accountancy , accountants , afrphotos.com AFR FIRST ONLY USE SPECIALX 24147<br /><br />** LOCKED FOR AFR BUDGET SPECIAL - 10-5-2005 **I’ve spent the last few days (on and off) gathering together everything needed by our accountant to complete our tax returns. This year’s tax return is more involved than normal because we have the purchase of our first investment property to consider and my wife’s life insurance—part of which may be tax deductible.

We’ve had an accountant prepare our tax returns for many years now—initially because it all seemed a little complicated and now because it is a little complicated.

Back then we had income from one or two employers, bank interest, HECS debts, and deductions like professional memberships and insurances, training, mobile phones, internet, stationary, uniforms, and depreciation of office equipment and furniture. I wasn’t sure how my income and tax returns related to my wife’s and vice versa.

These days, we’ve got more of the same plus private health insurance, life insurance, the investment property establishment costs (any IP is an interesting mess in its own right when it comes to taxation), dependent children, and the occasional minor offset to me as a non-earning stay-at-home parent. And of course the tax laws are always changing in many of these areas, making it hard to keep on top of what we can and cannot do, legally. Next year we’ll have the IP income or loss, interest and running costs to deduct, building and fittings depreciation, and so on.

The first accountant we worked with claimed he would be able to to cover his costs and we always found that to be the case… in other words, he was able to include valid deductions that we probably wouldn’t have considered (plus he didn’t charge us much). 

That first year our intention was to use his return as a template for subsequent years but it seemed just as easy to go back to him and so we did.

Although I wouldn’t recommend using your accountant as your financial adviser, our first accountant was the only financial professional we relied on at that point in time and he was able to offer some useful tips. For example, he highlighted the benefits of having private health insurance instead of paying roughly the same amount for the Medicare Levy (of course our insurance premiums increased as we started planning a family and it seems like the Medicare Levy doubled at some point along the way too…).

Now days our accountant is a key member of our broader financial team and we’ve “upgraded” to an accounting firm that deals regularly with clients who own investment properties (WSC Group—I’ve written about them before in the context of financial advice and insurance). WSC were recommended to us by Open Wealth and they’ve offered an outstanding service thus far—note they’re not directly affiliated with Open Wealth.

We pay for the expertise of an accountant but did you know accounting costs can be deducted the following year? Our first accountant also claimed he’d never had the ATO question a return he submitted (I assume tax return audits are fairly random but having a professional submit your return can’t hurt). While I probably could do our taxes, I’d prefer to know the return is correct and, more importantly, that I’ve claimed all of the deductions I can to reduce our taxable income.

If you’re considering the purchase of an investment property, or hold an investment property today, do you know how your quantity surveyor’s report relates to the depreciation of your building and fittings—and therefore you tax return? I’m estimating those two deductions alone will be worth nearly $10,000 in the first year. Don’t know what a quantity surveyor’s report is? Ask your accountant!

I forwarded 7MBs of PDFs to our accountant this morning so that’s my job done for now, hopefully.

I suppose a disclaimer is also worth posting: I'm just a guy, I'm not an accountant, lawyer, solicitor, tax agent, mortgage broker, banker, financial adviser, insurance agent, land developer, builder, government agent, or anything else so I disclaim your application of anything I write here is to be applied at your own risk. What I write may be incorrect and you are best to seek your own professional advice (tax, legal, financial, and otherwise) before entering into contracts or spending your money. Your situation is unique to you and what I write here reflects my experience only. This content is not professional advice and is not tailored to your situation. I'm learning too and expect to make many, many mistakes along the way.

Enjoy,

Michael

20 - The saga of a sliding door, seven years later

Slider - Lintel Sag DimensionsThis post doesn’t really belong on this blog but I wanted to share my experience dealing with a builder’s defect more than seven years out from practical completion, particularly as we’ll soon have our first investment property build complete and under warranty. I’ve written in the past about pushing your lenders and insurers; this post is about pushing your builder and their suppliers.

As regular readers of this blog will know, we built our family home through 2006-2008. The house was constructed by one of the project builders here in WA, Don Russell Homes. The house is a two-storey double brick and tile construction, typical of many homes built in Western Australia to modern standards. The block on which we built was originally sloping so we retained and filled with sand prior to the builder compacting and commencing construction. We took up residence in mid-2008.

One notable feature—and the subject of this post—is the double sliding door at the rear of the house which opens on to our back garden. The door opening is 3500mm wide and is filled by two fixed panes at either end and the two doors in the middle which slide open over each fixed pane. A galvanised steel lintel spans the window opening and the door frame is powder-coated aluminium. The windows throughout our house were manufactured by Jason Windows.

During our practical completion inspection near the end of the build, I flagged to our site manager a problem with the sliding action of one of the doors. This was noted on the PCI report and I subsequently listed it in my communications with the builder. Essentially one of the doors would catch and stick as it travelled along the track.

The builder’s initial solution to this problem was to lubricate the door track. This worked as a temporary solution (long enough for the fix-it man to make his get away!) but was not a lasting solution for an unsheltered external door which catches the weather coming from the Western coast. The external garden was also still a sandpit at this stage and of course sand and lube don’t mix very well. It was apparent to me there was either a problem with the door wheels, the frame, or the track and it was the responsibility of the builder to address.

In addition to our PCI report we listed a large number of issues (forty, actually) on our 16-week “liability issues” report, which we submitted a few months after move-in day. A number of these were major issues which required the builder’s attention and watered down some of the lesser issues like a sticky door. Other than lube, there was also no quick fix for this problem by the builder’s trusty fix-it man and it should have been referred back to the window company. It eventually fell off the radar as Don Russell’s maintenance division became less and less communicative and as time wore on.

Over the next few years the problem got worse and I assumed the door wheels were clogged with or damaged by the sand and needed to be replaced. After I tried to change the wheels myself in 2010 without success (the doors, including the fixed panels, need to be completely removed to change the wheels, my wife arranged for a window maintenance firm to come out. Jason Windows do not offer a maintenance service.

The maintenance firm suggested, to our surprise, the wheels were fine but the door would need to be cut down to better fit the opening. The gap was so minimal, the metal of door frame itself was riding directly on the track. We never received a quote for the work and the issue once again slipped off the radar as life marched forward for us. I telephoned a sliding door repair company from the Yellow Pages at one point and it was suggested this is a common problem with the lintel having sagged but, again, the fellow was reluctant to come out to inspect and quote.

In retrospect, I should have flagged this as a warranty issue to Jason Windows while the door was still under warranty but the path for resolution under warranty of a supplier’s product when you’ve previously dealt exclusively with the builder is not well defined. It’s also not terribly obvious (to me) if windows form part of the structure and are therefore covered by structural warranties—it’s likely they do not.

In recent years the door became virtually unusable. Both doors now stuck as they “slid” open or closed and on a hot day would take a proper shove to move.

I finally contacted the Sliding Door Doctor and a window manufacturing company. The Sliding Door Doctor quoted $600 to repair the door whereas the window company quoted around $6,000 to replace the doors. Both groups reiterated the “sagged lintel” idea, based on the measurements from top to bottom across the door opening (see the opening image above). The Door Doctor also pointed out the top locking plate was missing—likely removed when the door was installed as the door wouldn’t have fit with it in place!

As there are no other signs of a sagged lintel (cracks to the brickwork) I concluded the lintel was likely bent when it was installed or the door opening measurements were incorrectly supplied to the window company/the door was built too large by the manufacturer.

At this point, after picking my jaw up off the floor (I expected a replacement door set to cost around $2,000-3,000) I decided enough was enough and attempted afresh to contact the service department at Don Russell. My emails and calls were ignored for weeks if not months and I finally went in to the builder’s office in person to ask to see the Service Manager. He wasn’t in and I asked to see his superior… who also “wasn’t in”.

The receptionist must have sensed my frustration and as I noted down contact details for the Service Manager’s manager (the Construction Manager), I was offered details for the Operations Manager. Only by writing to this individual did I finally receive a response from Don Russell.

In my letter to the Operations Manager I complained about the lack of response I’d received from the Service department and included the log of my failed contact attempts. I included my measurements (illustrated above) and photographs showing the sagged lintel. I made a video of me opening the door to demonstrate the severity of the problem—which I posted on YouTube (as a semi-private video). I included a copy of the original PCI report and the 16-week liability issues report.

And I demanded the issue be addressed at the builder’s expense.

After another brief delay, the Operations Manager replied to tell me the Service Manager would be in touch, which I took as a good sign. The Don Russell Service Manager and the Jason Windows Service Manager eventually came out to the house together to inspect the problem. During this appointment the builder’s Service Manager vehemently declared the lintel not to be sagged. The Jason Windows representative was simply aghast at the idea we’d lived with this problem for such a long time. The issue of cost did come up before I suggested it would be dealt with between the two companies and it was not mentioned again.

After another few months of manufacturing delays, the original door stiles were replaced to lock to each other (instead of using a lock rod system), the track was properly secured to the lintel, the door frames were filed down slightly, and the wheels were replaced. The doors now slide much better than they ever have before and, while not perfect, are functional.

Yes it was embarrassing and annoying to have to chase the builder on this matter after such a lengthy time period. This is time lost I could have spent on other more prosperous activities if the builder had done their job properly in the first place. Thankfully both Don Russell and Jason Windows were sympathetic to the situation and did the right thing by their mutual customer.

As a last resort I could have raised this problem with our house insurance company but we have a high excess and I’d prefer not to have that black mark on our insurance file for something that wasn’t, originally, our fault.

At the end of the day, I felt I had a case to be heard and was finally able to get my point across to someone with the authority to see the problem resolved. I’m thankful to both companies for addressing this problem and, more than anything, glad to see the end of it!

I suppose a disclaimer is also worth posting: I'm just a guy, I'm not an accountant, lawyer, solicitor, tax agent, mortgage broker, banker, financial adviser, insurance agent, land developer, builder, government agent, or anything else so I disclaim your application of anything I write here is to be applied at your own risk. What I write may be incorrect and you are best to seek your own professional advice (tax, legal, financial, and otherwise) before entering into contracts or spending your money. Your situation is unique to you and what I write here reflects my experience only. This content is not professional advice and is not tailored to your situation. I'm learning too and expect to make many, many mistakes along the way.

Enjoy,

Michael