44 - Re-letting IP#1

Our Brisbane tenants vacated the property in early September at the conclusion of their lease. No clear motivation for their departure was supplied to us by the property manager, apart from the girlfriend being pregnant. I wonder if the $5/month rent increase we applied when the lease was renewed/reworked was partly to blame but I suspect the tenancy simply ran its course. The local Griffin rental market is currently oversupplied and rents have fallen slightly.

The outgoing tenants willingly tidied up and addressed a handful of issues that required attention (a chipped kitchen tile, dog faeces in the back garden, some cleaning residue on the walls). Having the house empty was also a good opportunity for the builder to rectify a roofing defect and related ceiling damage from a recent water leak.

The property was not producing income during this vacancy period but my (admittedly pessimistic) budgeting plans anticipate a four-week annual vacancy period.

While home inspections were not widely attended before the last tenants vacated, interest picked up gradually from September. The property manager tells me the local rental market is oversupplied with new developments recently coming online and we eventually dropped the weekly rent from $415 initially to $410 and then to $405 as the weeks went by. Every $5 decrease translates into an additional loss for the investment of $260 per annum—less than I would have thought.

The “competition” (i.e. rentals exactly like or very similar to ours) were including a free week of rent and/or other incentives like six months of free gardening services. Our PM also suggested we could upgrade the realestate.com.au advertisement to feature/highlight our property but the rent decrease seemed the obvious way to go as it impacts the tenant’s bottom line.

We had a diverse range of applications through while the property was vacant:

• An ideal first application came from a mum and dad couple with two older, pre-teen boys and no pets. Dad was working away but mum was not employed and is, presumably, a homemaker. Unfortunately the neighbour’s aggressive dog growling through the fence scared them off (a friend initially inspected the property on their behalf as they were all living North); one of the sons was reported as having a disability and being afraid of dogs.
• We then received a second application from a mother with an older daughter, who herself has a 2yo and a newborn baby. They have a large breed dog, only 12 months old. It wasn’t clear whether mum was effectively planning to serve as guarantor for her daughter but they could service the rent payments between them. Kids and dogs don’t make for ideal tenants in my mind but that’s exactly the market we’re targeting with this style of property (4x2) in this location (outer-ring suburb). The pair were ready to go immediately on a six or twelve-month lease but, between my prompt reply to the real estate agent and their following up with the applicants, the applicants had accepted another property.
• On the back of the second application falling through, we received a third application from a very young couple (late teens/early twenties) with no rental history and very little rental affordability (<30%). Although without kids, they too have an active dog. As our only option, we discussed the risks with the property manager who thought the affordability risks were high. Meanwhile, my wife and I were both thinking back to when we were the same age, with very little income, a cat (and eventually a dog); we stayed in our first rental for four years, paid the rent on time every week, kept the property clean, and caused no damage. The PM discussed having a parent join the application as a guarantor but this couple also found an alternative rental before anything further happened.

Between applications and twice-weekly home opens, the property manager was working to see what could be done about the dog next door. The ranger was called and inspected the situation but decided the neighbour’s property is adequately fenced and the dog could not be labelled ‘menacing’. The ranger did speak with the owners and it was agreed a barrier could be placed against the fence to prevent the dog from getting as close to the boundary. Our PM also spoke to the neighbour’s PM about the situation and was told the dog would be brought inside during home opens (and is friendly once it gets to know someone).

We finally received a fourth application for a couple with two kids under five and two dogs—an older large breed dog and a younger small dog. They were requesting a 12-month lease commencing within the coming days. We approved their application and an executed lease document soon came back. At last!

The property was physically vacant for six weeks—and someone likely kicked a hole in the letterbox during that time, just for good measure—but the new tenants are hopefully in and happy as of last Friday.

Given the length of time the property was vacant, I consulted my risk matrix for some hints as to what to do next—should the vacancy period continue. My mitigation and contingency strategies were minimal (‘review property manager’ and ‘review financial controls’) but, following this experience, I added ‘review market supply’, ‘offer incentives’ and ‘promote advertisement’. I also increased the Probability rating from Remote to Occasional. Fortunately, we’re not cash flow investors and have sufficient cash buffers to weather an extended vacancy.

Although I naively expected our first tenants to stay on for another year at least, I likely need to adjust my expectations to assume a tenant will stay somewhere between 6-12 months. A 12-month lease gives us some surety but also locks us in to a rental amount and the tenant, who may or may not be problematic.

In terms of lessons learnt, I created a Landlord’s Vacating Tenants Checklist. This checklist differs from the standard checklist which might be supplied to the outgoing tenant or used by the property manager during the exit inspection in that it lists the things I need to check and do to a) ensure the tenants have done the right thing and b) ensure the property manager has done the right thing. More about the checklist and b) soon.

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 not selling anything and I do not receive any form of commission or incentive payments for any companies or individuals I endorse. I'm learning too and expect to make many, many mistakes along the way.

Enjoy,

Michael

42 - Tenant Churn

The property management firm (Century 21) managing our Brisbane property contacted us recently seeking our instructions regarding the renewal of the current 6-month lease, which runs out in the next few months.

It was noted the current rent is at the high end for the area, with a nearby estate also coming online—increasing rental supply. The agent reminded me the last (and first inspection since this lease began) was acceptable, and mentioned monies owed by the tenant are generally within tolerances.

The agent additionally mentioned a contractor reported two dogs at the property, one being a small puppy. Although I’d not formally rejected the tenant’s pet request, I hadn’t approved it either.

Despite being annoyed about the dogs—mainly the dishonesty of the matter, I proposed another six month lease at the same rate and approved the pet request as there seemed to be no option not to. I asked that our dissatisfaction about the dogs be conveyed to the tenants and requested the tenant raise any other issues now so they might be cleared up. It’s frustrating when the adults you lease a property to behave like three year-olds but if they’re paying the rent, that’s a good thing.

After all of that, the property manager came back with a response from the tenant and they won’t be renewing the lease. We haven’t been given a reason why but the agent was going to enquire.

Open Corp have noted a preference to lease to families due to the stability they offer as tenants (kids in school, general stability, other life pressures which preclude moving house, etc) but we approved the original trio of adult tenants as they had no kids, no pets, and were the first and only application we received. We also pretty much had to approve the application to secure the Open Corp 12-month rental guarantee at the original rent we desired.

Having the lease turn over means the property will need to be advertised and we’ll need to pay a new letting fee to the property manager. Of course there may also be a vacancy period. I’ve budgeted for both the costs of an annual letting fee and four week vacancy period. Although very much not preferable, I’m confident we have an adequate financial buffer to cover any gaps. Nonetheless, I also include long-term vacancy as a risk on my property investment risk register.

Admittedly, from the point we transitioned this property from acquisition and commissioning to tenancy, my expectations around the time a tenant will remain in place were likely too high. My only frame of reference for this was as tenants ourselves: we spent four years in the Adelaide house and a couple of years in a Perth rental. I hoped to get two years out of the original Brisbane lease but will adjust downwards future expectations on the back of this experience. Although I dislike the idea of churning tenants and the wear and tear a house takes in the process, as long as we have tenants in place to contribute rent towards the holding costs, I suppose I can’t care too much… everything else can be repaired! I’d be curious to know the average tenancy duration across different types of rentals in different areas…

It’s easy to trick yourself into believing being a landlord should be a set and forget exercise once the initial setup is complete. The books, magazines, and online resources (such as this blog) tend to focus on matters such as types of investment, types of property, location principles, ownership structures, financing, tax structures, and so on; the day-to-day landlording is typically glossed over by promoting the use of a property manager or improving the property to “manufacture wealth.”

The last twelve months have offered me an enormous experience as a newly-minted landlord but this role still feels very foreign to us and the mandatory, ad hoc decision making requirement when you least have the headspace to spare can honestly be a hassle. I’ll endeavour to write more about this aspect in future posts.

The property will be advertised about six weeks out from the end of the lease; it will be interesting to gauge the market and find out who we get next as tenants. I’ve intentionally remained very anonymous with these tenants but am rethinking our approach the next time around to experiment with a more personal approach (while keeping the PM in their role).

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 not selling anything and I do not receive any form of commission or incentive payments for any companies or individuals I endorse. I'm learning too and expect to make many, many mistakes along the way.

Enjoy,

Michael

38 - Surprise! Unexpected Changes

I find the vast majority of mainstream real estate reporting in the media is either all or nothing: the market is going gangbusters or it’s the next worst thing since the Great Depression and all hope is lost (I’ve given up paying any attention to the news…). There’s no middle ground. Similarly, the property spruikers only share the positives and conveniently overlook the details when they do cite a one-off example of something gone wrong.

Although many of the posts on this blog have been relatively upbeat—in line with our experience to date, I strongly believe in reality, facts, and the accurate, fair reporting of our experience. On that note, today’s post is a recounting of what is likely to be the largest single “upset” (not to dramatize) so far along our property investing journey.

Earlier this month we had three tenants in the Brisbane property and over six months remaining of a 12-month lease; then, suddenly, we had one tenant plus an “unknown” (or rather, the girlfriend of the remaining original tenant) and a pet request for a middle-aged, large-breed dog. On Friday morning last week, a water leak in the metre box was also reported.

How quickly things change from a seemingly stable position to near chaos. Fortunately, the exemplary property management team at West Property is handling all of this for us but I won’t deny I’ve found it remarkable that tenants can simply walk away from a contractual agreement they’re legally obliged to uphold. If nothing else, this doesn’t make for a good lease reference for them and they may end up have to cover re-letting fees for us.

I’m not sure why two of the three roommates have left but I believe they were together as a couple and I assume they either now aren’t or have decided they needed more privacy. I suspected there may be some instability when we took on the trio (we very much expected to end up with a family—mum, dad, two kids, and a dog) but they were the first application after a few weeks of home opens and they were happy to pay the advertised weekly rent. I thought one of them might leave eventually but wasn’t expecting any changes in the first year. In my mind, you sign a lease for twelve months, go to the hassle of moving, and then you stay put for a few years—call me simple and old fashioned.

We were notified by the property manager the pair have now moved out and requested to be removed from the lease. We had the option of saying no to this request and they would be obliged to continue paying their share of the rent—regardless of whether they’re actually living there. Practically, that option may be difficult to enforce.

In their place, the girlfriend of the remaining tenant had moved in, I’m told, but she had neither applied nor was she approved by us to live at the property. The wording in the lease document is quite specific to this point and clearly notes no one else can live in the house without prior agreement by the landlord.

If this new couple are keen to stay on, can afford the rent, and seem to be acceptable, then we’re all for that. Ideally that means no break in rental income. Plus there’s less wear and tear on the house for them to move out and be replaced with new tenants. But who is this mystery woman? Does she have an income? Does she have any prior rental referrals (or a criminal history)? Does she smoke? If she’s not paying her way, can her partner afford the full rent on his income after paying only a third of the rent to date?

Technically, there are more questions to be answered if the girlfriend checks out. Do we amend the lease to include her or have the tenants sign a new, 12-month lease? Do we increase the rent now as part of the new lease or after six months via some kind of special conditions clause (which may be tricky to do in Queensland—I’m not sure)? If the couple opt for a 50/50 split, the original tenant will need to increase his bond contribution from 1/3rd to 50%—or 100% if he’s covering the lot.

The worst-case scenarios I can imagine are having the remaining tenant vacate (for whatever reason), leaving us with an empty house to re-let and the resulting loss of income, or—if he stays—having a gap in the rent payments from the departing couple while all of this is sorted out. If all else fails, we are still covered by the Open Corp rental guarantee but that does mean having to accept any tenants they pre-screen and put forward to us (which could be good or not so good). Without checking the finer points of our insurance policy, we may also be covered for loss of rent if the rental guarantee were not in place.

Here’s another good fact sheet if you’re interested: http://tenantsqld.org.au/wp-content/uploads/2009/12/You-Want-to-Leave-Nov-09-SD_NEW.pdf

On the dog front, I simply wasn’t mentally prepared to deal with this request so early into the original lease and the property manager has recommended we say no for now (which was a relief). Before today’s revelation, we had considered allowing the pet if the (original) tenants were willing to sign a new 12-month lease effective immediately—using this request as a trigger event to keep the tenants on for a longer period. That’s less of an issue now.

We also hadn’t yet decided whether there would have been a corresponding rent increase; we can’t increase the rent mid-lease in Queensland so even a token increase would likely be the way to go to a) ensure we achieve an increase within the 12-month period, b) condition the tenant that the rent will always increase at renewal time, and c) cover any issues related to the dog (i.e. damage) as we can’t charge a pet bond in Queensland.

Meanwhile, the water leak is still being investigated by the water company. At least it’s outside and I’m told it’s likely on the water company’s side or will otherwise fall to the builder to rectify.

A few weeks on, and after consulting with Open Corp and receiving a tenancy application from the girlfriend, we offered the couple a six-month lease to see how it works out. We also increased the rent by $5/week. The lease was accepted and signed and we shouldn’t have missed any rental payments (the outgoing tenants would have been required to continue paying their share of the original lease until it was terminated). It will be interesting to see if the relationship lasts and what bearing a breakup has on the remaining tenant’s affordability; it’s easy to say a married couple with kids would have been a more stable tenant option but who knows—with the frequency of divorce I’m not convinced marriage equates to tenant longevity.

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

33 – Gifts

With Christmas fast approaching, the question occurred to me “should we send our tenants a gift?” I debated the same question in September when the current tenants moved in but I didn’t really have a chance to act as I was only just back to work full time and somewhat preoccupied with finalising the construct/inspect/handover/tenant process. At the time, the property manager said some landlords do house warming gifts (bottle of wine, movie voucher, etc) and others don’t. The property manager would have actually organised something for us.

Personally, I can’t make up my mind between keeping a “professional distance” to avoid issues that might otherwise come up and fostering a relationship to encourage the longevity of the tenancy. I suspect there is a middle ground. I’d like our tenants to connect the concept of their home to our house to encourage them to respect and care for the property—which of course they may do anyway. Of course the extra prompting from a gift if they turn out to be bad or “mid-tier” tenants!

We’ve never met these tenants but their first inspection went well (the next is due soon) and they’ve been reliable if not slightly ahead on their rent. That said, they’re not a typical two adult/two child family and, being reasonably young, I don’t expect their household to remain intact for more than a few years as their personal situations evolve due to work, relationships, life events, etc. Of course that’s no reason not to be generous.

An impromptu discussion at the office among co-workers who have been renters themselves and some of who are also new landlords in their own right indicated some of us have received Christmas gifts from landlords and others haven’t. I’ve written in the past about our close relationship with one of our landlords, from who we received an occasional Christmas card. As per the image above, it seems some landlords will go so far as free rent—which is extremely generous (but perhaps not a great business decision).

I haven’t made up my mind about this yet and, knowing us, we’ll barely have time to think about gifts for each other and our immediate family let alone interstate tenants. I’d love to send them a card at the very least but I wonder if that would be considered a bit miserly.

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

30 – Progress Update: Done!

And that’s the end of the beginning, so to speak.

Since land settlement in March (only six months ago), we’ve built a house and found tenants. The grunt work to secure financing happened before all of that, of course, so make it nine months all up if you exclude our dithering at the beginning of the process.

I spoke to our Client Liaison Manager at Open Corporations earlier this week—the final phone call to say “it’s all done”—and today we received a fitting gift from Open Corp in the form of the Monopoly game.

From here we transition into the various guarantee phases with Open Wealth (rental and maintenance) and start on the pathway to long-term property value appreciation. Hopefully the property will become positively geared one day in the near future (I’ll post a financial overview of our current situation in an upcoming post). The next few years will certainly be enlightening as I interpret the numbers come tax time and we do our best to ensure we’re keeping the ATO happy.

It’s impossible to accurately predict what the future holds for our family and our country and whether this will prove to have been a sound investment. Will negative gearing laws have been abolished and would that really affect us much anyway? Will more significant tax reforms have come into play? What will population statistics show? What will the employment landscape look like. Will China be at war with the West? Will the upwards trend in property values that started in the 70’s continue at the same pace or fall back? Will there be a shift towards a preference for apartments over houses?

Going on the history, it will have been a wise investment and become an asset but I’m not going to assume history will repeat because there’s no guarantee. For now, however, I think we’re on the right track and I’ll leave it to the goodwill of time to smooth out any short-term lumps and bumps. The hope, of course, is to one day retire—if not live—off the income from this and other (as yet to be acquired) properties.

Of course Brisbane hasn’t seen much in terms of significant growth for a little while now so it will be very interesting to see if we do get that initial growth as the property clock advances and the cycle peaks in the next few years.

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

29 – Pets Allowed?

Of all the varied decisions we’ve had to make of late, we also had to consider whether to allow our first tenants to keep pets. Queue the cat lady.

By way of a preface to this post, we’ve always been “dog people”, had pets in the properties we’ve tenanted, and keep a dog and a cat in our own home—so we know all about animals. The dog in the photo is Riley. She's a ridgeback cross Rottweiler, around ten years old now (the photo was taken when she was younger). We also have a cat, who thinks he's a dog—and he's almost as big, named Ted. This crux of this post is our personal story about how we acquired Riley without permission while renting and our experience as pet owners (in case you’re not). I discuss some other considerations further down.

Ten or twelve years ago, we were living in in Adelaide near the university where we both studied. We found a house through the university's accommodation board after landing in Adelaide from Perth, days after I emigrated to Australia (a sordid tale, those first few weeks in Adelaide).

The landlord, Grant, worked next door as a steel fabricator and the house was ancient—or felt that way to us. Think green and yellow motif in the kitchen, gold threadbare carpets, a toilet in the sagging rear addition that was so cold on a winter’s night you might as well have been in an outdoor dunny, and ceilings that stretched to infinity. Our view from the front veranda was an old Colourbond fence across the street, what I would come to call an "ugly tree" on the verge, and Grant's crane through the twisted chain link fence separating the house from his factory. Grant started early—7am at the latest—and steel deliveries would often arrive around that time with a flatbed truck reversing down his drive which ran alongside the boundary of the rental property—and the master bedroom—with only inches to spare.

The house was close to the university and shops, it was clean, and it served us well given the affordable weekly rental of $125. Despite the occasional late night and weekend, Grant was a good neighbour and it was convenient having our landlord next door when it came time to pay the rent. Upon meeting Grant, we told him we had an old cat to deal with but, to quote me, "she'd be dead soon", and he was okay with that.

We spent four years in Adelaide, in the same rental. I think our rent increased once by five or ten dollars—a very good thing too as we had no money to our name (I was studying as an international student and we simply had nothing behind us despite menial part-time jobs, a meagre Centrelink allowance, and a simple existence).

At the start of our last year in Adelaide we woke up one overcast Saturday morning and started talking about dogs. We'd both had dogs we loved growing up. The wife said, hypothetically, she'd really like a Ridgeback. I said I'd really like a Rottweiler. We decided to drive down to the RSPCA that morning "just to look." We came home with 10 week-old Riley: a laughable sack of brown, wrinkly skin and a Ridgeback-Rottweiler cross.

Sunday we spent playing with Riley and thinking through how we might explain this situation to Grant. We thought he may not be too keen on the idea but we knew he had a family dog of his own. The rent was due on Monday so we had to go over anyway and he would have seen Riley in the garden if we weren't upfront things. We took Riley with us in the hope of persuading our landlord with puppy cuteness. Of course she was happy as any puppy can be be out for a walk, not knowing how much trouble her new parents might be in.

Grant met us at the roller door of his shed. The sun typically came up behind the shed and, walking up the workshop’s driveway it was often impossible to see what was going on inside, through the deep shadows beyond the door.

As we approached and my eyes adjusted to the dimness I saw an inquisitive smile on Grant's face and a raised eyebrow. He asked us what we'd done as we both cringed slightly and avoided eye contact.

Grant told us she'd dig holes in the grass and I promised him we'd look after the place. By this point he'd bent over to scratch her ears. All the necessary exchanges, of course—there was really no negotiation required and Grant's smile said it all.

And so we had a dog. The surprise was sprung upon our landlord but at least he was on board. The puppy dug holes every so often and I dutifully filled them in. She peed and pooped on the kitchen floor, where we left her the first few days when we had to go off to uni; when we arrived home, we washed the tired lino floor after collecting the mess and the freshly shredded newspaper we’d left down. She ate our phone once, while in that kitchen. She pulled laundry from the clothesline, once outside more regularly, and we arrived home one afternoon to find wifey’s unmentionables strewn across the front lawn. Thankfully she was quiet about it all and never barked much.

Grant would park his ute in a little garage at the corner of the factory lot and open the side gate first most mornings. As Riley slept outside in Adelaide, she'd come to greet him through the chain link fence every morning, sauntering sheepishly past our corner bedroom window to say hello. Or so we thought: we peeked at the two of them one morning from behind the curtain and realised Grant was actually sneaking Riley treats.

When we left Adelaide to move to Perth, Grant asked for a picture of Riley. Obviously we lucked out as Grant could have told us to get rid of the dog or cancelled the lease when we brought her home.

We still have Riley today. She still digs holes and sheds fur and tracks mud and sand into the house. She’s older now and drools brown slobber through her old teeth. As work progressed on our first investment property we discussed whether it would be wise to allow prospective tenants to have pets. The house and all of its fittings, including the carpets and gardens, are brand new. We can’t ask tenants for a pet bond in Queensland but I suppose we could charge a premium rent if the market would tolerate it (Open Wealth’s rental guarantee might not, however). Allowing pets has the potential to widen the market of applicants and might also help install a long-term tenant at that.

We've read horror stories about the smell that lingered even after the carpets were pulled out. We know from first hand experience dogs and cats have oils on their fur that gets left behind on every doorway and corner they rub past. Fur gets into everything. Cats have claws that pick at carpets. Dogs dig holes. And they all get poop and occasionally vomit on floor coverings and walls. They sometimes bleed (another story). They sometimes claw at doors. They sometimes chew wood. They sometimes dig up new gardens. They bark (and meow). Even a fish tank might leak and a snake might eat the kids. Is any premium really worth it? It would likely be hard work to evict a cat lady and insurance might or not might not cover some of these problems.

We've loved our pets. They cause us no end of heartache at times but they're good value nonetheless and the kids love them. I don't think a new house is the best place for tenants with pets—from my perspective as a landlord, anyway. Maybe in ten years when the place has been bumped through by several shorter term tenants and is due for a fresh coat of paint and new carpets.

Nonetheless, our property manager at Century 21, Kerry West, indicated most of the applicants looking for a 4x2 house in the area have pets (think family: mum, dad, and two or three kids plus cat or dog or both). Kerry further suggested a family without a pet on move-in day might seek to acquire a pet later on, which would likely be a juvenile animal instead the mature animal(s) we might get upfront. All valid points we hadn’t considered.

And so we left the Pets Allowed box ticked on the appointment form and agreed to wait and see what happens. In the end, the first application through (which we accepted) is from a trio of roommates with no pets and the lease formally stipulates no pets.

If the tenants come to us in time asking to have a pet (or having acquired one) I can’t say I’ll be as sympathetic as Grant was with us but I can’t say that I’d say no either. At the very least there would the cost of replacing the tenants if they chose to leave in order to find a more accommodating rental. We certainly understand the benefits of having pets in our lives and it would be hard to begrudge someone else that luxury.

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

28 - To Inspect or Not to Inspect?

One of the inclusions of building an investment property with Open Wealth Corporation is a travel “allowance”, of sorts, funded from the development management fee paid at the beginning of the process. The question facing us now is whether we take advantage of those funds and see the property and the house for the first time with our own eyes.

Open Wealth offered us the opportunity to fly to Queensland from WA to inspect the area when we were considering a purchase and again at land settlement. With construction now complete, and no tenant in the house as yet, we recently received a final offer to have a look. In our case, we’ll be reimbursed $400 for costs to get to Brisbane and back, which is money that will otherwise go back to Open Wealth. As a return flight to Brisbane from Perth costs $538 at a minimum, we’ve been asking ourselves whether we spend the extra money and inspect the build or not.

Were it not for the money (and possibly the time), the question would be a silly one and the answer would be “of course! We’ve just built a new house so why wouldn’t we want to see it?!?”

The obvious response is to remain emotionally detached from what is a purely financial investment. We have no plans of ever living in Queensland or in this property and as long as it can be successfully rented to fund the cost of holding the true asset—the land—we shouldn’t care if the front door is pink or what the view out the front window looks like. We don’t actually need to see it in person.

The practical man inside of me, however, has a slightly different opinion on such things. Including our family home, this is the second house we’ve now had constructed by a project builder. From experience with our first build, we know some things will have been overlooked and some things will have been delivered to an unacceptably low standard. These defects, if not addressed during the builder’s warranty period, have the potential to translate into a significant cost to us in the future.

I’ve previously noted Open Wealth conduct a number of inspections throughout the build and the first and second practical completion inspections have already occurred. A small number of defects were logged and the builder addressed those defects promptly. The defect list seemed well-considered and detailed. To that end, my visit is likely redundant but for the $200 and a day out I’d rather be certain—I don’t have laser vision but it’s pretty close and I’m a stickler for details.

I’d also like to photograph the house inside out before tenants move in. Open Wealth will again be providing us with professional photographs of the completed house and the property manager will take dozens of photographs for the baseline property inspection report before the first tenant moves in. Like I said, stickler for details.

Beyond the basic house inspection, Open Wealth will supply me with a driver for the day and suggested I have a look around the local area. I’ve never been to Brisbane before and, if we opt to build again, having a better (albeit very quick) feel for the city and state will be helpful. I’ll also be meeting the builder’s site manager and one of the property managers from Century 21 and it will be great to have that personal contact.

As we’ve got two young kids at home it’s going to be a quick one: fly over in the morning and fly home that night. I’m hopeful it will be worthwhile.

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

27 - Appointing a Property Manager

The first step in transitioning our newly-built Queensland investment property to an income-generating asset—rather than a financial liability—is to find a rent-paying tenant. But let’s not jump ahead because first it’s time to find a good property manager.

As we reside in Western Australia, managing an interstate investment property ourselves would be challenging but not impossible.

Travel costs to inspect an investment property are tax deductible once the property is income generating but not before. Once a property is tenanted, the ATO allows its owners to deduct travel costs twice per year but be careful because if you and your spouse are joint owners and travel together that’s your two trips (and if you’re thinking about making the trip into a holiday opportunity, think again: you may not be able to deduct all—or any—of your costs). It’s also worthwhile attaching a dollar amount to your time and asking yourself if that time can be spent more productively.

Then there’s Queensland law, in our case, which entitles a property owner to only four inspections per year. That number includes regular, scheduled inspections by the property manager.

To my mind, hiring a licensed property manager to manage an investment property offers another layer of risk management—an insurance of sorts—and is yet another cost of “doing business” as a property investor. We could play the role ourselves but it doesn’t seem to be a good idea apart from the cost savings, which are tax deductible anyway. Speaking of insurance, some insurance companies offering landlord insurance require the insured property be managed by a professional property manager.

In theory, even an average property manager will know the area (and rent benchmarks for that area) and may have a database of possible applicants ready to go. The property manager will advertise the property, schedule and host open for inspections, screen applicants, conduct rent inspections, and manage maintenance. We also have the option of having the property manager arrange payment of some charges, such as rates, the water connection, cleaning, landlord insurance, etc from rents collected. Of course a property manager also deals with rent collection and bond monies and can represent you at tribunal (for an additional fee) if necessary.

Importantly, a property manager offers a layer of separation between you and your tenants to avoid getting too personal and keep things business-like.

Expect to pay between 7 and 10 percent for a property manager. In our case that breaks down as commission of 5.5% of one week’s rent (including GST) plus a 2.2% management fee.

I’ve heard it suggested finding a good property manager is imperative but perhaps not the easiest thing to do. There are countless property managers for hire out there and a much smaller selection of really good ones.

Open Wealth recommended us to West Property Group (Century 21) and I spoke with Kerry West, the proprietor, who was extremely helpful and patient as we talked about everything from insurance to rent expectations to annual rent increases to pet bonds and so on. Kerry is a property investor herself and having someone representing you who understands what you’re trying to achieve is a big plus in my view.

Notably, Open Wealth include a rental guarantee with their properties, the terms of which mandate the property is to be managed through the agent they nominate.

Our success is linked with that of Open Wealth, in a way, so it’s obviously good for Open Wealth to have their client’s properties managed by good managers, with the added bonus that we receive a slightly discounted management rate. At the end of the day, this property is a turn-key investment and I’m happy to accept Open Wealth’s advice as we move from acquisition and construction to “commissioning”.

There were a few minor differences between property management norms in WA and Queensland that surprised us.

We’ve previously rented in Perth and, as tenants, had to pay the letting fee ourselves; in Queensland, the landlord pays the letting fee (of 110% of one week’s rent—inc GST). 

Apparently the area attracts many families with pets. In WA, as pet owning tenants, we paid a pet bond. In Queensland it’s not legal to charge a pet bond. I’ll be writing more about pets in an upcoming post.

Given the rental guarantee, the geographic distance between Perth and Brisbane, and our lack of experience as landlords, appointing a professional property manager is the right thing do in our case, at least for now. Hopefully they earn their keep and attract a quality tenant at a good weekly rent!

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

26 – Progress Update: Final Stage

It’s hard to believe how quickly it’s all happened but construction of our first investment property is complete (well, “practically complete” anyway). As with all of these milestones and progress update posts, we received another—the final—invoice and we’ve been scrambling ever since to ensure everything is in order.

The builder’s Invoices are due within seven days of receipt (communicated to us through Open Wealth) so the first order of business was to authorise payment by the bank. This payment also required proof of insurance, which had to be purchased. Our client liaison manager at Open Wealth forewarned us about this one to avoid any delays so I’d been comparing insurance products when the call the came in to let me know the last invoice had been issued. Even still, it caught me off guard a little bit as I wasn’t expecting everything to be finished until the end of August. The bank is also doing a final inspection/valuation so this payment will likely take a little longer than most. 

As it’s now time to move into the next phase of this project, tenants, it was also time to select a property manager and get my head around all of the services covered, our options, and the necessary paperwork. I’ll write about that in an upcoming post but the house is on the market and seeking a good tenant.

Finally, there’s now the critical decision as to whether we fly over to Brisbane to have a look, ideally in the next few weeks before the house in tenanted. We’re only entitled to inspect the property, legally, four times a year (including official property inspections by the property manager). Open Wealth contributes $400 towards travel so it seems silly not to take advantage of that offer (the $400 ultimately comes out of the development management fee we pay to Open Wealth at the beginning of the process—we could have gone over earlier, i.e. at land settlement).

We’re ultimately very keen to stay emotionally detached from this property. That said, while I’m confident the build was executed well and has been fully inspected, I’d very much like to do my own, thorough inspection and snap a million photos of all the nooks and crannies while it’s new and before tenants arrive. The property manager will also provide evidentiary photos before tenants move in but I’ve got eagle eyes and want to ensure all the defects are spotted so they can be addressed by the builder now.

Speaking of which, Open Wealth will have now completed their first inspections and the builder will have the next few weeks to address any issues. If all goes well, we’ll have a tenant lined up by the time we handover formally.

The pictures below look great—if not slightly out of date as the fencing and gardens obviously aren’t complete. Gotta love the security screens—at least they should stop tenants from coming and going through the windows!

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

On 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.

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