Growing your future by Cristel Stenhouse

GROWING YOUR FUTURE by Cristel Stenhouse

Copyright ÂŠ 2016 by Cristel Stenhouse All rights reserved. No part of this publication may be reproduced, distributed, or transmitted in any form or by any means, including photocopying, recording, or other electronic or mechanical methods, without the prior written permission of the publisher, except in the case of brief quotations embodied in critical reviews and certain other non-commercial uses permitted by copyright law.

About the Author

Cristel Stenhouse is a fully licensed real estate agent who has worked in the industry for the last 14 years. She has managed a variety of properties within Australia including a Government portfolio, commercial, retails, land, holiday as well as residential investments. Cristel has been round to see the industry evolve into what it is today – one that needs specialists to ensure that all legislative compliance is adhered to. She believes that the biggest part of owning any investment is managing your risk, and she takes pride knowing that she manages this risk remarkably well for all of her owners both past and present. Cristel’s approach to property management is different from traditional methods. She has a strong focus on target marketing to suit your properties specific demographic and puts plans in place to ensure you receive the maximum rent, to the best quality tenant, in the shortest possible time. Cristel follows through her uniqueness in managing her clients investments – she understands that no two owners or properties are the same and recognises that they should not be treated as such. Cristel has a strong focus on communication to ensure that her owners are always up to date and at ease with what is happening with their investment day to day. Cristel believes that you have to make the process easy for owners and tenants alike; we are living in a fast paced World where clients want everything at their fingertips. She understands that the majority of people are time poor in this day and age, and has seen a growing trend in visualisation – which is why she places a large importance on marketing and photo reporting. She has regularly been featured in various industry publications, and has been featured as a panellist in industry seminars. Cristel’s owners know their property is in capable hands because simply she takes most of the risk away!

You’re looking for an investment property – what do you look for? Congratulations on deciding to take the step of investing in your future. Investing in real estate is a business, and if treated as such has many perks. In this chapter I will guide you through why real estate is a valuable asset. Firstly, lenders favour bricks and mortar. Real estate is one of the few investments where unlocking the banks money couldn’t be easier. Why? Simple, after a down payment, you can leverage your capital and thus increase the overall return on your investment. You have the ability to grow – TAX FREE! Due to the ability to claim depreciation on your asset and the interest on your loan, your cash flow if set up correctly should have the ability of being tax free. For the most part, the majority of investors will not pay tax on the cash flow from their asset until they decide to sell – which is when they are liable to pay capital gains tax. Tax write offs – dependent on your situation and set up you are able to unlock an overage of tax deductions to offset your income. Business write-offs. Don’t forget that real estate is a business, and because of this you have the opportunity to convert some personal expenses into valid business deductions. For example, any travel expenses to inspect your asset are a tax deduction, and again offset your income. Investing in real estate is also an incredible means to save. The reality is that most people don’t have savings, or should I say substantial savings that are going to appreciate enough for your retirement; owning an investment ensures that you are without realising, saving your money – TO GROW YOUR FUTURE! When considering prospective investment properties, it is of the utmost importance that you do your homework first. There are certain attractions that will assist you in leveraging your property to ensure the best return and a secure tenant. This is something is rarely considered, but can make a considerable difference to the income capacity of your investment. Location. Location is the biggest factor; we’ve all heard the saying “location, location, location” - there is truth to it. Before investing it is best to consider multiple locations; consider how they have performed. The likely vacancy rates, what the average yield is and the demographics – these determine the type of tenant the property likely to attract. Further to this the majority of prospective tenants will also consider the proximity of the property to modern conveniences such as, schools (including school zones), shops and public transport. Having a deep understanding of these areas will assist you in making an informed decision.

Vacancy rates.

Vacancy rates are the average time that a property is vacant. Each day a property is vacant it costs you money; therefore, it is important to ensure that you are considering an area with low vacancy rates. This can be determined by asking the local real estate agents what their current vacancy rate is and what has been the largest vacancy rates experienced in the area; this gives you an indication of how quickly the property will rent to ensure that you are not left out of pocket. Yield. The yield a property achieves means the percentage of rent you can expect to achieve against the property’s value. You want to aim for an area that attains a high yield. This means that your rent should cover a decent portion of your mortgage payments. An average yield is considered to be around 5% so anything above this means it is achieving higher than average. To work out a rental yield, the weekly rent X 52 weeks, is divided by the purchase price. A quick way to work out a yield in your head is that 5.2% yield is approximately $1 of rent per $1000 of price. Example 5.2% rental yield on a property at $400,000 purchase price would be $400 a week rent. ($400 X 52 = $20,800 divided by $400,000 = 5.2%). Demographics. Demographics are statistical data relating to the population and particular groups within it. Demographics can be broken down into suburbs, which is great news – as it helps you determine the following: -

The income of your potential tenants

The age of your potential tenants

If they are more likely to be a couple or family

If they are likely to own cars

These attributes need to be considered when determining if you are investing in a suitable house that corresponds to the majority of the demographic. New or old? The Australian Tax Office allows owners of an income producing property to claim a tax deduction “depreciation”, on the buildings structure, plant and equipment; now as you can imagine purchasing a property from new you are likely to receive a greater amount of deductions over a greater period of time. Once all of the above have been considered, you know that your “business” is headed in the right direction. Please note that depreciation is not available on homes built prior to 1985.

Self-manage vs. engaging a property manager? This is a question that many new owners ask themselves. The answer really is dependent on your time, and knowledge. Property management has evolved over the last fifteen years, and it is now an industry unto itself. Property managers must understand and utilise many different Acts of legislation including:

The Property Occupations Act 2014

Agents Financial Administration Act 2014 (QLD)

Queensland Civil and Administration Tribunal Act 2009 (QLD)

Codes of Conduct through relevant regulatory body

Financial Services Reform Act

Census and Statistics Act 1905

Corporations Act 2001

Family Law Act 1975

Freedom of Information Act 1982

Fringe Benefits Tax Act 1986

Fringe Benefits Tax Assessment Act 1986

Managed Investments Act 1998

Native Title Act 1993

Privacy Act 1988

Sex Discrimination Act 1984

*NOTE: these vary from State to State.

In Australia there has been an ever-growing trend of self-managing owners, now one in every three property investors are self-managing their investments. Let’s face it is a way of saving money – especially if your property is negatively geared. However, there is a lot of time and stress to put into the property to ensure that it is being managed efficiently. Whilst you have great tenants – self managing may not be an issue, so long as you have time to comply with all of the legislation; but getting a bad tenant can cost you thousands, and honestly most property managers won’t want to take on the problem – and if they do it will be for a large fee.

As a self-managing owner the following is a very basic overview of your duties:

a signed copy of the lease agreement given to the tenant;

a signed copy of a Property Conditions Report given to the tenant;

the bond lodgement form signed and submitted on your behalf to the rental bond board or trust;

the provision of a clean, safe and secure property ready for immediate occupancy;

provision of one set of all keys to each tenant on the lease;

the regular servicing and maintenance of all fixed appliances such as water and gas heaters;

payment of water and sewerage rates;

the issue of detailed receipts for rental payments to the tenant;

the financial and resource preparedness to conduct necessary and urgent repairs when needed, and

10.

respecting the right of the tenant to peaceful and quiet enjoyment of the premises, observing rules for notices for inspections and access.

These do not include the tedious items that can arise during a tenancy, and the time and effort that must be put in to resolve these issues. You must also consider what your time is worth. If you are working a job that pays more than your investment does â&#x20AC;&#x201C; then it may be best to leave it in the capable hands of a property manager. The reality is that property management fees are a tax deduction against the property, and the cost will be offset against your income tax at the end of the financial year. Therefore, it is a wise decision to appoint a property manager â&#x20AC;&#x201C; but an experienced and knowledgeable one who is a specialist in their field.

How to choose a property manager This is by far one of the hardest areas of owning an investment property, as selecting the wrong person can cost you thousands. Whilst it has long been believed that if you go with a well-known brand or company you will be looked after, the reality can be far from this. Each company, even if it is a well-known brand is a franchise that is owned and run independently. It is more important to put focus on the actual property manager that will be responsible for the day to day management of your investment. Many companies employ property managers with limited experience, as the cost of their wage means that the business owner is putting more money into their back pocket. Property managers can become accredited by attending a one-day course, meaning that they have very limited actual knowledge of the industry and are less likely to be able to manage the property effectively and guide you toward the best options for your property. The key is to seek out the property managers that have been in the field for a long time – which is considered to be in excess of 7 years. This ensures that they understand and have practised the role and have an understanding of the job and responsibilities. I personally have witnessed property managers who are unable to complete a simple task such as calculate rental payments. The problem is that the industry relies on computer programs and “set roles” for property managers meaning that you may even end up dealing with 5 or 6 different people through the process rather than the person you selected at the start. An easy way to combat this is to ask questions – and lots of them! Here are some questions that I believe all owners should ask any prospective managing agent:

What is your current arrears rate?

What is your current vacancy rate?

How many people in your property management team?

How many properties does each property manager manage?

Do I only deal with you or one am I dealing with different people?

What do you offer that the other agencies don’t?

How and where will you advertise my property?

Based on the demographics of the area, who do you believe will be most likely to rent my property?

How often do you conduct routine inspections?

How often will you disburse rental funds?

Do you engage licensed tradesmen, and do you get copies of their relevant insurances and licenses?

What checks do you conduct on prospective tenants?

What is the full cost of your management?

Are you portfolio or task based?

The last question is an important one. There are a few different ways that property management departments are structured. The most are as follows: Portfolio based. A portfolio run team means that you should only deal with one property manager. They are solely responsible for the day to day management of your investment. In this instance, it is important to ensure that they are the person you meet with, and that you are satisfied with them. Task based. I personally believe that this structure was created out of the need for experienced property managers in the industry, and to ensure that when a property manager moves on the business stays. A task based system means that there are different employees for each part of the management, for example there would be: -

A leasing manager/team – they are responsible for finding you a tenant and screening the applicants.

A maintenance manager – they handle all of the maintenance for all rentals. This can be a downfall as if they do not know the property, it can create issues.

An inspection manager – they carry out all routine inspections, prepare and send the reports to the property owner, as well as carrying out ingoing and outgoing inspections.

Trust Accountant – they are responsible for disbursing funds to the property owners and maintenance contractors; as well as receipting of trust monies.

Tenant Manager – they with the tenants only.

It is completely a personal decision, and I know many agents that think task based is best as they have the ability to give the roles to specific people that suit them. However, I know as a property owner there is nothing more frustrating than being passed around to 5 or 6 different people to gain answers to your questions. You need to contemplate the following: -

Do you want to deal with only one person?

Do you feel confident in the whole team – do you know the background and experience of all of them?

If you list with one property manager, are you going to be prepared if they leave and you need to deal with someone completely different?

The other role that has emerged over rent years is the role of Business Development Managers. This can be tricky, as a Business Development Manager myself I manage a portfolio of properties I personally bring into the business – because I don’t want to promise an owner something will be done, unless I can personally ensure it will be. I know other Business Development Managers that all they do is source a listing and then pass it onto someone else. This is why the question of will you be managing my property is important – imagine you really like an agent, you list with them only to find out it is not them looking after the property and it is handed over to a property manager with less experience, and poor communication. All of these items need to be considered. This is why I honestly believe this is the hardest part of the process – not to mention that it is a high turnover industry, so the reality is that at some point they may move on. For a full list of questions to ask a potential property manager refer to Annexure 2 at the end of the book.

Property Management Fees - What should I be paying?

This is a loaded question. Each State, and department are different and charge dependant to this. The amount of times I have had an owner come to me after engaging the cheapest agent (which usually works out to about 50 cents a week cheaper!), and then come to me saying help the tenant has done thousands of dollars’ worth of damage and the problem still hasn’t been fixed by them – who at this point in time won’t return my calls - is a countless! Remember, Agencies with cheap fees can usually sustain these fees because: -

They hire inexperienced staff at half the cost of an experienced agent.

They usually utilise sub-standard technologies within the office as cost has been the major focus of their business.

Their staff usually do not attend regular training to keep abreast of the industry.

I like to use the metaphor of a car. If you go out and buy a really cheap car – you are likely to have problems with it, it usually results in costing you more money than it would have if you had bought the more expensive one in the first place. The same rule applies to property management. The fees you are likely to pay include: Management Fees This is usually a percentage of the rent collected. This is deducted from the tenants rent. Letting Fee This is the initial fee to get the tenancy ready. This includes tenant vetting, conducting inspections – both open for inspections or private, performing checks on all applicants, collecting and lodging the bond with the relevant authority (it is different State to State), getting all the initial documentation signed – including the lease. These are the two main fees, then there are extra fees a company may charge, which can include: -

Database check fees

Credit check fees

Lease renewal fees

Administrative fees

Marketing fees

Routine inspection fees

Maintenance fees

All of these will vary from company to company. The truth is the difference in cost will usually be minimal, but the difference in management can be vast.

Advertising your property You only need to scroll thought the first page on realestate.com to see the significant difference between investment property advertising. I believe that if you were to sell your home – you would – or should theoretically invest money to get a greater outcome; property management should be no different. Most agencies take their own photos – which I personally hate. I am sick of seeing property managers, or cameras showing in photos that are over exposed, taken at the wrong angles or worse show the property managers belongings sitting on the bench. We all need to understand most of us lead busy lives, and prospective tenants are no different to this rule. The majority of us are visual, most of us look online and scroll through the properties and click into it based on the photos that are displayed, only then will look at the information and scripting of the property. Most property managers do not comprehend this, and continue to take substandard photos – because it is more cost effective for the Agency. If you only do one thing – get professional photos! I do a full marketing package for my properties, I have studied and know my area. I know that tenants look at between 4-6 properties before making a decision. I give every prospective tenant a brochure on the property – not a photocopy (which let’s face it is better than nothing!), but a full colour 300 gsm brochure. Leave them with the full impression after inspecting the property – help them to see why your property is better than the others. In my demographic, I know that most of the locals talk and quite often I will have prospective tenants view a property based on being informed about it by someone who lives close by. I have integrated just listed rental cards – again a full colour professionally printed card that goes into 200 homes surrounding the property, so next time they are talking to their friend who is looking to move into the area – they have a beautiful brochure to give them on the property; that is inviting and helps them make the decision to come and inspect the property. I like to use photo boards too – the reality is most prospective tenants will drive passed the property prior to attending an inspection to ensure it is well located and to see if the photos reflect the property. Having a photo board gives you the opportunity to show them what the home offers inside. All of these things together with email marketing to a prospective tenant database, highlight properties on realestate.com etc. mean that you are gaining a larger audience which in turn leads to a greater number of applications to select from. This doesn’t mean you have to spend thousands of dollars you like you would be expected to if you were to sell the home but spend the relative amount to advertise your home to ensure the best outcome. Another consideration at this point is the price you list the property at. Whilst conduct a Comparative Market Analysis (it sets out simular properties that have rented recently within 1km radius, and the conditions of the market over the last 6 months) on all of the properties I

attend, you must also observe properties currently on the market when you are ready to advertise, as these are the properties your investment will be in direct competition with. Remember, the majority of prospective tenants look at between 4-6 properties before making a decision â&#x20AC;&#x201C; because they want to be satisfied that they have made the right one. You also need to ensure that the property is priced to suit the price parameters of the search fields. For example, if you put a property on at $600 per week when a search is done by a prospective tenant who is looking under $600 your property will not show; I believe it is always best to sit $5 off the parameter to open up your market; for example, advertise it at $595.

Inspections The advice on these varies depending on if the property is currently vacant or you are occupying it. If you are occupying it, I recommend the following: -

Turn all lights on – make it bright and inviting

Light some candles

Have some mood music playing in the background

Play to the strengths of the property – if it has a large outdoor area, dress it to show off it’s entertaining capabilities.

If it is vacant, it is important to ensure that there is electricity connected for lighting, use air fresheners – a vacant house doesn’t always smell the best, and ensure that the yard maintenance is up kept. Remember, you only get one chance to make an advantageous first impression– which is usually only a 15 minutes’ preview – so, show the prospective tenants what the property offers, and the type of lifestyle they would attain by moving into the property. This makes a significant difference; especially when most inspections are conducted by agents in the dark, and they usually show up right on time when there is already a line of prospective tenants down the driveway waiting to see the property. Naturally, if you don’t do these things you will still at some point acquire a tenant, but it may cost you substantially in rent – both what you may have achieved weekly, and the loss of rent during the vacancy.

Tenant Selection This is a crucial part of the process. The tenant you select will determine how your investment works for you. I believe that doing all of the items we have set out in previous chapters will assist you in ensuring that you receive the maximum amount of applicants for your property, meaning you have a greater choice. I like to use a relatively new technology called 1Form to have prospective tenants submit an application; whilst I appreciate there are some agents that don’t like it for various reasons; I have found it quick and easy for both the property manager and the prospective tenant – which means we get to check the tenant out faster, and can get in to offer them the property before another Agency offers them something else. The application gathers lots of information from them including:

Names, address, contact details, license/passport details

Number of occupants and their ages

Their employment – where, length of time in current employment, and wages

Their previous rental history – where, who manages it, what they pay, why are they leaving

If they smoke

If they have pets

How many cars they have

Personal references

Business references

From here, most agents will contact all of the references listed, as well as current and previous agents, employees – if self-employed their accountant etc. From here a tenancy check is usually completed. I do two tenancy checks as well as a credit reference check. Whilst most agents see this as over the top – I understand that how critical this is for the ability of your investment to serve you in the time ahead. I like to base the tenant’s wages at 33% of the rent, this is a great figure to utilise to ensure that they have the ability to pay the rent, whilst also affording to live. It is also important to match the right tenant to your property – there is no point placing tenants that are used to paying $250 per week for an apartment into a $700 per week acreage property – it’s a recipe for disaster. I like to provide the applications and all checks to the property owners so that they can see all of the information that has been provided, and it allows them to make a completely sound decision.

At the end of the day, you need to feel comfortable that these people are going to care for and look after your investment, as well as being able to make the necessary rental payments.

Pools, gardens, solar power, pets and more! I am regularly asked what it the best options for properties that have pools, immaculate gardens, high tariff solar power, acreage, tanks, body corporates, smoking and pets. I will quickly outline my guide on what I believe is the best way to handle properties with these traits:

Pools. From experience I have learnt, it is always best to ensure you have a licensed contractor attend to the pool once a month to check water levels, ph. balances and functionality. You can make an agreement with the tenant that you will do this but when the contractor attends the tenant will be liable for any chemicals the pool will require. From here the contractor gives the tenant an invoice for chemicals and the agent or owner an invoice for the monthly service. I ask all of my owners to provide me with a pool safety certificate prior to signing a lease and a copy is provided to the tenants, to show them that the pool was in a safe condition at the commencement of tenancy.

Gardens. Despite popular belief (tongue in cheek!); tenants generally do not care for the gardens and lawns in the same manor an owner would. A tenant will very rarely be seen out the front of the property with a pair of shears trying to get that hedge in tip top shape. If this is something that is of concern to you the best thing you could do is incorporate a contractor to attend to the property to carry out the works as required. Most tenants will say “oh but we love gardening so can’t we just take it out of the rent and we will do it ourselves?” – truth be told I wish I had a dollar for every time I’ve heard it, and then another dollar for each time an owner agreed only to find that the tenant would not be upholding the same standard they expected. If you want your garden to remain the same – engage a regular gardener. Now, I can’t tell you how often it should be done; this really varies State to State, and also depends on the weather. I usually have owners meet with a gardener to work out a plan of attack.

Solar power. This issue is a relatively new one for both property managers and tenants alike. If you do have solar power and it is on a high tariff – it is usually best to keep the power in your name and have the tenants invoiced if required. Not only is this more attractive for the tenants – it can add value to your rent. You must be aware, to ensure that the invoices are paid on time, the best option for this type of set up is for the invoice to be paid from the rent and then reimbursed by the tenants. This ensures that your credit does not suffer if the payment is received a few days late by the electricity provider.

Water. Again, this is a difficult one as it varies from State to State. However, in any state the owner is responsible to pay for the sewerage and drainage costs associated with the property and the tenant is to pay for the usage portion of the invoice. In Victoria – the water utility companies will split the invoice so that the tenants receive an invoice with their usage on it and the owners receive an invoice with the sewerage and drainage charges on it; whereas in Queensland it is all on the one invoice and the property manager or owner must invoice the tenants for the water usage section of the invoice. Further to this, I advise all of my owners to acquire a Wels Compliance certificate prior to the commencement of a new tenancy – this is only for Queensland. This certificate states that the property complies with the minimum requirements to be able to charge tenants for water usage – for example the property must have dual flush toilets. In Victoria, it doesn’t matter, either way the tenant is liable for the usage costs. The tenants in Queensland are able to ask for a copy of this certificate at any point to show that they are in fact liable for all water usage at the property.

Pets. I honestly believe it is pointless advertising a property “no pets”. The people that will do the wrong thing will submit an application and at the first inspection they will have “saved a poor shelter dog, that they couldn’t bear to see be put to sleep” – again, another instance where I was I had a dollar each time I had heard it! If you advertise the property that pets are acceptable they will be honest from the start. I have found that some of my best tenants have had pets, and my opinion is they should be considered on a case by case basis.

Smoking. Each lease should have a no smoking clause in it. This stipulates that under no circumstances are the tenants or their guests permitted to smoke inside.

Acreage. I have managed many acreage properties, and it is important to match the right tenants to them. I usually advise owners to engage a contractor to slash the paddocks as required, dependant on if the tenants have an allowance for livestock. Where this is the case there is usually a clause added to the lease that the tenant must maintain the fencing. Again, if the tenant says they will arrange the slashing – it more than likely won’t happen or won’t happen often enough.

Water tanks. These can be tricky! A property manager should tap them and note the level they are at, at the commencement of the tenancy and the tenants must ensure that they are at the same level or more at the end of the tenancy. During the tenancy if the tenant needs more water – this is at

their cost. It is advisable that there are instructions left for the tenants on the best practices you like done with your water tank â&#x20AC;&#x201C; i.e. cleaning the filters, treatment etc.

Body Corporates or Owners Corporations. It is always advisable in units or apartments that tenants are provided with a copy of the rules and regulations. I like to have a copy attached to the back of the lease and have them sign it, as well as leave a copy at the property for them to refer to at any time. This should ensure that they comply with all of the rules and regulations.

Adding clauses to the lease Anything you want to have set out through the tenancy it is best to have written into the lease. Items that are frequently written into a lease are as follows: -

No pets

No smoking inside

Any maintenance inclusions i.e. pool, garden, tanks etc.

Principle place of residency clause: This clause is for owners that had been living at the property prior to the tenants being placed into it. It allows owners to give tenants only 2 weeksâ&#x20AC;&#x2122; notice before the end of the lease if they should need to move back in.

Whilst I understand the endless clauses owners want written into leases, you must always remember that no matter what is written into the lease and signed by the tenants â&#x20AC;&#x201C; if the Act states something different, it will always override any clause.

The Condition Report, and initial documents A condition report is the report that is completed prior to the tenants taking possession of the property. It is ideally conducted a few days prior to the tenants collecting keys. This report states the condition of the property when the tenants moved in and thus the basis for how they must leave the property at the end of the tenancy. There is usually photographs taken to form a part of it. The tenants are given a copy of the Condition Report and photos and sign off on and return within three business days of receiving it. For any reason if the report is not returned by the tenants it is deemed that they had no issues or discrepancies with the report and the original with no comments will be used at the end of the tenancy. Agents should also copy the keys that are handed to tenants on the day they move in, this ensures that all keys are handed back at the end of the tenancy, and covers you should any locks require changing. I encourage my owners to leave photocopies of instruction manuals, and also notes on anything that you feel may assist the tenants on an easy transition into the property. Remember, this sets the tone for the rest of the tenancy.

Insurance This is an option that I recommend to all investors. You probably won’t ever need it – but at least if you do, you’re covered. There are three types of insurance you should consider. Building, minimal contents and Landlord’s Insurance. Whilst you do not need to cover the tenants’ contents, some insurance companies will class items such as floating floor boards as contents not building. Having the minimal cover ensures that you will be covered in the unlikely event of an incident. Building insurance can be the same insurance you have always had, however you must advise them that the property will be tenanted – and confirm that they will also cover your public liability as part of the insurance. Public liability safeguards you if the tenants, their visitors or anyone else injures themselves at the property. Landlord’s insurance is different from company to company but will cover you for items like loss of rent, malicious damage and audit fees. Some companies are now offering accidental damage – this is a good option to look for as proving to an insurance company a tenant has done damage maliciously can prove difficult.

Tax Depreciation Tax depreciation is defined as: As a building gets older and items within it wear out, they depreciate in value. The Australian Tax Office (ATO) allows owners of income producing property to claim a tax deduction called depreciation, on a building's structure and plant and equipment assets contained within it. Depreciation for income producing properties defined by the ATO is claimable under two major components: Capital works allowances (division 43) and Plant and equipment (division 40). Capital works allowance or building write-off refers to the tax deduction for the building's structure and items considered to be permanently fixed to the property. In a residential property, capital works deductions are available to be claimed at 2.5% for the ATO specified life of the property – 40 years.

Some examples of items that can be depreciated are: •

Built-in kitchen cupboards

•

Clothes lines

•

Doors and door furniture (handles, locks etc.)

•

Driveways

•

Fences and retaining walls

•

Sinks, basins, baths and toilet bowls.

*the above is an excerpt from BMT Tax Depreciators website.

It is a common misconception that accountants do this – some might but, you generally need to have it completed by a Tax Depreciation agency such BMT Tax Depreciators. They will send an assessor out to your property to conduct a report on the worth of the items and will do up a ten-year schedule stating the depreciation the property can claim each year. You give this report to your accountant and the amount will be deducted from your income tax for the financial year meaning that you effectively pay less income tax.

The first routine inspection. The tenant has now been residing at the property – with hopefully no hiccups. The first routine inspection is conducted at three months. I believe that it is worth the owners or someone on their behalf going through the property with the property manager for at least the first inspection – and a good property manager will give you this opportunity. I personally love it when owners come through, it puts their mind at ease, as they can see that the tenants are quality tenants and do care for the property. Always ask the question at the “finding a property manager” stage if you will have the opportunity to attend these inspections. If you are not able to make it you should receive a report – and hopefully photos of the property, letting you know the following: •

The state of the property

•

Any maintenance that is required

•

Anything you should budget for – meaning if the property is looking like it needs a paint, advising you at this time so you are aware and can budget for it for when these tenants vacate.

I send a maintenance form and a checklist to the tenants prior to attending the inspection. This means that the tenant knows what we expect, what we do, and also gives them the opportunity of advising of any maintenance issues that are currently small that if not seen to now could be potentially big ticket maintenance items in future. They will of course also advise of other maintenance items, but it does give you the chance to ensure that the property is in order – as a rundown property will depreciate in value.

Maintenance. From time to time, just like your own home your investment is going to require a degree of maintenance. I have found that a peak maintenance time is when tenants first occupy a property – this is by no means to upset an owner; it is purely due to the fact that everyone lives differently, and something that never bothered you or wouldn’t bother you – does them. I usually advise my owners of this when I sign the listing on, as it prepares you for maintenance, even if there is none. Years ago it was common that most owners conducted their own maintenance, however in recent years there has been a large shift in this due to the liabilities it poses. Property managers should have a team of tradespeople that are fully licensed in their roles. The company should obtain copies of all of their licenses and also a copy of their professional indemnity insurance on an annual basis; this ensures that should the tradesman injure themselves whilst at the property there is no liability on you. When maintenance is done, it can be easier for it to be paid by the agency to the contractor from the rent, as at the end of each financial year you will receive a statement from the property manager for your tax accountant. It will show a total of the income on the property for the financial year as well as show any outgoing costs – including maintenance. Having the property manager pay these makes it easier for you to consolidate at the end of the financial year.

Lease renewals. If you have been happy with your tenants, then three to four months before the end of the lease you should be contacted by your property manager. They will advise you that the lease is coming to end and see if you wish to offer a new lease, the length of lease you would like to offer and also advise you if a rental increase can take place on the property.

The reason this is carried out so far in advance is for the following reasons: -

If you wish to increase the rent it allows for notice times.

If you wish to have the tenants vacate it again allows for notice times.

It gives time to ensure that the tenants have sufficient time to get the lease signed and returned prior to the end date of the current agreement.

It is always advisable that even if you want your tenants to go onto a month to month lease that a new lease is drawn up. This is due to changes in legislation â&#x20AC;&#x201C; the agreements are amended regularly and you want to ensure that it forms a valid lease. I am frequently asked is month to month or a longer term tenancy better? The answer to this question really depends on your circumstances. If you are holding the property long term it is always in your best interests to enter into a longer lease â&#x20AC;&#x201C; especially if you know the tenants are great. A month to month lease can be utilised when you are unsure of the tenants, have any concerns, or are planning on either selling or issuing the tenants a notice to vacate for any reason.

The tenants are vacating – now what? The tenant must give the agent specific notice when they are going to leave the property. This notice time varies from State to State. It enables you to prepare any works that the property requires and re-advertised the property with the goal of re-tenanting it with minimum vacancy. When the property is vacant in between tenants it is a great time to attend to items such as: -

Painting

New carpet

New curtains/blinds

The big items that pose huge issues when a property is tenanted. This won’t always be necessary, but if it is utilise this time. A fresh house – means better tenants! Once the tenants hand keys to the agent – they now have possession of the property and can attend to carry out a final inspection (these are called a few different things based on the property manager – also known as an exit report or bond inspection). The property manager legally has 10 business days to return or make claim on the bond. I encourage owners to attend the final inspection with me if they can – it just ensures that they too are completely satisfied with the way the tenants have left the property. Usually, if there are items that require fixing if time permits it is best to allow the tenants back into the property to attempt to rectify the issues, if they do not do this then you can make claim on their bond. This can be a slow process. The property manager needs to apply to the Civil and Administrative Tribunal in their State, and then await a hearing. This part of the process alone can take up to 14 days. Then you must await the hearing; the case is heard and the Member will award what they feel is appropriate. You must always remember when making a claim that items in a property are depreciated. Based on this the Civil and Administrative Tribunal are likely to only award a partial cost of the replacement dependant on the age of the item. This must be considered when looking at applying to the Civil and Administrative Tribunal as often the cost to attend once you pay the fees to both the Court and the property manager can cost more than the actual item you are seeking compensation for.

Best of luck! I wish you all the best with your investment endeavours. Remember, ultimately this is a business and your decisions will determine how profitable it is for you. May your future grow.

Cristel

Annexure 1. Good or bad investment checklist □

Is this a high growth area?

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Are amenities close by? - transport - schools - shops

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What are the vacancy rates here?

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Based on the demographic of the area will the property suit them?

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Has the area got a steady historical growth rate?

□

What is the rental yield for the property? and how does it compare to the area? (To calculate net yield, you need to deduct all the expenses (ongoing costs + cost of vacancy) from the annual rental income (weekly rent x 52). You then divide that number by the property's purchase price and times it by 100. This will give you the percentage yield.

□

Can you maximise your return with tax depreciation at this property?

□

What is the average rent in the area?

□

Do you know what this property would rent for?

□

Is the property in a prime location? i.e. close to amenities but not on the busiest road.

Annexure 2. Questions to ask a potential property manager 1.

How long have you been a property manager?

Will you personally be my property manager?

What types of properties do you manage?

How many properties are you currently managing?

How many property managers does your company have? Do they all look after portfolios or are they task based?

How many properties does each property manager look after?

How many vacancies do you have right now? What is your vacancy rate?

What is the average length of time it takes to fill a vacancy?

What is your late rent policy?

10.

Do you perform regular property inspections? How often? Do I get invited? Do I get a report and photos?

11.

What percentage of tenants do you have to evict?

12.

How does the eviction process work here?

13.

What are your management fees?

14.

Are there any other fees (cancelation, eviction, renewal, marketing, account setup)?

15.

What do you charge for finding a new tenant and leasing the property?

16.

Do you charge a fee when my property is vacant?

17.

What are my guarantees? Do you offer one?

18.

How and where do you market your properties?

19.

What is your repair process? Do you have copies of the tradespeopleâ&#x20AC;&#x2122;s licenses and insurances?

20.

How do you screen prospective tenants?

21.

When and how will I receive my rent?

22.

Can tenants pay rent electronically?

23.

What do you do that other agencies donâ&#x20AC;&#x2122;t?

24.

What is your current arrears rate?

25.

Based on the demographics of the area, who do you believe will be most likely to rent my property?

26.

How often do you conduct routine inspections?

27.

What checks do you conduct on prospective tenants?

Annexure 3. Rental Property Worksheet

Income Rental income

Other rental related income

Gross rent

Expenses Advertising for tenants

Body corporate fees and charges

Borrowing expenses

Cleaning

Council rates

Deductions for decline in value

Gardening/lawn mowing

Insurance

Interest on loan(s)

Land tax

Legal expenses

Pest control

Property agent fees/commission

Repairs and maintenance

Capital works deductions

Stationery, telephone and postage

Travel expenses

Water charges

Sundry rental expenses

Total expenses Net rental income or loss (Gross rent less total expenses)

$ $