The life of a landlord can appear to be a gravy train when looking from afar… You buy a property, rent it out and let the management company take care of everything while you lay poolside sipping gin and juice. This isn’t an impossibility, but neither is financial ruin, so maybe it’s best we examine the series of unexpected events that can lead to the latter before we start mixing drinks.
So, you’ve done your due diligence about the costs involved, have sufficient funds and leap headfirst into the rental market, more than ready to kick back and watch the money roll in. It’s going well and you’re enjoying the newfound income. But then the unthinkable happens – the oven and fridge in your rental die, you renew the insurance and the premiums skyrocket, then your ‘model’ tenants go postal and cause damage that will cost four times their bond to repair, they do a runner and you’re faced with the costs involved in finding new tenants and covering the mortgage yourself. All this in the same month and you feel like you’ve been hit by a bus, both mentally and financially.
While it’s unlikely all of these things will happen at once, it isn’t outside the realms of possibility. Even having to replace the oven or fridge can be financially crippling if it strikes when you’re unprepared.
This is why keeping a reserve of emergency-only funds can be so vital to surviving as a landlord. It’s easy to see any income from your rental(s) as disposable, but the trick is to put some aside. As the weeks, months and years pass – hopefully without the above happening – the reserve fund will mount-up and build a nice little financial safety net to use in emergencies.
There are a whole host of things that can happen that you won’t see coming. These can include unexpected repairs; appliance replacement; annual rises in standard costs like rates, insurance and management fees; damage by tenants, their pets, or even burglars; and then there are law changes that affect your responsibilities as a landlord.
Repairs, Damage and ‘Maintenance’
Maintenance is meant to be routine, but here it’s a loose term that covers anything that needs fixing or replacing. While things often seem to creep up, some will have been quietly brewing so attention to detail can be the key to prevention. Things like replacing mouldy curtains or door and window frames that have rotted over time can be avoided in part by ensuring the house is warm and dry with the right amount of insulation, heating and in some cases a dehumidifier. Wear and tear happens over time and is unavoidable for the most part, but budgeting is essential. We recommend planning on these expenses adding up to 0.3-0.5% of the value of the property each year.
Rates, Insurance and Management Fees
Rates are a constant and their fluctuation is almost guaranteed so we advise betting on a 10% increase year-on-year to guard yourself from an unexpected hike.
Natural disasters and social trends like the methamphetamine epidemic can have a big impact on insurance for rental properties. The huge increase in meth-related claims has seen insurance giant, IAG say landlord’s premiums will increase by between $40 and $130 a year as a result, with standard excess soaring from $400 to $2,500. That emergency fund is looking pretty attractive right now, huh?
Fees charged by a property management company won’t vary too dramatically over time, and despite any increases, the benefits of having experienced professionals like McPherson Property Management doing the legwork for you far outweigh the time and monetary costs involved in going at it alone. Having a management company doing your vetting can also reduce the prospect of dodgy tenants destroying the place and causing more damage than a bond can cover.
Changes to The Law
Changes in regulation that alter what’s expected of you as a landlord are delivered with plenty of warning and aren’t all too common, but can hurt your wallet nonetheless. Case-in-point is the recent law change regarding insulation – all tenancy agreements now require an insulation statement and all rentals will require underfloor and ceiling insulation by July 2019.
These are some of the more likely costs that can come as a shock to landlords, but there are plenty more lurking just around the corner. Read this post to help you estimate rental property expenses, standard and unforeseen, and don’t hesitate to get in touch for a deeper understanding of how we can help you expect and prepare for the unexpected.