The success or failure of an investment property can be heavily influenced by the quality of the tenant. This week we look at 2 issues to do with tenants. Firstly Michael Yardney will talk about whether to buy a property with a tenant in place or not and Shannon Davis outlines the 5 things tenants really hate.
Today in the show Ben Kingsley gives some tips on how to find properties before they hit the market.
Also Brad Beer answers a question from Sonya who inspected some units under construction and was shown a depreciation schedule. Sonya wants to know how reliable they are and would it be risky using those estimates to calculate the units viability.
And hear what a seasoned developer has to say about how to find a decent builder, someone you can rely on so that you can make sure the development you are about to undertake will be finished on time and on budget.
Kevin: There was a saying – there still is, I guess – “Happy wife, happy life.” You can translate that through to investment property, too. If you keep a happy tenant, you’re probably going to have a pretty well-maintained investment property. That’s certainly the theme of our next chat, which I’ll be having with Shannon Davis from Metropole Property Strategists and also Image Property in Brisbane.
Good day, Shannon. How are you doing?
Shannon: Good day, Kevin.
Kevin: It’s very important to have that good relationship with the tenant. What have you found are the things that tenants really hate that will turn them off?
Shannon: Definitely the biggest one would be poor treatment. I think there is an element of disrespect given to tenants sometimes, that perhaps property managers or real estate professionals feel that they work for the owner and don’t have to treat the tenant with as much respect. That, coupled with unwillingness to resolve issues or making the invisible visible, are the things that really frustrate tenants.
Kevin: Yes. They are treated as second-rate citizens, aren’t they?
Shannon: Oh, definitely. You cannot be a property investor without tenants, so in that respect we need every tenant we can, especially in a rising market right now where we’re losing tenants to buying.
Kevin: I’ve heard tenants complain about things like no feedback, being treated like they’re second-rate citizens. “I make a complaint, and I’m just left hanging. I never hear anything.”
Shannon: Yes, that “left hanging” is a big one. Being ignored; timely responses. Even if it is taking longer than you need to resolve an issue, we need to keep them in the loop. “The owner is overseas at the moment. Once I have the response, I’ll be straight back to you,” or if a tradesman is waiting for a part. These are things that need to be explained.
Kevin: Of course, we’ve got an obligation to make sure that the property is well kept and be on top of those maintenance requests and issues, as well, Shannon.
Shannon: Yes. Well-maintained, safe, and secure. Privacy is what they’re after. If they’ve rented a property in a certain state, and through disrepair or maintenance it’s no longer in that state, then they’re expecting – and they should expect – the right for that to be repaired. It’s our obligation as owners and therefore the owner’s representatives –property managers – to fix those things. That’s definitely a bugbear of tenants.
Kevin: You talked earlier about that being left hanging. I’ve been a tenant; I know what it’s like. There’s nothing worse than being kept in the dark when just a simple email sometimes… You don’t have to make a phone call.
Shannon: No, definitely. An email, a text message, just something to keep them in the loop of where it’s at. They know that they’re being appreciated and their issue is important to us.
Kevin: Another issue that I wanted to quickly talk to you about is rent rises. Is there any legislation saying how much the rent can go up by, and what’s reasonable?
Shannon: They can definitely contest it on a market review. If it was over market review, it could go as far as QCAT or the Administrative Tribunal to have it heard. Rent rises are definitely another complaint of tenants.
I think what happens mainly is it’s just sent through the mail – “Here’s your rent” – no consultation, no phone call to soften the blow. In some cases, there’s no rapport with the tenant, so instead of the tenant signing back on at an improved rent, which would be in the best interest of the owner, they choose to pack up and go. Now the owner is faced with vacancy and the wear-and-tear that comes with another move-in, and of course, the next tenant might not be as a good character as the one we already had.
Kevin: It’s difficult for a property manager to sit in the middle. Owners can reasonably expect for those rent reviews to happen, but sometimes it’s easier for the property manager just to do nothing.
Shannon: Yes, and just say, “Look, they’re good tenants,” or “It’s just $10.” There’s nothing really scientific about those processes. A rent review is important. They don’t always go up; you might have bought yourself into an area where there’s such increasing supply that your rent is actually going down in a short-term period. It’s important in those instances especially to try and keep your tenant rather than have them move out, test the market, and be in a lease situation that was worse than the previous one.
Kevin: When we were operating an agency, we had a good-sized rent roll, and one of the things that amazed me was if you don’t treat tenants like tenants – in other words, treat them like human beings, just be nice to them – you’d be amazed when you find out sometimes that they’re actually investors themselves. Just because they’re tenants doesn’t mean to say they don’t have property.
Shannon: Exactly. We’re finding that more and more now, where people’s first investment is actually an investment property, not a house or a home. People are getting married later. There are all sorts of reasons as to why that’s happening.
I think they’re just chopping their nose off to spite their face. I think win-win is how best outcomes are done. We need a happy tenant in order to get the best solution for owners and the best results.
Kevin: Very good advice. Shannon Davis from Metropole Property and also Image Property Management. Thanks for your time, mate.
Shannon: No worries, Kevin. Any time.
Kevin: Ben Kingsley joins me once again. Ben, of course, is the CEO and founder of Empower Wealth. They specialize in finding the best buys for their clients no matter where they are in Australia.
One of the tricks is being able to find a property before it even hits the market. How do you go about doing that, and how do you make sure that you’re not paying too much?
Ben: It’s a good question, Kevin. I remember when I was 23 years old and I was just getting into the property space. I actually did a letterbox drop around the area that I identified that I wanted to buy in. I can tell you that I dropped about 600 pamphlets into different letterboxes, saying, “I want to buy your house,” and I had two people call me and say, “Who are you? What do you do?” That’s the hardcore approach.
There are a couple of hardcore approaches. The first one is that letterbox drop, and the second one, which is a little bit more adventurous, is looking at family courts and seeing some of those divorce settlements going through. Those usually result in a sale transaction of the family home.
They are certainly some more adventurous ways, but the traditional way that you’re going to find off-markets and what we call pre-markets is just talking to the agents in the area. Ultimately, they’re the ones who are still going to have control of the majority of buyers who are coming to the marketplace.
What I talk about when I say a pre-market sale is I’m talking about the agents who are just about to bring a listing on, or they’re just signed up, and the boards haven’t gone up, and the photos haven’t been taken. Usually in those cases, the agents will allow seasonal buyers such as buyer’s agents and the like the opportunity to go through the property, or they might have also a VIP list of clients ready to buy that they send through the property.
You don’t want to be a stranger to the local agents in the area that you’re looking to buy in. It doesn’t necessarily mean you have to tell them exactly what price you’re ready to pay – we need to keep some of our tricks up our sleeve – but ultimately letting them know that you’re an active buyer in the area is really important.
Kevin: It’s long-term, isn’t it? I talked there in the title about trying to buy a property before it actually hits the market. I guess, there’s no such thing really, because it only ever hits the market when you have a willing seller. I guess the trick is to be there when they make that decision.
Ben: Yes, it is. Ultimately we still hear stories about people getting an opportunity to buy the property down the road because they know the local neighbor or they’re involved in the golf club, or the RSL, or something like that. Someone wants to sell the property, and they’re thinking, “I’ll cut the agent out of that conversation.”
But in terms of those properties, those transactions are very small and few and far between. The reason for that is if I was wanting to sell my property, I want to get the best price possible. Usually the best way to do that is to get a marketing campaign behind me. It’s not easy to sell a secret, so you want to get the message out there to market.
Coming back to the point I was making, if you really show that you’re a keen buyer in a particular market, and you’re talking to the local agents in that area, they’ll get you through a property very quickly, because they also want to show their vendors that they do have buyers ready to go.
Kevin: The great agents, no matter where they are, will be very quick to tell you that listings don’t just come on and they get them; they actually put a lot of time and effort into getting them well before they come onto the market. You just have to be patient, do your homework, and as you said, spread that network far and wide.
Ben: That’s right, Kevin. Once you identify the area that you want to buy in – coming back to the point we made – it is about talking to those agents, and finding those agents that have got the most listings, and building a relationship with them to see when the right asset does come up, you can strike at it.
Kevin: Ben Kingsley from Empower Wealth. Thanks for your time, mate.
Ben: Pleasure, Kevin.
Kevin: No doubt when you’re buying an investment property, one of the major considerations is the tenant, of course, because without a tenant, there’s no cash flow. But is it best to buy a property with a tenant or one that’s vacant? Let’s get a view on this.
Michael Yardney is from Metropole Property Strategists. That’s a question I’ll put to you, Michael. Would you buy a property with a tenant in it?
Michael: Hi, Kevin. The answer is yes, I would. I like them, but I’m also very cautious about them.
Kevin: Why do you like them particularly?
Michael: We’ve found that a lot of the off-market properties we get offered at Metropole have got tenants in place, because the agents can’t always run a normal marketing campaign. They don’t usually run [0:37 inaudible] campaigns with a tenant in place because a tenant doesn’t make it very easy to get access, and sometimes they’re in such poorly kept conditions that they’re not even prepared to run a normal campaign. If you can see past that, Kevin, you can see the opportunities, there are some good buys out there.
Kevin: What are the things you would look for that would indicate it’s a good buy?
Michael: First of all, tenant or no tenant isn’t the main question. It really is is it the right property in the right location with the right sort of floor plan? All the things we’ve talked about in many of our other conversations have to come into play. But if everything else is right, then I look for the details of the tenant’s lease. Remember, the lease stays on. Even though the ownership changes, you take on any written obligation that the previous owner had, so you have to look at that pretty carefully.
Kevin: Apart from that, do you look at things like how long the tenant’s been there? That’s obviously going to be an indication, maybe, about how long they’re going to stay.
Michael: That’s a really good point, Kevin, because you want them in there long enough to make it feel like home and they’re going to stay. On the other hand, you don’t want them to be in there that long that the previous owners have let the rent slip back and haven’t caught up to date.
I’ve found there are a number of properties where the rent is substantially below market. On the one hand, that’s an advantage, because it may put off other potential investors, but on the other hand, if the tenant isn’t paying the right rent and you increase it, it’s possible you could lose them.
Kevin: Michael, if a property ticks all the boxes and the tenant actually looks good but is simply underpaying, would you still go ahead and maybe look at some sort of a step payment to bring it up to market?
Michael: Kevin, rather than pushing it up in one big lump and losing the tenant, and having a couple of weeks’ vacancy, and having to pay the property manager their normal fee for renting the property, yes, it makes sense to maybe do it over a period of time.
You can come to an arrangement where you increase the rent now, and maybe again in six months, and again in a year’s time, giving them evidence that, “You’re paying below-market rent, but I recognize that you’ve been a good tenant, so I don’t want to disadvantage you.” Definitely make it a win-win for both.
Kevin: If a property is under-performing in that way, is that a poor reflection on the property manager? Should that be an indicator, Michael?
Michael: You don’t know the story. Was it the previous landlord who was scared to push up the rent? Was it the property manager? But remember, you don’t inherit the property manager with the property. Check them out. Make sure they’re going to do a good job for you. If not, you can always swap property managers to somebody you’ve already been working with.
Kevin: When the property does actually change ownership, the agreement with the property manager becomes null and void?
Michael: It depends upon which state you’re in. The property manager has an agreement with the owner, the landlord, and that then gets transferred to the new owner, but it actually isn’t in their name, so you really do have to sign a new agreement.
Kevin: Are there any other additional agreements that you should be aware of that could get you in hot water?
Michael: You should ask about them. You should look for them, because sometimes there has been an agreement by the previous owner to improve the property, to repaint it, to put in new carpets, to do things that if they’re in writing, you may be obliged to follow them up. It’s best to ask those sorts of questions.
Kevin: The bottom line, Michael. What is it?
Michael: Having a tenant in place is nice. It gives you that shorter vacancy upfront. You don’t have to have a vacancy or pay realtor letting fees. But it should not be enough to sway you, but of course, it shouldn’t dissuade you either. The most important thing is to own the right property, because that’s what’s going to be there in the long term. The tenant won’t, Kevin.
Kevin: Michael Yardney is from Metropole Property Strategists. Follow Michael, too, on his very popular blog site, PropertyUpdate.com.au.
Michael, thanks for your time.
Michael: My pleasure, Kevin.
Kevin: I had a question from a listener during the week who writes, “I inspected some units currently being constructed and was shown a depreciation schedule. The agent said it was just an estimate. How reliable would it be, and is it risky using these estimates to calculate the unit’s viability?”
To answer that question, a man who knows all about tax depreciation schedules, Brad Beer from BMT Tax Depreciation. Good day, Brad.
Brad: Hi, Kevin.
Kevin: Sonia’s question there, is that something she should be cautious about?
Brad: It’s an interesting question. As quantity surveyors, we do a lot of estimates of what sort of depreciation might be available. The important thing is looking at who it’s being prepared by. Has the builder prepared it? Has a specialist quantity surveyor prepared it? What exactly the numbers are made up of. Have a look at it.
Now, we have calculators on the website you can use to check against. You can talk to us or someone who’s reputably doing depreciation. It should have a minimum and maximum range of depreciation potentially available.
Obviously, it’s an estimate. When we’ve done that as an estimate, we don’t have all the information. But we’ve done a lot of depreciation schedules, so if we’ve done it, and we know what we’re doing, we should come up with numbers that you should be able to rely on being pretty close to the truth.
Using the minimum or a bit less than the minimum to be really safe is the thing to do. Making sure it’s prepared by someone who knows what they’re doing is the important thing.
Kevin: Are these depreciation schedules, or the supply of these, regulated in any way, Brad?
Brad: The regulation is not very heavy as far as an estimate like that. The costs that are used for the purpose of depreciation – a quantity surveyor’s cost – will be acceptable. Sometimes a thing to be a little bit wary of is when it has an agent or someone who is selling you the property. It’s probably in their interest to make the numbers look high, so you really want to double-check it or make sure it’s done by a reputable company that’s not prepared to move the numbers to help sell the unit. That’s the thing to be really careful of.
Kevin: How would you check out their credibility? Go to their website?
Brad: Go to their website. Ask your accountant, “Have you used their report?” Have the accountant have a look at that. If it’s not done by a depreciation specialist, get a depreciation specialist to actually have a look at it.
Kevin: That’s actually a very good point – going to your accountant – in all of these things. If you’re buying any property, you should always be checking with your accountant and your solicitor, and running it by them anyway.
Brad: If they’re an accountant who deals with property investors – and if you’re a property investor, you probably want that to be the case – they will probably have specialist depreciation guys that they regularly do use. Maybe the accountant would want to ask their contact, just to get a double-check on that to make sure it’s not something done by the builder or something to make it look more than it really is going to come out at.
Kevin: Is it reasonable that someone would want to get their own depreciation schedule done even if they are looking at buying? Would that help them substantiate those figures, Brad?
Brad: That’s most definitely the certain way as a potential buyer of any property, not just one that’s new that has a depreciation estimate done. There are calculators on websites, and they’re free. You can go in and use them to check and see. Put some of the information in yourself, and see if it comes out close to what’s been provided.
You can always talk to my guys about your particular property, and send us some photos. We’ll have a discussion and give you a rule of thumb based on what we can see. We don’t charge for that to have a bit of a look at it.
If you want to be certain, you get one done properly, absolutely, but normally it’s done after the fact. We can get pretty close with an estimate, and we’ll give you a range. Whenever you’re plugging in and crunching your numbers on property, it’s always good to be conservative to start, and then at the end of the process anything else is a bonus.
Kevin: Very good advice from Brad Beer, one of our recommended suppliers. Of course, all BMT Tax Depreciation’s details are on our website, and you can check out their featured channel, as well. Lots of great information there for you, and in fact a link straight back to their site, as well, if you want to check that.
Brad, thank you so much for your time. We’ll catch up again soon.
Brad: Great. Thanks, Kevin.
Kevin: It’s a conversation that comes up reasonably often in Real Estate Talk, and that is, “How do I get a decent builder?” and even, “How do I get a decent tradie?” Nhan Nguyen from Advanced Property Strategies joins me. This is something, I guess, you confront quite often. Do you also have to help some of your clients with this, as well, Nhan?
Nhan: Yes, I do. I’ve built over 20 houses or so as a developer – not as a builder, but organized houses. Yes, often my clients who want to build a house ask me those questions, and I help them through the process of choosing the right builder.
Kevin: Let’s learn from your bitter experience. Tell me what tips you have for us.
Nhan: Yes, there’s been a lot of good experience and a lot of bad experience, as well, like you said. The main thing, firstly, to start off with is trying to fit the builder to what you’re wanting to do, because there’s obviously a handful of projects you could do.
You could do what’s called a project home, which is a basic type of build, and there are what are called project home builders who build 300 or 400 homes a year. The other type of builder is what we call an executive builder. They do more of an up-market, up-spec type building. Then there’s the high-end, and there are the units and townhouses type builders. There are about three or four types of builders, and firstly you need to choose what type of builder suits your project.
Kevin: It seems to me one of the major concerns with people is their builder is either not going to go out of business or is not going to misuse the funds. Would I be right in assuming that some of those big builders, those project builders, are probably going to be more reliable, Nhan?
Nhan: Yes and no. I agree with you. The things that concern me when I’m talking to a client or an investor about choosing a builder is definitely, one, going broke, or two, mismanaging the funds. That’s not to be really negative as such; it’s more so to deal with reality. There are many builders out there, and a small portion of them don’t know how to run a business, and as a result, that affects you as a client.
Kevin: Great builders but poor businesspeople.
Nhan: Exactly. Just because you know how to build a house and use a nail gun doesn’t mean you know how to manage cash flow, staff, approvals, and juggle it all at the same time.
Kevin: Let’s move on to a couple of the other tips then.
Nhan: One would be that ideally the builder has been around for a reasonable amount of time – five, ten, 20 years – and doesn’t have a lot of debt in their business. It’s hard to know whether they have a lot of debt, but you can watch them over a period of time or at least know that they’ve been around for at least five to ten years.
Another thing that you want to watch – if you can, if you find this information out – is to make sure their growth hasn’t been too erratic. When any business grows, as you might know, there are constraints. You have to put more staff on, more office, more expenses.
On some websites – in Queensland, we used to call it the Building Services Authority, the BSA; they’ve changed their name now – you can search the builder’s history and find out if they’ve had complaints, as well. That’s another way to do research. Find out if they’ve had complaints and been served notices of complaint for bad construction practices.
Kevin: I believe there are similar sites in the other states, as well, where you can check the stability of the builder.
Nhan: Exactly. It comes down to customer service. At the end of the day, it is a business. Whether you own a restaurant or a building business, it’s customer service. If people complain, there’s a reason for that. People don’t just complain for the sake of it.
Erratic growth is definitely something I’d check out, and turnover. If a builder is growing too fast in a short period of time, especially in the first one to five years, it can be very detrimental to you, especially if they’re using your money to pay for projects they did one to two years ago.
Another way I suggest with any business is to go and get referrals and references from people who built one, two, three years ago with them. When you finish a building, there’s generally a six- to 12-month warranty period, and the builder gets called back to finish any things, like leaking taps, or materials that have been used improperly, or render falling off. If you speak to customers who have used the builder before, then you get a realistic idea of do they answer the phone, do they return your phone calls, and do they give good advice?
Kevin: Just getting back to an earlier point you made there about the BSA in Queensland – the Building Services Authority or whatever they’re called now – on its own, that’s not a good enough check. I’d suggest you should be doing all the checks you’re talking about. Because on that site, I’ve actually seen builders who have a very bad reputation, and they’ve remained on that site. You shouldn’t just take it at face value.
Nhan: Correct. I absolutely agree. These things are all-encompassing. You need to do everything you can to do that research. A big part of it doing your research before you actually go out and buy a block of land, and doing that part-and-parcel. Rather than just buying a block of land, and saying, “Yes, I’m going to go build a house,” you have to do the research on the house builder during the process that you do the land acquisition and business planning, as well.
Kevin: Very good advice, Nhan. Thank you very much for your time. Nhan Nguyen from Advanced Property Strategies. Thanks, mate. We’ll catch you again soon.
Nhan: Thanks, Kevin.
Kevin: Alarm bells should be ringing for all investors if you have an investment property and there’s a possibility that you may actually have lead paint. There was a recent case against an owner of a property by a tenant because they were concerned about the concentrations of lead in the paint inside the house.
Peter Carter has been following this. Peter is from Carter Capner Law, and he joins me. Peter, give me the background of this. How widespread is the problem?
Peter: Kevin, this involved a home at Zillmere where the tenant had a long list of complaints that the agent hadn’t fixed from several months after moving in. But the most serious of the complaints was flaking lead paint, which the owner was compelled to remove promptly, and because that owner didn’t, there was financial compensation payable to the tenant.
Kevin: Do you know how much that was?
Peter: It involved a reduction in rent over the period of her occupation, and it allowed her to break the lease. It was $2500.
Kevin: Zillmere, you mentioned there, is a suburb in Brisbane. Is this confined only to Brisbane, or is it around Australia?
Peter: The issue is anywhere where lead paint can be found. I imagine certainly in Queensland that historically problems resurface from time to time, and it’s something that all landlords should be aware of. It’s something that all agents should be aware of, because it’s a precaution that they can easily take to determine whether that has existed in the home they’re about to let out to tenants.
Kevin: It’s pretty easy to do, because you can get a lead-detection kit, which I think only costs $10 or $15. You can get it from all of the good hardware chains. Are you suggesting that this is something that all landlords and all agents should be testing for?
Peter: Landlords owe a duty to ensure that the premises are habitable and safe at the time they let the home and to keep them in those conditions. This is a simple, easy test, as you say. It should be on the landlord’s list as a must-do before each tenancy.
Kevin: We’ve seen the fallout over the years in recent times as to what happened with asbestos. This could be the new alarm on the horizon.
Peter: It certainly could be. It’s a sleeper. It’s like plate glass not being to current standard. It’s the sort of thing that needs to be thoroughly investigated. It’s a real problem. It’s for people’s safety.
Kevin: This is one of the things I think you should be checking when you do have a managed property with your agent that they’re up to date on all this legislation and that they are in fact doing all these things, because at the end of the day, it is the owner of the property who has to bear the liability for this.
Peter: That’s right. It’s the owner who bears the financial loss. It’s the owner against whom court orders will be made and against whom health department investigations will be undertaken, so it’s a real issue.
Kevin: Peter, thank you for joining us today and bringing this to our attention. Peter Carter is from Carter Capner Law. Thanks, Peter.
Peter: Thanks, Kevin.