Avoiding the five biggest landlord stress points

Stepping into property investing is daunting for many, and speaking with investors over the decades has also shed light on many of the significant reasons why some investors opt out of property altogether. This blog addresses the five most serious (and common) stress points, and shares how to either mitigate or avoid experiencing each stress point.

Stressor 1: Property not performing (specifically, underperforming in capital growth, or worse still, losing value). This is not uncommon, unfortunately, and it tends to strike when an investor circles in on a particular strategy that carries inherent risk, for example; buying off the plan/buying brand new, or taking on a speculative asset in the hope for a quick gain. The basis for new and off the plan stock representing a higher risk of low capital growth relates to a poor land to asset ratio. As for a speculative purchase, an example may relate to a small town with a surprise burst of activity looming, ie. a mining town or small coastal inlet. While the escape to the regions during COVID aided many past speculative investors’ wealth creation efforts, speculative purchases don’t always prove success. Just ask some Moranbah investors how their investments have performed over the last decade.

Mitigant: Property is a long game, and for those who have insufficient deposits to enter the established property market, my best advice is to continue saving. Short-circuiting the need to save a deposit by purchasing off the plan could set an investor back more than they have considered. Expecting unrealistic, short term capital growth carries high risk also. A minimum tenure for holding an investment property should be at least ten years, and ideally over twenty.

Stressor 2: Expensive issues to fix (accidental, age-related, and malicious issues). This can be exhausting and upsetting for an investor, because not all issues are predictable, and many investors today will be experiencing the need to spend money on upgrades that in previous years, weren’t required by the legislation at the time. Malicious damage is another matter altogether, and for the purposes of this article, I will apportion it to the fifth stressor; the troublesome tenant.

Mitigant: First and foremost, getting a building and pest inspection pre-purchase will give a purchaser insight into the current issues, likely remaining lifecycle of appliances, any threats to further damage and an indication of the immediate rectification works required. We like to run our observations past a reliable property manager too, as they can often flag any issues that may not meet minimum legislative requirements. For any properties currently tenanted, we also seek to understand whether the vendors have had compliance checks (now legislated every two years) carried out, as it can be helpful to know if the property has already passed gas and electrical compliance checks. Most importantly, an investor should not only have sound building insurance in place, but should also provision a sensible annualised amount for repairs and maintenance AND they should have a kitty for surprise issues. My recommendation for the surprises kitty is $15,000 per property. Extra insurances, (like title insurance) should also be considered.

Stressor 3: Not being able to rent out the property (experiencing a long vacancy). In today’s climate, this rarely strikes in our major regional and capital cities, but when it does, it can really hurt. If the property is well-located and in reasonable (and compliant) condition, it may just relate to a localised/seasonal downturn in tenant enquiry, (such as a cold, wet winter), or it could be a difficult time to rent because other local landlords are competing for tenants.

Mitigant: Having a great property manager really counts when vacancy bites. There may be some items that can be installed/improved that the investor wasn’t attuned to, or it may be a case of reducing the rent that is required to get traction. A sharp property manager’s experience will come to the fore when it comes to tackling a vacancy. Too many landlords hold out for a rental price, sitting it out week after week and whittling away their annual return by resisting a rental decrease. If the market conditions require a reduction in asking rent, the sooner an investor can apply it and secure a renter, the better.

Stressor 4: The cost of holding the property becoming too excessive for the investor. This is often caused a fundamental mistake that the investor has made in relation to cashflow calculation and/or provisioning for higher running costs. It is relevant today, as our interest rates are rising and the mortgage repayments are increasing. Investors can’t simply pass on their increased holding costs to a tenant, and doubled with the recent rental reforms, Victorian investors in particular are feeling some pain in relation to addressing maintenance upgrades and compliance checks as well.

Mitigant: It’s critical for investors to model their holding costs at historical averages when it comes to calculating interest repayments. We all enjoyed the sub-2% interest rate environment, but that was never sustainable long term. Many investors work off 7%. Recognising the items that can fluctuate on the financials page is really important.

If a property presents significant (surprise) maintenance issues, ie. huge special levies for building movement etc, an investor should work out quickly whether the property should be sold or retained before they are faced with a panic situation and competing sellers in the block forcing down the selling price.

Stressor 5: Being stuck with a troublesome tenant. This is one of the most significant threats to a rental provider, particularly in states like Victoria where rental providers have less control of their asset. Recently, our no-reason notice to vacate has been removed, meaning that a rental provider cannot issue a 120 day, notice to vacate at the end of a lease for no documented reason. Acceptable reasons are listed here, and it’s fair to say that the risk of troublesome tenants causing significant stress has just got worse. Our wait-periods for tribunal hearings extend for many months, so even if a case can be heard, the damage/financial stress in the meantime could threaten the viability of the investment for many investors. Troublesome renters don’t always strike, but when they do, it can become a nightmare for a rental provider. ‘Troublesome’ includes consistent rental arrears, malicious damage and social upset.

Mitigant: Now, more than ever, I can’t stress the importance of a great property manager. Choosing a reliable, respectful tenant is so critical. However, properties need to reflect what a rental provider hopes for out of the relationship too. The property should be well-presented, in good order and all reasonable maintenance requests should be seen to immediately.

This past guide for sourcing a good property manager offers some valuable tips for investors.