Chapter 20:
No hassle property
management
We are constantly reminded about the changing pace of life in the nineties. The way we go about our daily lives is changing with incredible speed. The way we bank, shop, invest, study and even spend our leisure time, are all undergoing rapid change.
Fifteen years ago the proliferation of electronic funds transfer, the personal computer, mobile phones, instant information by phone, voice, computer or fax, social legislation and many other developments, seemed almost a science fiction fantasy. In the business of property investment management and ownership the changes have also been substantial.
Property market data and information is available from statutory authorities at the push of a button, rental payments can be made by bank or electronic transfer, and legislative changes in areas such as capital gains tax, Rental Tribunal, and property related Anti-Discrimination issues are happening with increasing frequency.
Whilst the benefits of sophisticated technology are many, it also means the business of owning rental property is becoming more and more complicated. The potential pitfalls become harder to avoid. A highly specialised knowledge of property investment, property law, banking & finance procedures, investment analysis and many other related skills are required to maximise returns, and successfully manage investment property.
KEEPING UP WITH CHANGE
Residential property remains the most attractive form of investment available, however as in all aspects of life in the nineties and beyond, the rules are constantly changing and special care is required to ensure your investment serves you well into the future.
Many factors effect the performance of your property investment, and to demonstrate the varied ways in which our company, Quartile Property Network has embraced these issues to the advantage of our clients, we will cover the following topics.
Avoiding Bad Debts
Selecting the Right Tenant
Tenant Disputes & Rental Tribunal
Appointing a New Manager
Maintenance and Damage Control
Taxation and Finance Issues
Market Trends and Changes
As we progressively strive to improve our service in our property management business, we find the only limitation to what can be done, is our ability to conceive of new and innovative ways to do things better. Our objective it to bring residential Property Investment Management into the age of service, efficiency and value added benefits.
As a specialist property investment organisation with forty four years experience in actively managing residential property for investors throughout Australia, our company has often set the standards for others to follow in the area of property management. It is an extremely important activity in the investment process and starts with people.
Property Management staff must be carefully selected, meeting stringent background and performance criteria, with experience in management of large portfolios of residential property, spread over a diverse geographic area. The days of small real estate agencies using their young, inexperienced receptionist as a part time property manager have hopefully gone.
Selecting The Right Tenant
The selection of a good tenant requires a great deal of skill, research and knowledge of property law.
Property Investment Managers, understand that a vacant property is non-productive. It may be prudent for a property to be vacant for a few extra days whilst the right tenant is found, rather than leasing a property to a tenant who may be unreliable and cause problems in the future at potentially greater cost.
For this reason, owners who list their property to let with a number of agents, may be doing themselves a disservice. In the race to be the first to find a tenant and receive a one off letting fee, some agents may lower their selection criteria, and select a tenant who may cause future problems. This is especially so if that agent is not responsible for the ongoing management. The tenant becomes somebody else's problem.
The following guidelines should be used to assess the suitability of a prospective tenant.
Stable employment and regular income helps to ensure rent is paid, and paid on time.
The amount of income determines the affordability of rent.
Checks on previous tenancies help establish a stable rental history; and
Bank and other references indicate reliability.
Changes to legislation regarding credit reference checks prevent all agents from using the Credit Reference Association of Australia to establish credit worthiness of prospective tenants. This makes it essential that every alternative reference source available is checked to determine the background and reliability of a prospective tenant.
To assist with reference checks we use direct dial-up access to three on-line tenant information services, RPD (Real Property Data), TICA (Tenants Information Centre Australia) and TRA (Tenants Reference Australia). These computer databases are updated by property investment managers throughout Australia, and contain valuable information about tenants, including rental payment history, state of repair of property on vacating, managing agents evaluation and general comments.
Changes to anti-discrimination legislation specifically relating to rental property also require careful management to avoid later conflict in our increasingly litigious, politically correct society.
Property Inspections
Once a new Lease Agreement is entered into, the property is immediately inspected specifically noting cleanliness and condition. Each inspection undertaken follows an inspection check list, paying special attention to details of additional fixtures and appliances that may be included with the property. Attention to detail at this time can minimise the possibility of disputes in the future.
When tenants vacate, the property is carefully inspected again. Upon vacating, we insist that the property be thoroughly cleaned and in similar condition as at commencement of the Lease Agreement.
Regular inspections are conducted every six months to check the cleanliness and state of repair of the property. This information is then submitted to owners, in written report form.
These formal inspections afford owners the opportunity of checking the condition of their property and ensures that any damage has been reported and repaired promptly. If market conditions necessitate a rent review upon lease expiry, it makes good sense to inspect the property before formulating an opinion of the new market rent. The object of maintenance is to preserve the capital asset and maximise rental income. In addition, good management and maintenance procedures will minimise tenant complaint and vacancy factors.
Maintenance and Damage Control
The object of maintenance is to preserve your capital asset. In addition, good management and maintenance procedures will;
Maintain a good appearance and therefore the marketability of the property
Prevent tenant dissatisfaction or complaint which can cause tenants to withhold rent.
Reduce the vacancy factor.
Increase income and capital growth for owners
Some property owners may believe that spending money on repairs and maintenance does not benefit the net return on their property. Eventually when they wish to re-let their property, they may find that the premises have become run down, which in turn effects the quality of tenant the property attracts, the gross rent achieved and ultimately the net return on their investment.
Managing property maintenance requires careful balance to ensure the property remains attractive to the market whilst maximising net returns. All trades people should be selected for their workmanship and reliability, as well as the discounts they offer Quartile Property Network clients.
Avoiding Bad Debts
Although unpaid rent money may be retrievable from Bonds held with the Rental Bond Board, our policy is one of "prevention is better than cure". Naturally , we would prefer to avoid bad debts altogether. Having the best possible tenant is much easier than recovering bad debts, and this is why we consider our tenant selection criteria to be so important. Maintaining a healthy, business-like relationship with tenants helps in resolving any problems before it may lead to a dispute.
The collection of rent when due, and prompt and regular accounting to property owners is the primary responsibility of a property investment manager, and in order to control rent arrears, it is important to have a well maintained, easy to manage rental collection system.
We have a system whereby we offer each tenant the option of paying their rent direct into our Trust Account by bank deposit at any branch of our Bank, or by automatic transfer from their bank account. These methods of rent collection have proven very effective in minimising late or non-payment of rent. The majority of our tenants elect to remit rent by bank deposit and a significant number authorise payments direct from their bank account.
We also use a direct banking system to remit monthly rents to owners. This is done via electronic funds transfer, and ensures funds are cleared quickly, and reach owners accounts the day they are processed.
These innovations are a direct result of our resolve to build a Property Investment Management "system" which is unrivalled anywhere in the world.
Strict and firm follow up of late payments is essential in preventing the exacerbation of bad debts. Tenants will take advantage of any weakness perceived in management.
Tenant Disputes and The Tribunal
In New South Wales the Residential Tenancies Tribunal has been constituted as a specialist Tribunal to determine all matters relating to residential property. It’s main jurisdiction and powers include;
To make orders for the payment of up to $5,000 including unpaid rent, debt or damages;
Order the performance of work, the cost of which should not exceed $5,000.
Orders for the termination of residential tenancy agreements and for possession of property;
Orders in respect of breaches or disputes relating to Residential Tenancy Agreements -including orders requiring action in performance of the agreement or for compensation etc, even if in the nature of an injunction or specific performance, and in circumstances when that remedy would be unavailable under the general law;
Orders relating to rental bonds, taking the jurisdiction of the Consumer Claims Tribunal;
Other powers include:
Order that the landlord or any other person may enter the premises;
Authorise the landlord or tenant to alter, remove, or add locks for security;
Order that a rent increase is excessive, and make an interim order suspending payment of the whole or part of the rental increase;
Order compensation from the tenant to the landlord if the tenant fails to comply with an order for possession;
Declare the premises have been abandoned;
Order compensation by the tenant for loss caused to the landlord by abandoning the property.
The Residential Tenancies Tribunal is bound only by the regulations and rules of evidence of the Residential Tenancies Act 1987. Managing agents of residential investment property, must remain familiar with the Act, and the procedures and powers of the Tribunal.
Except in unusual circumstances lawyers are not permitted to represent the parties in Tribunal matters. Quartile Property Network always represents its clients in Tribunal matters, where we have a high success rate
A LONG TERM RELATIONSHIP
Many issues which are not day to day property investment management tasks may arise during the course of ownership of investment property. Some of these are covered in the following sections.
Building a long term relationship with a property investment management organisation who have a well rounded experience in all facets of the investment process can have many advantages.
Your property manager should be more than a collector of rent and supervisor of maintenance. This is why we prefer to call our people, property investment managers. Not only must they be expert in the day to day issues, they should also be informed advisers in all aspects of finance and taxation as they relate to property or at least have ready access to in-house expertise in those areas.
Taxation & Finance
Over recent years a number of significant changes have been made to the taxation treatment of returns from residential investment property. These changes may have been discussed in other chapters of this book, but suffice to say that Property Management staff must be watchful in this area. For example, capital expenditure on newly acquired items such as carpets, blinds, light fittings, furniture or appliance are often overlooked as claimable depreciation items.
Building Allowance
From 17 July 1985 a building allowance on residential buildings which commenced construction on or after that date can be claimed by owners of income producing residential property. This allowance is explained in detail elsewhere in this book.
A good Managing Agent can assist clients in consultation with their accountants, to claim this allowance, often retrospectively recovering many thousands of dollars that have previously been overlooked.
Capital Gains Tax
Since Capital Gains Tax was introduced in September 1985 it has become particularly important to maintain detailed records of capital expenditures, acquisition and disposal costs, changes in beneficial ownership and changes of use or occupation relating to income producing residential property. For example, capital improvements to a property acquired before the introduction of Capital Gains Tax may generate a future Capital Gains Tax liability. At the same time improvements may qualify for the Building Allowance mentioned previously.
Investors approaching retirement who hold Capital Gains Tax exempt property could consider sale of that property and re-investment in newer property which is tax sheltered by the building allowance, providing greater net income to live on. A good property investment manager will not be afraid of suggesting these types of alternatives which are only identifiable by keeping an eye on the big picture.
Group Tax Adjustment
Many investors hold negatively geared property on which they are subsidising the investment by amounts which may have a short term negative effect on their lifestyle even though a tax refund is received after the end of the financial year.
Under Section 221D of the Tax Act a simple form can be lodged with the Tax Office whereby group tax instalments are reduced through the year by an amount equivalent to the estimated tax credit or refund which would otherwise be received up to eighteen months later. The result is a smoother cash flow and avoids lending money to government interest free at the expense of a comfortable lifestyle.
We often prepare cash flow estimates and projections for clients to allow completion and lodgement of a 221D application.
Finance
Competition amongst major lenders has seen a variety of loan packages available in the marketplace over recent years. Comparison of these products for new lending or re-finance purposes has become increasingly difficult as the lenders apply different rules and conditions for each type of loan.
A client was recently shocked to see our comparison of the banks recommended type of loan and the effect on her cash-flow, compared to the same banks fixed term, fixed rate investment loan, which they did not tell her about, which caused her to be thousands of dollars better off.
Lenders generally consider loans based on their serviceability criteria, which may not reflect the impact of the loan on the borrowers current and future lifestyle.
It is essential to prepare cash-flow projections from the investors point of view at the time of taking a loan, for no other reason than it is your investment, your future and your lifestyle that created the need for the loan in the first place - not the Banks. Quartile Property Network consultants are fully conversant with all these issues and prepare this type of information for property investment management clients not only at point of purchase, but from time to time for re-finance purposes.
Financial Position & Accumulation
A common question from clients involves the issue of further investment in property as a result of increased equity in currently owned investments.
Periodically reviewing the position of property investments is of course a prudent action. Some clients revise their Asset and Liability Statement as frequently as monthly. Others seek our assistance in reviewing their property portfolio on an annual basis. Either way we are able to help keep you up to date by regularly reviewing all aspects of your property portfolio, from cash-flows to current value and borrowing position.
As an owner you naturally retain a responsibility to manage the manager. The appointment of the right Property Investment Manager is essential and should become a long term relationship of mutual benefit. Whilst it carries with it some responsibility it should be a trouble and worry free association. Ownership of rental property can be an enjoyable and rewarding experience.
Regular contact between manager and owner is important and should be initiated by both parties. Good communication will alleviate problems that arise out of misunderstandings and lack of suitable explanations and or instructions. Six monthly or at least yearly meetings between manager and owner should be scheduled. In the case of an overseas or interstate owner these meetings can be held by telephone, electronic mail or other means.
Many programmes can be implemented to assist in minimising vacancies and maximising income. These should be initiated by your manager but good consultation between both parties is helpful in putting such plans into operation.
If you currently own rental investment property and you are not satisfied with the service you are receiving you have two choices, one is to bring your manager up to standard the other is to change managers.
It may not be entirely your Managing Agents fault. Perhaps you have not properly instructed them with regard to maintenance policy or tenant criteria. You may be difficult to contact for consultation. Some owners have even been known to demand top service for a reduced fee.
Nevertheless often a change in management is warranted. Do not hesitate if you conclude you are not receiving the standard of service to which you are entitled.
It need not be a difficult or embarrassing task. Select a new manager carefully, preferably by personal interview. Meet all the staff involved and question them on expertise, policy and results. Inspect sample stationery including rent statements, pro forma letters, previous advertising and most importantly ask for references from other clients of the manager. If you are not completely happy, move on. Its your property and income at risk. If you decide on change we have provided a form at the end of this chapter that should be completed and forwarded to your newly selected managers. They will do the rest, even pick up keys and files from your retiring manager. You will not have to make any contact yourself.
A Property Investment Checklist To Judge Whether Or Not Your Manager Is Up To The Task.
Does your property qualify for the Building Allowance and has it been claimed on your annual tax return in every year of ownership?
Have you calculated the before and after tax return from your investment?
Does your accountant specialise in property investment and ensure that all allowable deductions are taken up?
Do you know recent sale prices in the area surrounding your investment property?
Does your tenant remit rent by bank transfer or direct deposit?
Do you receive regular written property condition reports for your property?
Is your property occupied at least 97% of the time?
Is the gross yield from your property satisfactory compared to the rest of the market or alternative investments?
Have you lodged a 221D application with the Australian Taxation Office?
Do you have a written budget for your property investment?
Are your total property expenses, including management fees, less than 30% of total rental income over a full year?
Are you sure your property investment is performing for you as efficiently as possible?
If you answered NO or DO NOT KNOW to one or more of these points, question your manager to see if they can lift their game. If still not satisfied look further afield, your property investment may be costing you money. If you answered NO or DO NOT KNOW to three or more questions look further afield without delay.
When you have selected a suitable new manager just give them the written authority to assume management and they will pick up files, and keys from the agent without you having to make any contact with your old manager in any way at all.
As a guide to the virgin investor we provide a typical scale of property management fees and a transfer of management authority.
PROFESSIONAL FEES
1. Residential Leasing
Letting fee upon effecting the initial leasing of residential property is:
Lease term 6 months, or less 1 week's rent
Re-letting fee upon effecting subsequent lettings 1 week's rent
Lease preparation fee $15.00
2. Residential Management
Fee for Management of residential property: 7% of gross rent collected
3. Disbursements
Disbursement costs may be incurred in letting and managing your property and may include such items as bank charges, statutory fees, certificate fees, telephone calls,travel, postage and copying.
4. Advertising
Advertising expenses are incurred in respect of each letting and management and vary considerably between properties depending on market conditions, property type, location and other factors. A comprehensive menu of advertising services including charges should be available from your manager.
5. Services
Attendance as witness at a Tribunal or Court $30.00 per hour
Service of a notice or summons $30.00
Applying for a Tribunal order $20.00
Arrangement/Supervision of repairs 5% of repair cost .
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