Being a landlord isn’t all smooth sailing
BEING a landlord is not just a matter of sitting back while the money rolls in. There can be sizeable problems for unwary investors - and no one should think that being a landlord means money for nothing.
Here, we run through some of the most common problems for landlords . . . and how to solve them.
Landlords can be hit with big bills at any time and these can reduce returns. If your rental property is a stand-alone house, the bills are your problem, though they are tax deductible against your rental income.
Unit owners in strata premises benefit from a centralised, pooled ownership structure, which means expenses are shared between owners.
But there are many cases in which major repairs have been needed to a strata premises and there has not been enough money in the sinking fund, requiring big extra contributions from all the owners.
``If you are buying a strata property you need to check the repairs history for the building and look at how much money is in the sinking fund," James Garnsey, of financial services firm Yellow Brick Road, said.
Mr Garnsey also warns about the potential for defects in modern apartment blocks and resulting problems in chasing developers or insurers for financial redress.
``In a building I lived in, the body corporate had to wear the expenses of chasing the builder, who had gone bust," Mr Garnsey said. ``The block was only built in 2001 but had serious problems and we had to pursue a damages claim for $1.2 million.
``It took us nine years to get the money and cost us about $400,000 in legal fees."
If you are faced with a tenant more than 14 days in arrears, you are entitled to give them notice to vacate, but to do so for such a short lapse would be inadvisable.
Try to come to an agreement with the tenant, but if you do want them to leave there are strict rules governing the eviction process and if you breach any of them, the law could land on the tenant's side.
Unreasonable rents, a glut of properties at the same time in a particular area or even just a period of fussy tenants can mean that your property can remain empty and eat into your returns.
Just three months without a tenant will reduce your yield by 25 per cent.
This isn't a pitfall unless you suffer from the widespread misconception that negative gearing allows you to reclaim the entire shortfall between rent and mortgage interest from your tax bill.
The reality is that only a proportion of losses can be claimed, in line with your marginal tax rate. So if you pay tax at 30 per cent, you can claim 30 per cent of the shortfall.
If you pay tax at 46.5 per cent, you can reclaim 46.5 per cent of the shortfall. That is why negative gearing is so much more effective for higher-rate taxpayers.
If you're doing your sums based on being able to reclaim back all of your shortfall, it's time to think again.