One of the best ways of maximising the returns on your investment property is to put some attention on your rental lease costs.
Charting a promising property finance course from buying to renting is one thing, but you also need to watch out for those unexpected costs that can blow your bottom line out of the water.
While council and water rates or property management fees are a given, there are plenty of other rental lease costs that can eat away at your cash flow, often in indirect ways.
In this article, we’ll equip you with some methods that will help you sidestep these unsightly rental lease costs and losses, so you can stay the course in the financial green.
1. Avoid loss on rental property rent
We’ve said it before and we’ll say it again: if you want to maximise your returns and save yourself a loss on a rental property, you need to treat your property like a business. A big part of this means being steadfast when it comes to collecting the rent.
If your tenant is late with the rent or falling behind in payments then there’s no time to dawdle. You need to act swiftly to avoid a nasty loss on your rental property.
Go ahead and shoot your tenant a reminder letter urging them to pay the rent ASAP, or try calling them and letting them know in real-time.
“Loss of rent makes up around two-thirds of landlord insurance claims at ABM RentCover”
But, if it hits the 2-week mark and your tenant still hasn’t paid rent for that time, you’re now (legally) permitted to step it up a notch. Serving a non-payment termination notice will let your tenant know that they have 14 days to vacate the premises unless they:
- Pay the outstanding rent in that time; or
- Enter into a repayment plan as agreed to by you
Clamping down hard and fast on unpaid rent is important for communicating the urgency and seriousness of the issue to the tenant. As well, getting on it early on is vital if you want to claim back the full amount of outstanding rent, should the case ever go to tribunal or court.
You simply can't have a tenant that doesn't pay rent sitting in your rental property.
2. Conduct routine inspections
Checking in on how your property is doing throughout the year is one of the easiest things you can do as an owner, but it has the awesome potential to save you big in the long run!
Regularly inspecting your property has a good reputation for unearthing damage and other things in need of repair. Why is that good for reducing your rental lease costs?
Well, by identifying those leaky taps and those rogue pests early on, you can get on the problem before it snowballs into a much bigger, more costly fix. The last thing you want is to have a full-blown infestation on your hands.
On average, property managers conduct at least 2 inspections a year. That's a good mark for you to shoot for as well.
So, make sure you schedule periodic inspections (up to 4 times in a 12-month period) to be sure you’re saving on rental property maintenance costs.
3. Budget your maintenance
While you may not be able to invest in renovation costs for your property, you can make sure you’re not spending more than you have to on your annual maintenance bill.
It’s important to remember that property maintenance costs cover both general operating expenses like painting and pest control, AND capital expenses like renovation costs for rental property.
Here are the 3 formulas you can use to forecast just how much you should be spending on rental property maintenance costs:
- 50% rule: no more than half of your rental income should be spent on maintenance
- 1% rule: yearly maintenance costs should amount to 1% of your property’s value
- 5X rule: annual maintenance should equate to 1.5 times your monthly rental income
For a more in-depth explanation of these formulas, you can check out our article on budgeting for investment property maintenance.
Once you know your maintenance budget, you can start putting this into practice. How? By scouting the market for tradies high and low and then comparing quotes. By giving yourself a range of different price options, you can steer clear of having your repair costs exceed your maintenance budget and incur a loss on your rental property.
Unsure about where to start? Check out Hiretradies.com.au, they give you 3 free quotes for pretty much any maintenance job you need done.
4. Get landlord insurance
If you really want to cover all your bases, then getting landlord insurance should be way up there on your to-do list. After all, what’s a little monthly premium when you could be saving yourself thousands in the long run? Who remembers the NSW floods that happened in March? You sure don’t want to be stuck paying out-of-pocket for that kinda damage.
You never know when the unthinkable might happen. So, why not give yourself that peace of mind knowing that you won’t be stuck with the bill in the event of:
- Unpaid rent (from a tenant falling into arrears or absconding from your property).
- Robbery and vandalism.
- Flood, fire, damage from rainwater run-off and storm surge.
- Loss or damage to furniture and furnishings caused by tenants.
As a point of reference, Canstar stated that the 2018 average market premium for $450,000 building cover and $25,000 contents cover for a house sat at $1,495 a year. Still a small price to pay for peace of mind, wouldn’t you say?
A great thing about landlord insurance is that, depending on your personal situation, you may be able to claim it as a tax deduction.
So don’t leave yourself exposed like 55% of self-managing owners tend to do, cover your bases from the get-go with property insurance that works with your needs and your budget.
5. Claim all possible tax deductions
Investment property tax deductions are a simple way of reducing your rental lease costs.
Unlike residential properties, investment properties enjoy a hearty serving of tax benefits. So, when it comes around to tax time, you may well be able to get back what you paid on:
- Council and land rates
- Utility bills
- Maintenance and repairs
- Landlord insurance
- Advertising cost for rental property
- Strata Fees
- Property management fees
You can even claim certain expenses over a number of years, like:
- Borrowing expenses (costs associated with getting a loan)
- Capital expenditure (improvements to your property and depreciating assets)
- Capital works (structural improvements, alterations, and extensions)
But don’t jump the gun, some of these rental lease costs can only be claimed under certain conditions. That’s why it’s a great idea to make sure everything is on the legal up and up by having a chat with a registered property tax consultant about your personal situation.
Read our guide to investment property tax if you want to know more about exactly what you can claim.
6. Advertise at the right time
So your tenant is moving out and you’ll soon be stuck with a vacant property and a hole on your balance sheet. What's the right time to get your property up on the market?
Getting the word out there about 1 week before you plan to hold viewings is a good bet. That’s because advertisements receive the most inquiries when they first go up. Meaning you’ll have plenty of interest going into your viewing period.
And believe it or not, some months of the year are better than others if you’re scouting for new tenants.
Ideally, you’d want to list your property in January and February when the rental market swells with demand because most lease agreements expire around this time and people generally wanting to start the year afresh.
June to August experiences the second-biggest yearly surge in rental demand. Six-month leases are set to end and mid-year uni intakes are underway.
Advertise at these times and you stand a much better chance of receiving greater interest in your property. And with that comes the potential to charge greater rent because of the increased demand.
Not a bad way at all to boost your cash flow, offset your rental lease costs, and even recoup the advertising cost for your rental property.
7. Set competitive rent
Ironically, one of the biggest mistakes owners make when trying to inflate their rental return is pricing themselves out of the market.
Do this and you’ll be left within an empty property and some serious rental losses from having no cash flow to meet your mortgage payments.
But this financial jam can be easily avoided just by being competitive about how much rent you charge. Even trimming a few tens of dollars off your rent can go a long way in attracting tenants to your property faster.
In the long run, missing out on $20 or $30 a week is well worth it if it means getting your property out of an extended vacancy where you’re losing hundreds of dollars a week in rent, not to mention the advertising cost for your rental property.
You can get a sense of what price is competitive by hopping onto realestate.com.au. And looking at other properties in the area. You can also check out our article on how to conduct a rental appraisal, so you can personally evaluate what rental price you should be charging on your property.
8. Background check your tenants
Bad tenants are a surefire way of bumping up your rental lease costs.
Sign on renters who fall into arrears, cause damage to the property, and move out at a moment’s notice, and you’re guaranteed some pretty inflated rental lease costs. It means you'll have to advertise again, pay the fees, and also lose out on income from a vacancy.
Luckily, background checks are prime for sorting out the superstars from the duds. You won't usually find the perfect tenant, but you can find someone who is reliable and checks most of the boxes.
Use our tenant selection guide for landlords the next time you go on the look.
9. Use technology to help manage your rental property
Property management software now means owners can save big on time, effort, and rental lease costs!
Doubling down on real estate management software means that owners can overcome many of the problems the industry has been facing for decades.
The end result is:
- Happier tenants.
- More time saved.
- Improved efficiency.
- Better pricing and budgeting.
So, what property management software is available for Australian owners?
Well, if you’re wanting to simplify the property management process and not have to worry about keeping track of income and expenses, legal documents and reports, then here are some of the best technologies on the market:
- :Different Property Management
Like what you just read? There’s a lot more where that came from.
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