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A tenant who pays rent on time and treats your property as you would is worth their weight in gold. They'll give you greater financial certainty, peace of mind, and spare you unnecessary stress.
On the other hand, the wrong tenant can increase maintenance costs, disrupt your cash flow, hurt neighbourly relations and drag you into frivolous disputes.
Your Investment Property magazine recently reported the story of a Narangba property investor whose tenant accrued $3,000 in rental arrears and caused significant damage, before abandoning the property - leaving behind a $7,000 repair bill.
The reality is that problem tenants are out there, and part of good property management is ensuring the risks are minimised.
As with many things in life, prevention is better than cure!
Leasing short cuts lead to bad tenants
Many investors unknowingly increase their risk by taking short cuts in the leasing process.
Superficial tenant checks and first-in-first-served letting is still common practice for many investors and property managers when facing a looming vacancy.
But here’s a breakdown of why this approach is not worth the costs and risk:
- Accepting the first application, regardless of the quality or suitability of the tenants may bring in an extra week’s extra rent. That’s a gain of, say, $400.
- However, a property manager that short cuts tenant checks may also take short cuts on the entry/exit report – so you can end up having to pay for hundreds of dollars in costs which should have been covered by the outgoing tenant.
- Late rent payments and/ or unpaid rent: a few weeks’ late rent could easily amount to $1200.
- The costs of re-letting your property when the tenant leaves unexpectedly, and the property manager doesn’t have the know-how to go to tribunal, will be several hundreds more.
As you can see, costs can quickly accumulate and hurt your overall returns.
Now, here’s the right way to vet new tenants
Vetting tenants for suitability up front is a much better strategy. Here are some of the criteria we follow on behalf of our clients:
Can the tenant afford the rent?
Your tenant's total net household income should be at least three times the weekly rent. This must be verified with their employer. More stable employment is also desirable - tenants with short, sporadic work histories may present a risk.
What is the tenant’s rental history?
Past behaviour is the best indicator of future behaviour, so rental history is extremely important. We check for red flags such as multiple broken leases, or a numerous short term leases and always obtain a rental reference from the manager of the previous property they were renting.
Has the tenant been checked against tenancy databases?
Unlike affordability and rental checks, tenancy databases can provide a long-term view of a tenant's rental history, extending well beyond their last property and if they have been black listed on a tenancy database for severe lease breaches, then we need to know. We vet all potential tenants against Australia's largest Tenancy History Database, TICA, as part of our standard application checking process to minimise risk for our owners..
Do you have watertight rental agreements?
We’ve seen property investors secure a “Note of Guarantee” from prospective tenants, believing that will protect them if the tenant walks away leaving unpaid rent and damage behind. It does not. It's best practice to ensure all Guarantors sign the lease agreement.
Saying 'no' isn't a luxury - it's a necessity
Many property investors claim they don't have the luxury of turning away less-than-ideal tenants. However, if your applicants aren't making it through the above criteria, then you don't have a tenant problem - you have marketing problem.
In order to be strict with tenant approvals, you also need to have a steady influx of prospective tenants and applications, allowing you to pick and choose the tenant you want.
This is why we put so much effort into tenant marketing at Rental Express. This means we’re able to rent our client’s properties more than twice as fast as the overall industry average, without sacrificing tenant quality.
By Simon Waide, Rental Express