Factors to consider before buying an investment property

Become a landlord with the right property investment.

Buying an investment property and becoming a landlord is something that can be hugely lucrative, providing you with ongoing income for years to come and leaving you with something of real value once you have paid the mortgage off on the property.

Of course, as is the case with any long term financial investment, you need to ensure that you do some research before choosing to buy an investment property. You'll be faced with a number of important decisions during your property investment journey, and making the right decisions can make all the difference between a good and bad investment.

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Important considerations when buying an investment property to become a landlord

It is important to look at a number of important considerations when you are thinking of property investment as a landlord. Buying a property to rent out to tenants is different than buying a property as an owner-occupier. You need to look at the property as a business venture. Some of the considerations that you need to bear in mind when it comes to finding the right property for your investment include:

  • The initial cost of the property: Whether you are paying cash or borrowing to buy an investment property, you need to ensure that the property fits within your budget. Make sure you work out a realistic budget and stick to it.
  • The property's target market: New research from Mortgage Choice revealed that two-thirds of property investors already have an ideal tenant in mind when they begin their property search. You need to work out who your target tenants will be. For example, some landlords prefer to rent to singles or professional couples whereas others will consider students or families with children. The features of the property you buy should be influenced by the ideal tenant you'd like to live there. If you want to rent to a professional single or couple, a one bedroom apartment might be ideal. If you want to rent to groups of students or families you will need to look at a larger house.
  • The area in which you buy: The area you buy in should be in-demand and fit the target demographic you'd like your property to appeal to. It should also have the potential to generate long-term capital gains. While your short- to medium-term goal is to have the property tenanted, your long-term goal will be to sell the property for a profit. Research buying and selling trends as well as rental vacancy rates to find an area that can help you achieve both of these goals.
  • The upkeep of the property: In order to maximise your profit, you'll want to choose a property that requires as little maintenance and ongoing repair as possible. Look for hard-wearing, low maintenance flooring. Ensure the roof and foundations are in good repair. Look at the conditions of the fittings and the state of kitchen and bathroom facilities to ensure that they are in good condition.
  • The rental returns: You'll need to balance asking rent that is high enough to help cover the mortgage payments and ongoing costs associated with owning the property with rent that is reasonable enough to remain competitive. Research properties in the area of similar size, with similar features to get an idea of a fair market rent.
  • The management of the property: You'll need to decide whether you want to manage the property yourself or enlist the aid of a property management company. While a property management company will mean additional costs, having a buffer between you and your tenants may save you time and stress in the long run.

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What are the different types of tenancy agreements?

A fixed term agreement is where the tenancy is fixed for a given period of time, which is normally 6 -12 months. This type of agreement must specify an end date.

On the other hand, a period agreement is set for an indefinite period of time. Generally, you move to a periodic agreement once a fixed tenancy agreement ends.

Government websites

To find out more about your rights and responsibilities in your respective state or territory, visit your relevant government website below.

Most government departments, such as NSW Fair Trading, outline the rights and responsibilities of landlords. This includes responsibilities when starting a tenancy, during a tenancy and ending a tenancy as discussed below.

Starting a tenancy

  • Provide tenant with agreement. You must provide a copy of the tenancy agreement to the tenant at the time that they sign it. If the agreement is set out for a fixed period of more than three years, you’ll need to register it with your government department, such as the Land and Property Management Authority in NSW.
  • Complete condition report. The condition report identifies the general condition of the property including the fittings and fixtures. It’s a good idea to take photos or videos to supplement the condition report. The tenant must complete their part of the condition report and return it to you within seven days of receiving it.
  • Collecting the bond. As a landlord, you’re responsible for collecting the bond. This acts as security in the event that the tenant breaches the tenancy agreement. Generally, you cannot charge more than four weeks of rental bond.
  • Lodging the bond. You must lodge the bond with your state tenancy authority.
  • Collecting rent in advance. At the start of the tenancy, the tenant can be required to pay the first two weeks of rent in advance. Keep in mind that this is not another form of bond. Instead, the tenant is paying for the rent two weeks in advance.
  • Safety and security. Most state governments have rules surrounding smoke alarms, swimming pools and spas, and window and balcony safety. Visit your state government website to learn more about your responsibilities in upholding safety and security standards in your property.

During a tenancy

  • Give notice prior to entry. Your tenant is entitled to some peace and quiet which means that you must give notice before you visit the property. The length of notice that you must give before entering the property depends on the reason for visiting the property. Generally, to inspect the premises you must give at least seven days written notice and to conduct ordinary repairs you must provide at least two days written notice. To carry out more urgent repairs, you may not be required to give notice.
  • Increasing the rent. Whether property values have risen in the suburb or you’ve renovated a part of the property, there may come a time where you increase the rent. If you do so, there are certain rules you must consider. For instance, in NSW, you must give the tenant at least 60 days notice in writing before the date the increase becomes payable.
  • Dealing with non-payment of rent. If your tenant has fallen behind on their rent, you can provide them with a termination notice giving them 14 days to vacate the property. Typically, you should include a statement that informs the tenant that they do not have to leave the premises if they pay the outstanding rate by a given date. You may want to negotiate a repayment plan if possible.
  • Handling alteration requests. A long-term tenant may ask to upgrade or change the premises. The tenant must seek your written consent before they conduct any renovation or upgrades on the property.
  • Managing sub-letting requests. If a tenant wants to sublet part of the property, they must ask for your written consent. If the tenant wants to sublet or transfer the whole premises to someone, approval is at your discretion.
  • Dealing with issues. NSW Fair Trading provides a free complaint service for tenants, residents, landlords and property managers with tenancy-related matters or disputes. Fair Trading can assist with tenancy matters related to repairs and maintenance, alterations to the property, non-compliance with tenancy agreement, and much more.

Ending a tenancy

If you want to end a tenancy agreement, you must follow certain procedures that are stipulated by your state government.

If you would like the tenant to leave the premises, you must put forward a written termination notice. It must specify the date that the residential tenancy agreement is terminated and the date in which you require the tenant to vacate. Typically, you need to provide at least 30 days notice if the agreement is due to expire or 14 days if the tenant has breached the agreement.

In some cases, it may be necessary to make a bond claim. Generally, you can make a claim to cover:

  • Unpaid rent.
  • The cost of repairing damage.
  • Unpaid water usage costs.
  • Cleaning costs.

Contact your state government department to find out how you can claim the bond.

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