Successful property investment hinges on taking your role as a landlord seriously, so make sure you know what’s involved.
As a landlord, if you manage your property and your tenants well, you’ll increase your chances of keeping good tenants and reduce your risk of losing money due to bad ones.
What are my rights and responsibilities as a landlord?
According to James Griffiths, Director of LJ Hooker Commercial, commercial landlords must:
- Maintain the property in a leasable condition
- Ensure the building is insured (although tenants are usually responsible for paying insurance, you should choose the policy yourself so you have control over what is covered)
- Adhere to lease conditions and legislation
- Ensure all the appropriate certifications are in place, such as the Fire Safety Certificate.
Residential landlords have fewer responsibilities. According to Amy Sanderson, Head of Property Investment Management for LJ Hooker, residential landlords must:
- Provide the property in a clean and tidy condition
- Allow for reasonable wear and tear
- Respond promptly to maintenance requests from tenants
- Follow legislative rules and guidelines relevant to their state.
All landlords have the right to:
- Receive rent in a timely manner
- Make sure the tenant adheres to the lease conditions
- Hold a bank guarantee (commercial) or bond (residential) as security over the property in the event the tenant goes into default.
Finding and managing tenants
Finding and managing tenants can be a time-consuming – and sometimes stressful – exercise.
Finding a residential tenant involves advertising, facilitating inspections, gathering applications, performing applicant reference checks and interviews. Ongoing property management is reasonably admin-heavy and involves ensuring compliance including payments, carrying out inspections, writing reports, organising repairs and maintenance and managing any disputes.
You can do all this yourself if you have the time and want to save the 5 per cent management fee charged by professional property managers.
However, Griffiths and Sanderson agree this is one expense you shouldn’t scrimp on, especially for commercial properties where leases are extremely complicated and finding a tenant requires good contacts and expertise. Property managers will help you find a good tenant and avoid the bad ones, which can potentially save you thousands by reducing the risk of property damage or missed rental payments.
Using a property manager
Both commercial and residential investors should start by finding the right agent. According to Griffiths, an agent who is active in the local area and has a strong understanding of comparable properties in the market will be able to advise you on how best to market your property, giving you the best opportunity of finding a good tenant.
The key benefits of using a commercial property manager are:
- They will understand the legal requirements around negotiating the contract and leasing the property
- They have a database of potential tenants and existing relationships so can expedite the process of finding a tenant by contacting them directly
- They can negotiate directly with the tenant on your behalf – often a difficult task, particularly for the uninitiated.
Commercial landlords should always ask to check tenant references and ensure they understand the deals negotiated in the lease.
Residential property managers will:
- Ensure the property is marketed well with professional photos, online listings, letterbox drops, signboards and property list brochures for local businesses
- Use their database to find ‘on-market tenants’ actively looking for a rental
- Cross check their database for tenants with a poor rental history and inform you of other applicant ‘red flags’
- Carry out time-consuming administration such as inspections, reports and tenant communication
- Provide tried and tested tradesmen for repairs and maintenance, often at better rates
- Advise on price setting and ways to maximise your return.
The residential and retail leasing markets are both heavily regulated. Each state has its own legislation covering the lease of these premises, under the Retail Leases Act 1994 and the Residential Tenancies Act 2010.
As a retail or residential landlord, your rights are set out under the legislation for each state, as well as in your lease. In the case of a dispute, reading the lease contract may be enough to settle the matter. Otherwise, tenants and landlords must attempt negotiation or formal mediation to try to come to an agreement before taking the matter to court. If the dispute does escalate, however, landlords should contact the Office of Fair Trading for advice. Be aware that residential tenants have many rights and are well supported by the Residential Tenancies Act.
Non-retail commercial leasing (office and industrial leases) is subject to less regulation, leaving these commercial tenants and landlords to agree between themselves. If a dispute arises that is not covered in the lease contract, Griffiths recommends talking directly to a solicitor. Disputes can be disruptive to business and are costly so are ideally settled swiftly.
Property managers can provide invaluable support and guidance in dispute resolution. According to Sanderson, managers provide an objective third-party voice, helping tenants and landlords follow legislative guidelines and avoid liability claims. If the dispute does go to court, your property manager can represent you.
Benefits and liabilities: Commercial vs residential
- Shorter leases require more time and effort in finding new tenants and create less income stability and cash flow.
- Tenant difficulties (petty grievances, property damage or missed rent) are common and legislation makes it hard to remove difficult tenants.
- The bond sometimes falls short of covering property damage and missed rental payments.
- Landlords are responsible for most expenses, including maintenance and repairs, insurance, rates and property management fees.
- Maintenance is lower – a new paint job, new carpet and keeping fixtures in working order is generally enough, although you will still need to cover expenses.
- Lease contracts can be complicated and blue chip tenants may have a professional negotiator pushing for the best deal for the tenant – many landlords appoint a specialist lawyer/manager to negotiate on their behalf.
- Maintenance can be very expensive, such as installing new air conditioning, refitting the premises, upgrading fridges and freezers or removing asbestos, although the tenant may bear some expenses.
- Commercial property is not a very liquid asset and can be difficult to sell in a slow market.
- Longer leases provide stability of income and generally require less time and effort in tenant management.
- The lease often includes a ‘make-good’ clause so that if the tenant doesn’t extend the lease they are obliged to return the property to its original state.
- If the tenant defaults on the rent, the lease is underwritten by a guarantor (often a bank).
- Commercial tenants are usually more reliable and less likely to damage the premises, reducing the time, effort and money required from the landlord.
Keep up with Commercial Real Estate news.
Keep up with Commercial Real Estate news.