Monday, 11 June 2012

Investing in Real Estate: Before leasing your property

This is my twelfth post in my Investing in Real Estate series which will cover the basic things you should do before leasing your property.  No property is ever going to be in perfect condition when you buy it and the pressing question for a lot of first time landlords is how much should I do (and more importantly what can wait)?

Broadly speaking, repairs and maintenance falls into three categories - the essentials, the things you really should do before you try and lease your property and the things that can wait and I'll cover each of these below.

The essentials

Most of the essential repairs and maintenance are pretty obvious but should never be forgotten or put off.  At best you will have some very irate tenants or will find it hard to lose the property, and at worse you could be sued for negligence for any injury sustained by the tenant.  Essential things to cover before leasing your property include
  • Any repairs / maintenance that are necessary to the structural integrity of the house and making it livable 
  • Complying with all relevant legislation.  For example, in Australia all rental properties need to be fitted with working smoke alarms. 
  • Getting rid of any pest problems such as rats or termites

Things that DON'T HAVE to be done but you SHOULD before you lease your property

The things which fall into these categories are not strictly necessary but if you want your property to be leased then you should do all or most of these things.  When prospective tenants are looking at a house they are trying to imagine themselves living in it.  The more you improve the property the easier it will rent and the more rent you are likely to get (note that you need to be careful not to overspend on these items)
  • Make sure the house is spotless:  This means cleaning, dusting, polishing where necessary.  It will take a couple of hours of your time or you can hire professionals to do this but nothing will put prospective tenants off more than a dirty house
  • Paint the doors:  You don't need to paint everything in the house (as a full repaint can be rather expensive) but the things that people notice first about every room is the door when they go to walk in.  Doors also suffer from scuff marks, dents etc so are most likely to need a bit of love.  Buying one tub of white paint with a gloss finish should be sufficient to do most of the doors in the house and for that relatively low cost and effort it lifts the house more than you can believe
  • Clean / mow the garden and get rid of weeds:  Your front yard is the first thing your prospective tenants will see and the back yard is where they will imagine spending time with their family and friends.  It doesn't need to be landscaped - just neat!  My property's yard was overgrown and there were weeds growing through the brickwork at the back and it looked pretty bad.  I paid a gardener $100 and he fixed it in a day!
  • For rooms that do not have walk in robes - buy some decent cheap cupboards:  This one was a piece of advice given to me by another property investor which I used!  Everyone needs robes in their house and not all tenants have their own.  A lot of houses have built in wardrobes in every room but not all (one of the rooms in my house didn't).  The easiest way is to go down to the local second hand store and pick one up - they are relatively cheap and are a tax deductible expense.
All of the above items are relatively cheap (or free if you are willing to do it yourself) and make your property that much easier to rent.  There is a danger in doing too much before you lease because for a given area there is only so much that people are willing to pay before they think they can go to a better area so your rental rate is always going to be capped.

Also in some jurisdictions (e.g. Australia) there are tax consequences of doing 'improvements' before the property is leased.  Repairs and maintenance are considered expenses but improvements are added to the capital value of the house which is a negative from a tax point of view.  Things that are done before the property is leased are generally considered improvements.

Things that can wait

These repairs are those things that are not essential to the structural integrity of the problem, are not likely to be an issue for a few years and are expensive to fix (or are nice to have but do not add significantly to the rent you are likely to receive).  Examples of this include
  • Brand new carpets:  Everyone likes brand new carpets but the cost is often prohibitive when compared with the increased rent you are likely to receive
  • Non core structural issues:  This includes things like cracks in the wall.  Every property gets cracks in its walls and it is not often a big problem.  If you wait for a few years it can be classified 'maintenance' and you can get a tax deduction for it.
  • Heating / cooling:  This really depends on the climate in which you live.  Where I live it is a pretty temperate climate so a basic heating and cooling system is sufficient.  A lot of first time landlords try to imagine what they like in their house and install that for their rental property but rarely make the return of this.  You need a basic system to keep the house comfortable but that is about it
  • Painting the whole house:  This does not need to be done to get tenants.  See my comments in the previous section
There are lots of other things that fall within this category.  The important thing is not to spend too much money and overcapitalise your property.  This is still an investment and you need to make your return.  At the same time you never want to be a 'slum lord' and rent out a property that is terrible and unlivable.  Always weigh your tenants needs and desires and your property will always be in demand.

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