If you are looking to diversify your portfolio into a safe and secure channel, purchasing rental property should be your target. You will not only gain long term wealth through appreciation of your property, you will also start earning passive income that comes as an end result of the investment. Passive income might look like an attractive and easy option to make money without any effort but in reality it is not so. A lot of time and effort has to be given to maintain the property and attract credible and respectful tenants. It is important to be able to identify the red flags when interviewing potential tenants and take remedial action.

Here are a few pitfalls that you as an owner of a rental property should meticulously avoid.

  • Not knowing your tenants well – Don’t rush into leasing out your rental property just because you want to minimise the vacant periods. When reviewing tenants and checking their antecedents, red flags to look out for include weak or bad references, prior evictions and frequent changes in employment. However, take an overall view before judging a potential tenant. It is quite possible that he/she might have gone though a lean period and is now on a secure financial footing. However, if you have a property manager, seek advice before finalising the final list of candidates with whom you will be comfortable with.
  • Not knowing the rules well – There are specific tenancy laws that govern administration of rental properties and not being aware of them will only create problems for you leading to unwarranted litigation in future. These include property maintenance guidelines, responding quickly to requests for repairs and providing tenants with required notice for inspections, rental increase and lease terminations. Different States in Australia have their own set of laws regarding Landlord responsibilities. Some of the bodies that fix policies in this regard are Fair Trading in NSW, Consumer Affairs in Victoria and Department of Commerce in WA.

Similar is the case with vehicles too. For example, the State of Victoria has strict laws governing issuance of roadworthy certificate in Melbourne which all authorised and certified garages have to follow.

  • Underestimating maintenance costs – While you do get a steady stream of rental income every month, there will also be recurring monthly expenses. On an average, the operating expenses (total expenses plus total rent) should be between 35% and 80% of total rent collected. Anything less than 35% means that you have miscalculated your operating expenses. Another parameter is the maintenance and miscellaneous costs which should not typically exceed 1% of the property value.
  • Having verbal agreements – Landlords often tend to convey decisions to tenants or accept their requests on an informal and verbal plane. This should be avoided at all costs as you will be in a weak position should any disputes lead to litigation in future. All interactions with clients must be supported by written and signed documents as these help to ensure tenancy privacy and lease terms. Even copies of emails and phone conversations should be maintained carefully.
  • Not taking help of property management services – If your focus is acquiring rental properties and increasing your investment portfolio you will do well to take professional help to micro manage them. Finding and managing clients, property repairs and accounts functions and maintaining tenant relations can all be entrusted to property professionals. However, before hiring one, check on their past experience and expertise and whether they are licensed real estate agents or taxation accountants. Get the best people working for you, just like you would take your car to a certified garage and service station only for car air conditioning regas.

Avoid these common pitfalls and you should be able to get handsome dividends from your investments in rental properties.