29/03/2010

It is a fact that happy tenants in an investment property are more likely to renew their lease and more likely to look after the property they are renting. It's also a fact that vacancy rates across most residential rental markets are starting to rise. So the question is, what's causing the increase in vacancy rates, and what can you do to keep your tenants happy, so they stay in your property longer?

Vacancy rates across most residential rental markets are starting to rise. So it seems the global financial crisis has finally started to affect what has been a very buoyant rental market. For the last three to four years property investors around Australia have enjoyed a very low vacancy rate, which in turn has resulted in rents increasing 8-12% annually in most rental markets.

However, the tide has definitely started to turn. The demand by tenants for rental property has decreased, resulting in rents starting to plateau and in some cases (mostly in outer lying suburbs) rents have even decreased. The very generous first homebuyers grant is partly responsible for this decrease in tenant demand. The recent Rudd government budget announced that 59,000 first homebuyers have taken advantage of the increased first homebuyers grant. This alone means that as many as 59,000 potential tenants are no longer in need of rental accommodation.

Additionally, we're seeing tenants more commonly sharing rental accommodation in larger numbers to reduce costs. At Rental Express we manage over 3000 properties across South East Queensland, and one trend we've noticed is an increase in demand for four bedroom houses. Typically two bedroom units and three bedroom houses have always had the highest demand, and while do, it's becoming more common for groups of four tenants to share four bedroom properties.

Steps to ensure you get quality tenants

A commonly asked question by property investors when talking to their property manager is "can you guarantee me a great tenant for our property?" The answer is that nobody can guarantee how a tenant will behave once they have leased a property, but there are certainly steps a good property manager can take to ensure the risk is almost eliminated.  These steps were covered in a previous issue of Your Investment Property magazine, and mainly focused on a rigid screening process.

It is important as an investor to ensure that only the highest quality tenants are placed in your property. This will reduce future problems related to rental payments and damage to your property.

Most property managers will have standard tenancy application forms that tenants are required to complete that include previous rental history, employers and income details and personal referees. It is important to ensure these references are checked.

There is a lot of work in properly checking the suitability of tenants, which is why you should always employ the services of a property manager. However, if you do self-manage your own investment property, here are a few tips for carrying out your application process. Remember the aim is to find out as much about the applicants as you can to ensure you are making an informed decision, so don't be afraid to ask too many questions.

1. Identification

Request sufficient identification from your applicants to ensure they are who they say they are. At least one form of identification should contain a photo. We insist on 100 points of identification using the same scale that financial institutions use when confirming the identity of an account holder.

Getting the right identification can help you piece together other information. For example, most people provide a drivers licence as identification so you can see what address/es they have listed on their drivers licence and ensure these match up with the previous addresses they have provided you with for reference checking.

2. Previous rental history

Request rental history for a minimum of three years. It is preferable to have references in writing and request a copy of their ledger so you can see the frequency of their rental payments made. Also, make sure you are not only asking if the tenant paid their rent on time, there is so much more involved in being a good tenant. You need to be asking questions such as:

  • how was the property maintained and presented when inspections were carried out?
  • have the tenants breached the tenancy in any way, including rental arrears or other breaches?
  • did the tenants have unapproved pets at the property?
  • were lawns and gardens maintained to an acceptable standard?

    how long did they reside at the property?

Would you rent to them again? This is a very important question. The tenants may have always paid rent on time, however, caused other damage to the property or been significantly difficult to deal with. The answer to this question may prompt you to dig a little further in your searches.

If they have put down a private landlord ensure you carry out the appropriate searches to ensure that person in fact owns the property. If they were living at home or with a friend, still call for a reference, you never know what they may tell you. If tenants have given you written references from previous agents or landlords, still call and confirm the information.

3. Employment and proof of income

Ask all applicants to provide you with recent payslips and their employer's details. You can often tell the stability of a person by how long they have been employed and what their employer has to say about them.

If the applicants are students ask for a copy of any government statements for proof of the benefits they are receiving. Also ask them for the name of university or learning institution, the course they are enrolled in and how far through their course they are.

It is important to also verify if the applicants can afford the weekly rent that you are asking for the property. A rule of thumb is to ensure that one third of their combined net income is equal to or greater than the weekly rent.

4. Search tenant database

Tenancy databases, such as TICA (Tenancy Information Centre of Australia), collect information on the rental history of tenants and give you an indication as to whether they have defaulted on a tenancy in the past. This information helps agents and owners decide if an applicant a likely risk.

It is important to keep in mind that delinquent tenants would only be listed if they have defaulted on a previous tenancy and the landlord or agent have listed them on such a database. While a large percentage of defaulting tenants are listed on such databases it is still possible for delinquent tenants to slip through the cracks. For example, they may be in the process of being removed from a rental property, however the agent or owner may not have listed them as yet as they are still in possession of the property and outstanding costs are still being finalised.

Some people question the validity or usefulness of tenant databases; however, in our experience we have found them to be quite useful. We have an office policy that anyone listed on TICA is not permitted to occupy one of our properties, no exceptions. Tenants are advised if they are listed on TICA during our application process and if nothing else this sometimes encourages people to finalise any outstanding debts so they can get off the TICA list and secure future rental accommodation. We have had tenants from the past come back and pay outstanding monies to us that had been outstanding for up to five years. In our experience, tenancy databases may not catch up with them straight away, but they do eventually.

It is important to keep in mind that there are multiple tenancy databases around, TICA is just one of the more popular ones. If a tenant has defaulted on a tenancy in the past they will generally either fabricate information on their tenancy application form or target self-managed properties as they are aware that most owners don't have the resources to thoroughly carry out reference checking.

Red alert!

Here are some warning signs that you should be cautious of and consider when processing a tenancy application.

Private landlords listed as previous rental history. Ensure you conduct the appropriate searches to confirm ownership of the property and ensure you are actually speaking to the owner of the property.

Gaps in rental history. Make sure if there are gaps that you ask the appropriate questions and gather further information. If tenants request for some of the applicants to only be 'approved occupants' rather than registered tenants. (A registered tenant appears on the lease, an approved occupant has permission to also reside in the property without being on the lease). Some agencies request that only registered tenants complete an application form, which means you may end up with people living in your property where the necessary searches haven't been carried out.

Tenants that apply for properties that are beyond their financial means or are relatively large in relation to the number of proposed occupants - this may indicate they plan on having additional occupants move into the property.

By following the guidelines above and carrying out all reference checks you will have the best chance of maximising your rental return.