From time to time I have been approached by unsatisfied investors, perplexed about their below average investment property performance. Sometimes poor performance is caused by unassuming issues, generally created by a lack of understanding and by not paying the attention to certain details.
Here are some of the issues that could cause trouble:
Poorly negotiated leasing agreements – occasionally landlords enter into an agreement without being fully aware of certain financial consequences created by particular agreed terms and conditions. Most common examples include: when the agreement is made for short multiple periods (i.e. 5 terms of one year each), the implementation of no (or very minimal) rent increases, or extraordinarily high incentives given to the tenant (considering the duration of the term).
Management agreement is not in line with leasing agreement(s) – this is not so rare an occurrence as one would think. Although in many instances the tenant is responsible for the cost of the ongoing management of the property, there are some fees charged by the agency that are not a part of the tenant’s financial responsibilities. Fees such as the lease renewal fee and rent review fee are among these. In simple terms, if the lease is one of those 5x1 year leases, every year a lease renewal fee and all associated legal costs will be chargeable, and that alone could be enough to deteriorate a landlord’s bottom line. There is a similar situation with rent reviews in that the negotiated rent increase could be the same amount or less than the charges applied. Most often this is the case with relatively small leases.
Wrongful tenant selection
- It takes knowledge, experience and common sense to match a tenant with a property. Some businesses, although financially sound and in any other way solid, could damage the building if the building is not designed to handle the types of operations performed. In some instances, the damage shows long after the tenant has moved on, leaving the repairs for the landlord to handle. Some concerns affecting industrial properties are: vibrations, environmentally hazardous substances, use of heavy machinery, loading over maximum floor limits etc.
- When the property is not suitable for the business operation, the tenant will use the first available opportunity to terminate the lease and move on. This mismatch of tenant to property creates frequent tenant changes resulting in higher vacancy rates and unnecessary leasing costs.
Reactive Maintenance style – if the landlord treats the property with disrespect and does not have a plan for regular (either seasonal or periodical) maintenance, he/she might find themselves caught out financing a major refurbishment or essential equipment replacement when they are the least prepared for it. The costs associated with this style of maintenance can be significant.
Landlord and property manager are not switched on
- Understanding the lease and financial responsibilities of the parties – in some instances, even though the lease is based on sound principles; the tenant is not requested to reimburse the landlord for all charges and impositions that they are entitled to in accordance with the stipulations of the lease.
- Control all costs associated with the property – it is very important to diligently monitor all property charges regardless of who is ultimately responsible for them. Strata or community corporation fees, council rates, electricity and building insurance are the most common charges that could easily spiral out of control and have a damaging effect. They could become unbearable for the tenant and force him/her to vacate, or they could irreparably damage the relationship between tenant, landlord and agent.
These are most obvious, practical reasons for the poor performance of investment properties. If you have any question or would like further clarification please do not hesitate to contact the author.
OUR common sense - Key for YOUR success