A large part of managing a property investment requires a good working knowledge of the costs associated with such. Every landlord dreads that midnight phone call: my key is broken and I can’t get in or the early morning: the geyser is broken, there’s no hot water and I need to shower for work. Being a landlord is very capital intensive, starting with the costs of acquiring the actual property and the costs relating to maintenance, repairs and fixing damages, especially the unscheduled type. This is also generally a very ‘touchy’ subject between landlords and tenants: I was once asked to come replace light bulbs.
Generally there are two types of costs associated with managing a property, direct and indirect.
Direct costs include:
- refuse removal
Indirect costs include:
- building insurance
- rates and taxes
- reasonable wear and tear (the most controversial)
- structural repairs and damages
Direct costs such as water, sewerage and refuse removals can be tricky when dealing with sectional titles as these tend be a part of the levy account for which the landlord is liable. Installing individual metering could help dealing with this so that a tenant knows that they are responsible for such costs and if they do not pay, they will be cut-off. Direct costs can also be tricky on free standing property as water, sewerage and refuse removal are often billed as part of the rates charged by the municipality which is an indirect cost attributable to the landlord.
It can be very temping for a landlord to charge any and all costs to a tenant and for tenants to try and get landlords to pick up the bill for everything. In order to avoid confusion, these costs and who is responsible for such costs must be explicitly covered in the lease agreement.
Landlords are also responsible for costs associated with reasonable wear and tear which includes deterioration in the condition of the leased premises, caused by normal, everyday use during the period of the lease. Wear and tear also refers to damage caused over time by the elements include exposure to sunlight, rain and other natural forces. Considering how controversial the issue of wear and tear is it is suprising that there is no fixed test for what reasonable wear and tear will be and this will largely depend on the type of property and intended use. It can for instance include a carpet being warn due to day to day use.
Reasonable wear and tear however should not be confused with damage/deterioration that is outside of the excepted norm caused to the property by a tenant. Such damage/deterioration can be caused by negligent or accidental destruction or damage to the leased premises. Examples include a carpet being ripped while items are moved, stains which cannot be removed easily by professional cleaning, nails hammered into walls in order to hang pictures, or even painting the walls a different colour without the landlord’s consent.
Note: DO NOT hang pictures or make any structural changes to a leased property, fixing this is expensive and will deplete your deposit.
The general rule is that, if a tenant has damaged something that does not normally wear out or has substantially shortened the life span of something that does wear out, the tenant can be charged for the replacement cost of the item or a prorated cost in which instance the landlord should take into account how old the item was and how long it may have lasted had it not been damaged by the tenant, as well as the cost of replacement.
In short (as a tenant), if the roof leaks, a plumbing pipe or geyser bursts or there is an electrical short circuit (not caused by over loading the system or dodgy irons) – call the landlord. For anything else: ask yourself, did I do anything to break this, if in doubt – fix it! and tell the landlord so that they are aware and can inspect the repairs/replacement. The landlord can direct that you re-fix any work done if they are not satisfied with the quality of the workmanship, so tenants should ensure that any repairs completed are done to the best quality.
Where landlords and tenants have agreed that the tenant shall pay for municipal cost, even though these are generally indirect costs. Make sure that as the landlord you continue to receive the municipal statements opposed to having these sent to the tenant directly. This will help you ensure that these costs are paid timeously and not leave you with a major shock and bill owed to the municipality at the end of the lease when you find out the tenant was not paying.
Importantly for landlords when considering an investment property, factor in the cost of indirect costs associated with the property into the rent, not as an additional amount to the going rent rate of the area but as part of the rent amount to be paid – see this as an operating costs. Also, it is important not to try and overburden your tenant with too many costs to the tenant, especially if you have a tenant you want to keep rather be prepared to negotiate and compromise a bit.
If possible try and build up a maintenance reserve account over time. Monies saved in this account can be used to for any unscheduled repairs or damages.
Times are tough and building/maintaining a property portfolio in a distressed economic environment is difficult, finding a good credit tenant is even more difficult. Do not fall into short term thinking: avoid the common pitfall of trying to get the most money out of the tenant and rather keep a tenant that pays on time each month and focus on meeting your long-term investment goals as opposed to a quick buck.
*Disclaimer: The contents of this article should not be considered as legal, professional, financial or any other form of advice. These are merely views based on the writer’s personal experience. Readers should obtain independent advice on any matter prior to making any decision.