Property Hub - Investment Insights & Inspiration - Realty Talk - Rethinking long term tenancies

Episode Date: September 19, 2024

How long is too long when it comes to a tenancy agreement?  Is that even a concern?  Jo-Anne Oliveri thinks so and in this show she makes some very good points that every landlord needs to consider on this subject.  She challenges the fact that your property manager boasts about how long their average tenancy is - the impact on the property of a long tenancy and the property’s viability as an investment.  Then we turn our attention to the growing cost of owning a property in a Strata development with Amanda Farmer one of Australia’s leading strata law specialists.  Subscribe for free to Realty Talk on the Property Hub channel, join our community and get more insights here: https://linktr.ee/propertyhubau Property Hub is a collaboration between Bushy Martin from KnowHow Property, Kevin Turner from Realty, Andrew Montesi from Apiro Marketing and Apiro Media, and Australia’s largest independent podcast network DM Media.See omnystudio.com/listener for privacy information.

Hello and welcome to the show. How long is too long when it comes to a tenancy agreement? Well, is that even a concern? Joanne Olivieri thinks so. Property managers want to take the road of lease resistance and that is for them it's easier to leave the tenant in the property than go through the vacate and then the process of finding a new tenants. So typically what they do is they'll advise the owner they're a good tenant, you should keep them in the property. Joanne makes some very good points that every landlord needs to consider on this subject and she does that today in the show. She in fact challenges the fact that your property manager boasts about how long their average tenancy is, the impact on the property

of a long-term tenancy and the property's viability as an investment. A lot to cover there, and Bushy and Joanne will kick off this week's show in just a moment. And then we turn our attention to the growing cost of owning a property that's in a strata development. But before we start the show today, I want to thank our supporters and content partners realty.com.au, BMT Tax Depreciation, Know How Property Finance, and Apiro Marketing. You'll find us on all podcast players as The Property Hub, also on the Southern Cross Austereo Network, also on Hot Copper, and on all social media platforms.

Property deductions can save you thousands of dollars each year. To make sure you maximise deductions, you need to work with the most experienced quantity surveyor in the country. BMT Tax Depreciation is the leading specialist in the industry. They've completed over 700,000 tax deduction schedules for residential investment and commercial properties Australia-wide. BMT guarantee to find double your fee in the first full financial year deductions. Call BMT on 1-300-728-726 today for an obligation free quote. Realty Talk and your host Bushy Martin. Now most investors are led to believe that the longer the length of a tenancy the simpler the easier and the better for landlords. But is this really the case? Well to challenge the potential

folklore assumptions surrounding this we're joined by author, award-winning global property management thought leader and founder of iRevolution, Jo Oliveri. I can't even say it, Jo. So welcome back to the show. Hi, Bushy. Thank you. It's great to be here. Yeah. And we had a great conversation recently. So we're looking forward to jumping into this subject because it's certainly one that doesn't get much people's attention. And there's a few myths, I think, surrounding some of this. But it's clear that long unending leases are certainly assumed by most to be the the ants pants for investors landlords joe so what's the general advice that landlords hear from most property managers when it comes to tenant and lease

longevity and and why yes yeah well um property managers want to take the road of lease resistant and that is for them it's easier to leave the tenant in the property than go through the vacate and and then the process of finding a new tenant so typically what they do is they'll advise the owner they're a good tenant you should keep them in the property well you know what constitutes a good tenant you know is that someone who pays the rent on time abides by the terms the conditions of you know their general tenancy agreement it's really about what the owner wants from this property and most property uh you know they're available so the owner makes money out of it so you know they've they've they've got a long-term asset that they need to grow and and you know

leaving a tenant in it's not a way for them to buy yeah that's an interesting thought so from your perspective and your experience then joe how long is too long for a tenant to stay in a property and why yeah well ideally i think a tenant should be in a property no more than five years you know three years is a good turnaround and what that means is you know the the tenant when they're in there obviously there's wear and tear and the myth is that there's more wear and tear from a tenant moving in and out when it's actually the other way around when someone stays in the property they become the property and the property is suddenly you know like the way they like it um and you know all of this uh wear and tear and repairs and everything

they they don't get attended to because there's no movement in and out of the property and what happens is it tends to build up and then the tenants so you know like they're saying well why increase the rent when things are wearing out and you know there's wear and tear it's like we've got to think differently about you yeah it's a it's a really good way to reframe the exercise and something that a lot of people aren't thinking through can you sort of run us through a bit of an example that compares a much longer term one with with an ideal one so that we've got a sense of what what that looks like yeah absolutely i think you know if we look at rent of say two thousand dollars a month you know what you see the longer it goes on the um the more we're

losing so if we've got a tenant who stays in there uh you know they renew year year two um the rent might have gone up to 2040 a month and that's about what market is the next year uh we're going to say oh you know they've been good tenants well just to increase it to 2080 let's do another $40 increase and we can probably get $2,200 for that rent for that property then the next year we're looking at you know oh let's just increase it $40 more yeah $40 is okay last year and now we're getting further behind because we can probably get $2,300 so you can see the longer it goes then the more apart it becomes and if you kind of like at year five what we're looking at it's a $200 difference get to year eight we've got about a $600 difference a month that's a lot

of money that they're losing every month so you know like it when you look at the numbers you analyze the numbers you start to understand it's okay to turn the tenant over yeah it's really interesting that accumulated effect both on the where it's here but also on the on the missed rent because you're trying to be kind to a long-term tenant and look after them but in in the process you're doubting yourself uh of potentially significant uh rent that you could be getting uh if you were relating it so we're very interesting so you've touched on this already joe but uh i just like you to confirm your thoughts on what you think is the ideal length of a of a tenancy then uh and why you think that's the case yeah yeah so you know ideal length is

three years no more than five years and the reason why we say that it's not just the rent that you're using but when a tenant moves out after you know like five years we start to see the enormous amount of repairs and maintenance and replacement that needs to be done so it adds up so we've lost rent as a result now we've got this huge cost in uh you know getting the property what I say tenant ready and during that time we've got vacancy whilst we're doing all that work as well so when you add up everything you're losing a lot of money by keeping the tenant in and you know leave it longer and you can have repairs of hundreds of thousands of dollars or more and I've seen this with properties so you know like how long should a tenant stay in no more than five

years and if you think about it depreciation of items is every seven years in a property so you put a tenant in the property longer than seven years their entry condition report you know is irrelevant when they move out anyhow so you know there's a lot of things to take into consideration there. Now very good thoughts I'm interested in your thoughts also and I'm putting on the spot here a little bit but given there's a lot of legislation changes that are rippling out right across the country uh in terms of residential tenancy legislation reforms there's a real push to uh ensure longer leases and longer stays for tenants given the protections that are put around that uh how are investor landlords and or property managers able to navigate and

negotiate that between the legislative requirements versus the the ideal sorts of frameworks that you're talking about that's a really interesting question because you know property managers are still reluctant to do more than a 12 month lease um you know some are still trying to do six months which doesn't fall in line with when rent increases can take effect now so um look we're going to go down this path we can do longer leases increase the rent because i believe that property managers should be market speculators as well we need to know where the rent's going to and we take the market there so when we forecast long term we're able to take the market to where it should be but then also because we're doing uh you know inspections on the property we understand what's

going on we're helping the owner to reinvest back into that property along the way so you know it's not a a shock when the tenants move out saying my goodness what happened to my property i love that It certainly gets away from that set and forget exercise and then have a massive bill in between times and promotes that sort of preventative maintenance approach to sort of continuously looking after the property. So to sort of wrap it up, Jo, if you were to summarise your thoughts on better tenant tenure strategies, what would they be? Yeah, I would say if you've got a rental property, then what you need to do every time that tenant lease is due for renewal, go through the number. it. Have a look at what the property manager's been picking up when they've gone and done the routine inspections or the in-resident inspections. Go through that. Talk it over with your property manager. It's like, what do we need to do in order to get my property to market

rent? And if my tenant can't afford to pay that, that's fine. It's market rent because that's what the market is determining that the market will pay. So don't be afraid to lose the tenant. You're not losing money by losing the tenant, yes, you've got a cost. But if you've got a very good property management company, they'll have everything ready to go. So when that tenant moves out or in there doing the repairs, we've already got someone to move in. So, yeah.

Great thoughts. Very good suggestions. And I'm sure that's going to get people to sit up and have a long think about this. So I really want to thank you for giving your eye-opening insights to continue to question and challenge the conventional wisdom around investment properties joe and as you've reinforced there's a real need for investors to continuously take a much more longer term strategic financial and business-like approach to the

performance of their properties rather than just adopt the assume an easy route so thanks again for sharing all this is here on the show today my pleasure at know how property we're more than just the best residential and commercial loan arranger we craft a plan for your lifestyle and future with our three-stage strategy we start with your lifestyle strategy whether it's fighting your dream home in the perfect location or adding to your residential or commercial portfolio we listen to what you want and need to do next we create a financial strategy we dive deep to uncover what you can do ensuring your finances are set up for success finally we implement our validation strategy we become your john west of property because it's the property we reject that makes

sure you get the best know-how property smart tailored strategies for your life and investments unlock bonus content now as a premium subscriber now depending on who you're talking to between two and a half to three million australians live in apartments and the numbers are growing as many hard-working aussies are shifting to apartment living for affordability and low maintenance lifestyle reasons. But like everything post-pandemic, the costs of owning apartments is rising and owner strata levies are soaring. So to dig into why this is the case and what you can do to keep your costs under control, we're joined by Amanda Farmer from Lawyers Chambers, your go-to strata lawyer specialist with over 20 years of strata experience. So welcome back to Realty

Talk, Amanda. Great to be back, Bushy. Now, Amanda, this is a bit of an interesting exercise across the board but I guess to set the scene what are strata levies and why do strata property owners have to pay them? Yeah so strata owners are legally required to pay an amount called a levy sometimes also called a contribution that is their share of the costs of maintaining and repairing the common property in a strata building so that's those shared spaces like the entrance foyer the lift the stairwells the pool or the gym if you're lucky enough to have those there are also running costs for the building electricity water there's an insurance premium for the building insurance and if you have a strata manager then they have a fee that needs to be paid too so all of these

costs are budgeted for each year and an amount is levied that each owner must pay as their contribution to these costs and usually that payment is made on a quarterly basis. And I'm assuming it probably includes a sinking fund for future renovations, maintenance and whatnot on the property as well I'm guessing? Yeah you got it. So our levy is split into two different components, the sinking fund or the capital works fund, we call it in some states, and then the administrative fund. So your administrative fund is more for that day-to-day payment. That's your strata manager. And if you have to engage one of those annoying strata lawyers, the money in the admin fund will pay them too. And then you're exactly right. The capital works or the sinking

fund is for that longer-term maintenance. And that's where we really should be building up those savings. It's a bit of a rainy day fund there. Yeah, beautifully said. So as I guess I mentioned in the intro cost of living is soaring and strata levies aren't immune to this so in your experience what are the specific factors that are causing strata levies to to rise yeah so three things that i would point to first of all rising insurance premiums so a lot of people don't realize this but the building insurance premium is usually the single largest expense for a strata building and that building insurance is mandatory. It is required by law, which is a good thing. Premiums are rising across the global insurance market and strata is certainly not excluded from

that. So definitely we're seeing some buildings go to their annual general meeting and say to the strata manager, insurance premiums up by 20% and the strata manager saying, is that all? You're lucky. It's just 20% because we're really seeing those premiums rise. Secondly, our buildings are aging and they need more and more expensive maintenance we've got 40 50 year old buildings that have had very little maintenance done on them we've got roof waterproof membranes that need replacing lifts that need upgrading and in most states now there are some legal hoops that you have to jump through when it comes to doing this work it needs to be done properly we're ensuring that there's good quality remediation being done in strata now which again is great

but it does lead to more expense yeah and thirdly our buildings are increasingly complex owners need and they want services like a strata manager like a building manager maybe even an on-site concierge and these all cost money our owners are busier now than in previous generations they don't really want to volunteer their time whereas grandma might have been happy to do that at a working bee in the garden on the weekend they want to bring in the specialists to help and that's all going to cost a bit of money. So we're increasing rough and as our lifestyle expectations increase our time reduces and our ability to do something occurs with all the liability that's attached to provision of any services now then I can understand why it's getting more expensive but

look a number of media reports have suggested that bankruptcies from unpaid strata levies are also on the rise, Amanda. Can a body corporate really bankrupt someone who doesn't pay their levies? Yeah, they come as a surprise, but the answer to that is yes. Just like any other creditor, a debt can be pursued by a body corporate, by an owner's corporation to that last resort, and it absolutely is a last resort. If you read some of these articles, you'd think that these nasty body corporates are banging on the door of the poor lot owner the week after the bill was due. That is not what I'm seeing happen. It is last in a long line of steps that need to be taken before it gets to that really serious stage. When an owner falls behind in their levies,

it's important that there's communication around that, checking in, checking if there's any financial hardship. Maybe there's a payment plan that could be considered, seeing if that can be up to. And then there's definitely plenty of notices, letters, local court proceedings is the starting point of the litigation. And only that minority of really serious cases that would end up in a federal court bankruptcy. Yeah. Okay. Well, you've touched on some of this already then, but can you expand on some of the options for strata owners that are struggling to pay their levies? And better yet, how can levies be kept under control in the first place? yeah keeping the levies under control in the first place is absolutely key and i say that

proactive maintenance when it comes to looking after these buildings which is a big cost and looking after the building properly does affect your insurance premium as well by the way yeah but proactive maintenance is always cheaper than reactive maintenance you certainly don't want to be forced in an emergency situation to be fixing the roof you certainly don't want to be forced by a court or a tribunal order to be doing work because a lot owner has dragged you through litigation. So plan ahead goes back to that sinking fund, that capital works fund, the rainy day plan. In most states across the country, we have to have a 10 year plan of expenditure for our sinking fund and capital works. So if you're planning that out, contributing a little bit each

year, that's going to help you save money in the long run. And if you're facing a major expense that really does need to be funded now and there isn't enough money in the sinking fund then there are a couple of options for paying for it you can have a one-off special levy and this is often where we see some owners end up in financial hardship they're having to pay a big lump sum very quickly if you've got owners who can't fund that one-off special levy then consider a strata loan that's a unique financial product where the building can actually borrow money there's no registered mortgages needed. It doesn't involve the individual owners. It's the owner's corporation, the body corporate borrowing the money. Yes, there is a higher interest rate before our investors in

particular. That may be tax deductible. Really important to get your own financial advice on that. But I often see investors choosing a strata loan over a special levy because they figure it's a better use of their money. Totally get it. Yeah, it makes a lot of sense. And I'm hearing that to have an active interest in the strata committee or the body corporate is obviously something that people need to be thinking hard about because it's very easy to wash your hands and then point the finger when things aren't going the way they are but if there's not open communication that open understanding that's clearly where some of these issues are likely to arise so again we've only really just scratched the surface but i really want to thank you for

bringing all of this to our attention, Amanda. And we suggest that anyone who has an apartment or is interested in buying one to get better informed by tuning into your Strata Property Podcast. We thank you again for joining us on the Property Hub here today, Amanda. Thanks so much, Bushy. Here's how Realty's discovery search works. Now, think of AI as an assistant on your real estate journey. How AI works is by using algorithms and data, the words that you use to describe the type of property you want. By entering what you want, the AI learns and makes predictions or decisions and then shows you the results. So rather than searching by suburb and then property type and

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