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Sunday, March 23, 2008

Are you landlord material?

“I HAVE to chase tenants for the rent.” “My tenants trashed the place.” These are common complaints that put people off the idea of becoming landlords. The inability to deal with these problems effectively results in sleepless nights, a feeling of helplessness and a situation where “the landlord is in effect paying the tenant to live in his property”.

So what’s involved in becoming a landlord and what are the tricks of the trade? Three seasoned landlords and a property manager give their take on how they manage tenant issues and remain die-hard landlords and property managers.

Have a cash cushion
If you want to be a landlord, don’t count on your tenants paying for all the expenses involved in the ownership of a property. You need to account for the costs of maintenance, lack of rental when the property is vacant and occasional failures to collect rent. The interviewees concur that they expect their properties to be vacant for two months a year when calculating the returns on investment.

“First, make sure that your income will be able to cover the loan repayment. Hence you can still manage during the months when your property is vacant,” says John Lee (not his real name), CEO of a Mesdaq-listed company. He has seven years’ experience in managing properties and lets out his five medium-range condominiums. Having started out with a bad investment in bungalow land in Sungai Long/Bandar Mahkota Cheras, he says the failure did not deter him. He has since reaped significant gains in property investment, netting about RM1 million from flipping properties.

In dealing with late payment of rent, the key is to act promptly, the landlords say. Renesial Leong, author of Property Jewels, stresses that a landlord must be prompt in acting against errant tenants. “If the tenant is one week late, the landlord should make a courtesy call to find out the reason for the delay,” she says. “I had a tenant who lost his job and could not pay the rental in the first few months of the tenancy agreement. So, I sat down with him to discuss his predicament. I suggested that perhaps it would be better for him to move into a smaller place, like a room. He took my advice and moved out in the third month.”

One way to reduce the risk of non- or late payment is to ask for advance rental. “For high-end properties, there is an emerging trend where company-tenants pay rental in advance. Some embassies choose to pay a year in advance and the rental could be quite high, like RM30,000 per month,” says Tan Joon Kai, head of property management at Eng Lian Enterprise Sdn Bhd. “By paying in advance, however, the tenant may ask for a discount if the landlord is not an established player in the market.” Tan has been managing the group’s portfolio of residential properties, shoplots and shopping complexes (Bangsar Shopping Village I and II) for the past seven years.

How much should a landlord spend on preparing a property and maintaining it? There are no hard-and-fast rules on how much to allocate, and it mainly depends on the tenant’s profile. “For students, I would just ensure everything is functional and clean. For high-end tenants, I may spend more, like allocate up to half a month’s rental to do up the property,” says Leong.

“I do not specifically put a maximum value for maintaining my properties. I believe that regular servicing will keep the maintenance costs low. As a rule of thumb, I may not spend more than RM5,000 a year to maintain a high-end property, and not more than RM3,000 for mid-range properties.

“In the higher-end market, tenants tend to prefer their own loose furniture such as beds and lounge sets,” says Tan. “So, we would usually just spend on the basics, namely the kitchen appliances and cabinets, bedroom wardrobe, air-conditioners and curtains and railings.”

When you target the lower-income group, the rule is to keep it simple. David Chong, owner of Infohan Sdn Bhd, a property management and investment company, rents out his threestorey 20-room bungalow in Petaling Jaya to factory workers. “I leave the rooms bare except for lights and fan.”

Chong bought the property below its market value and the seller had renewed the lease for 99 years. “I am continuing to look out for such buys,” he says. He also owns several commercial and landed residential properties, and has been investing since the mid-1990s.

“There is a lot of cleaning to be done in low-end properties. Hence, I visit my tenants and remind
them to be civic. It is important to talk to them in a friendly way,” says Chong. “I budget 5% of the rental income for maintenance and cleaning costs and hire a professional cleaner to clean the bungalow on a weekly basis.”

It’s a people business
In evaluating whether you are landlord material, remember this: While you shouldn’t need to constantly be on the watch, you shouldn’t be twiddling your fingers, waiting for the money to come in. Landlords need to find time to keep in touch with their tenants. “This is a people business where you must build rapport with your tenants. One must like working with people to become a good landlord,” says Leong.

“My current stable of tenants includes students, expatriates, McDonald’s, Tai Thong Restaurant, Secret Recipe and Angel Cake House. I support them in whatever way I can, such as giving business to them,” she says. “You see, building rapport and acting promptly on problems are the keys to managing tenants well.”

Chong finds the problem of collecting rent from the lower income tenants manageable. “Only about 5% to 10% of my tenants may be late in paying,” he says. “It is important to visit them immediately after payday.”

“In order to minimise problems in collecting rent, from the onset, you must be firm about your rules, and then build a rapport with your tenant along the way,” says Lee of middle-income tenants. “Send them gifts during festive seasons and be responsive to problems. Sometimes, I prefer to collect the payment personally to remain visible to them. Check the utility bills frequently to ensure your tenants are settling them promptly. Remind them immediately if any bill is overdue.”

For high-end units, Tan of Eng Lian says, “We have some expatriates, particularly the younger ones, who do not take the trouble of handing over units in good condition. So, it is absolutely vital to be diligent in checking the inventory listing when the tenants move out and deduct all repair costs from the deposit.”

If you lack the time, you can engage someone to handle the work. “It is advisable to engage somebody to help you manage if you have more than 20 properties because it can be very time-consuming,” says Leong, who employs two full-time staff to manage her tenants. “The fee to the property manager would be 9% to 10% of the rent collected for low-end properties and 7% to 8% for highend properties.

“In addition to this, you must have a team of people to help you such as lawyers, property appraisers, agents, insurance companies and handymen.”

This article first appeared in Personal Money, a monthly publication of The Edge.

By theSun (by Noelle Lim)

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