Beginners Guide to Being an Accidental Landlord

by Nick Gentle on Sep 25, 2024
Article appears under: About Property Investment

The premise:

You didn't intend to be a rental owner, perhaps you were unable to sell your home, or you moved away for a few years and wanted to hold onto the property. Whatever the reason, you are now in the business of providing accommodation, so where do you start?

1. Work with a property manager.

Especially for accidental landlords. You probably didn't expect to be renting a property out one day, and you certainly won't have expected the compliance work around inspections, vetting, healthy homes reports, handling rent changes, handling arrears, handling conflict, bond lodgements, keeping up-to-date tenancy agreements, maintenance, and more.

Yes, there is a fee, however, unless you go all in on the above list (including the "and more") and commit to running the tightest ship possible, you will likely find yourself at some point in rent arrears, earning under-market rent, behind on inspections for insurance purposes, and not sure if your contracts are current. I've invested for over a decade; I buy the properties and somebody else looks after them.

The real value of a good PM will become apparent when something goes wrong. A pipe will burst when you are overseas, or a tenant will find a new partner, stop paying rent, and cause problems. Do you want to be figuring things out in the moment, perhaps from half a country (or world away) or have someone who has done this 20 times sorting it quickly and efficiently?

Or if you really, really want to manage the property yourself...

Take a course on being a rental owner. The New Zealand Property Investors Federation offers one to members and it has a good reputation. LINK.

MyRent is a popular app for self-managers.

Tenancy Services is the official website where legally tested rental/bond/notice forms templates are available.

2. Get a separate bank account just for your rental property.

Your bank should be able to set this up for you for free in about 5 minutes.

Have the mortgage payments JUST FOR THE RENTAL come out of this account, also this is where you pay invoices (rates, insurance, repairs) for costs related to the property.

It makes your end-of-year tax filing much easier and cheaper to do.

When should you do this? Yesterday.

3. Understand tax-deductible debt vs non-deductible debt.

Owning a rental property is a business, so at year-end you deduct your expenses from your revenue to work out how much tax you owe. Your biggest cost will likely be loan interest, but also rates, insurance, upkeep, and property management fees.

Assuming an identical amount of money is used to repay debt, virtually all investors who have both an owner-occupier mortgage and a rental property mortgage are financially better off to pay their owner-occupier loans off first (non-deductible debt) and then their rental mortgage (deductible debt). This is called "fire-hosing" where you wash away one loan before the other.

This isn't financial advice, so please double-check this works for your situation by quickly asking your accountant and then chatting with the bank and don't confuse delaying paying a loan and going on a holiday with good financial discipline.

4. Get free money (start depreciating things).

Because owning a rental property is a business, you can depreciate some of the fixtures and fittings, like carpets, curtains etc. This means your taxes go down because of a "paper loss" on those items. Free money.

When you replace worn-out or broken items in the future, the remaining value is written off against your taxes, and the new item is slowly depreciated over time. That lets you replace things that get worn out (carpets) even though the value of the house will increase.

For example; if the report finds that the current value of chattels is $7,500 then by depreciating those items, you would expect to save $2,500 in tax. That is a lot cheaper than the report, and you will depreciate more the following year. If you replace something in the future, such a sa heat pump, your accountant will set the new item up to start depreciating.

Valuit is our preferred company that makes a chattels list that your accountant can then use to include depreciation at tax time. I believe it costs about $500 to do a report, and we can get you a small discount as we work with Valuit a lot. This cost of the report is itself tax-deductible. Email me and I will refer you, iFindProperty doesn't benefit financially from this referral.

5. Use a property accountant.

Now you are in trade you will need to file taxes. Technically you can file your own taxes, but most people will either make a mess of it or miss out on deductions, so we recommend investors to work with a property accountant. The emphasis on "property" is intentional; you want to work with someone who understands the ins and outs of rental property.

6. It's still your house, but not your "home" anymore.

Wear and tear is going to happen. A property manager will help you know what is reasonable or not.

Your tenants are not going to look after the garden like you did. You are better off converting to an easy-care setup or hiring someone to take care of the garden you do want.

Your carpets will wear out faster and there will be the odd chip in your immaculate paint job. That's life as a landlord.

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That's enough to get you started. Good luck!