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Taking heat from your tenant and landlord

By Elyse Perrau
11 November 2014 | 16 minute read
case study

"It’s the middle of a hot summer and a tenant of yours rings up and says they want to pay an extra $30 a week to get an air conditioner installed in the property. You ring the owner, who doesn’t have a job at the moment, and he says “No, I don’t have the money at the moment to afford it”. What do you do?"

Kelley Ann Seaton

Kelley-Ann Seaton

Property Management HQ director

Unfortunately, if the tenant viewed and accepted the property as is, without air conditioning, and the owner isn’t in a financial position to purchase one at the moment, the tenants really do need to try and understand the owner’s financial position at that time. Even though the tenant is willing to pay an additional $30 per week for the air conditioner, if the owner simply cannot afford to purchase the unit upfront, the extra rent per week isn’t really going to help at this time. The owners may secure a job soon and this position may change. If the tenant is happy to wait one or two months they could then make the request again – although it could also be autumn by then.

I would try and encourage the owners to proceed if they could get the funds from elsewhere. I would like to educate all property investors to have a slush fund with money saved aside for incidences like this, because if air conditioning was classified an urgent repair, there is concern as to how the owner would handle that without a slush fund or spare money in the kitty. The owners would certainly benefit in the long run by having air conditioning during summer, and I would advise the owners about the tax deductions they can claim against the property in an attempt to change their view and push towards approving the installation.

If the power of persuasion and assisting the owners to have this completed is not working, some alternatives could be to have the tenant purchase the unit, have it installed professionally, and for the owner to reimburse the tenant at a later stage; or even possibly replace some of the light fittings in the very hot rooms with combination light/ceiling fans to circulate the air flow better throughout the property; or the tenants could look at a cheaper alternative to air conditioning, such as using their $30 per week towards hiring or buying their own portable air conditioning unit, which means they don’t really need to involve the owner at all.

Do you agree with Kelley that all investors should have a slush fund? Tweet it >>

Cameron Ewers

Cameron Ewers

Pure Leasing director

Obviously there are a lot of variables on this: is the tenant a good one? Is the market weak (with a high paying tenant)? Could the property be easily re-let if they did vacate? Would it be a big deal if they did leave?

I am basing this on the assumption we have an excellent long-standing tenant who is paying a very good rate, the market is average so it would take a little while to re-let and the chance of replacing this tenant would be minimal.

Given the owner is currently unemployed, the most important factor is to achieve stability in the tenancy to secure the rental income for the owner. So the tenant’s proposal would need to be subject to them signing a further fixed-term agreement for as long a period as possible (circumstantial).

Assuming we could achieve that, I would educate the owner about the benefits of this and the return on the investment. For example, the air conditioner costs $2,000, and $30 per week reflects a return of 78 per cent within the first 12 months on the capital amount (hence the importance of a long fixed-term agreement).

If the owner is able to borrow/draw down on their current mortgage to finance it, the interest on $2,000 is still significantly less than the return achieved by the increased rental rate offered by the tenant, so it would be a positively-geared improvement.

While I am not into interest-free, take now/pay later arrangements through big retailers, this could be an option if the owner wanted to pursue it. As a worst case scenario, I would try and negotiate some sort of payment plan with the owner, where they can contribute a portion of the initial cost and ask whether the tenant (subject to state legislation) can facilitate the balance and offer them the rental subsidy to clear the balance.

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Hermione Gardiner

Real Plus business manager

Putting aside the legality of putting up the rent mid fixed-term tenancy, an owner not being able to afford repairs/upgrades is a common concern for a property manager. There are different types of owners – intentional investors and accidental investors – and often accidental investors have not budgeted for maintenance, so we come up against a wall, even if the tenant is prepared to pay more rent.

My general advice for situations like this could be:

  • To understand the true cost of owning an investment
  • To see if the tenant would be prepared to split the cost
  • To see if any of your contractors would create a payment plan
  • To remind the owner the payment can be taken from the rent, not paid upfront (although if the owner has no job he will likely need all the rental payment)
  • To conduct a cost benefit analysis. That is, $30 per week versus the cost of air conditioning and how long it takes to pay off
  • To consider if this extra $30 per week could be achieved on the market if this tenant vacates
  • To remind the owner that the cost of improvement could be a tax deduction
  • To proactively forward-plan maintenance and help your owner build a sinking fund (make suggestions at the start/end of the tenancy, routines and rent reviews)
  • To suggest the tenant puts the $30 a week towards renting a portable air conditioner

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Michelle Williams

Michelle Williams

@home Property Management Solutions managing director

This would really depend on the current situation with heating at the property. If the property had insufficient heating that was not economical to run, I would call my client to discuss the options to try and avoid potential vacancy. My advice would be based on a number of factors and I would have some questions to cover.

  1. If the heating is not replaced, will the tenant vacate at the end of the lease?
  2. How far away is the lease expiry?
  3. If the owner agrees, will the tenant extend the tenancy in advance for added security?
  4. Is it a quality tenancy (are they caring for the home)?
  5. How long would the tenant pay an extra $30 per week – only for the period to pay off their half, or on an ongoing basis?

I would put forward all of the scenarios to the client and advise them what I would do in that situation as an investor.

A question could be, is there an option for the owner to arrange an interest-free finance period?

If the owner agrees after considering the options, I would arrange for both parties to sign an agreement covering the arrangement in detail.

Ultimately, as property manager we act for the client, which means we should offer the best advice we can based on the benefits to the client.

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Tara Bradbury

BDM Academy director

As the property manager you are the middle man in this situation and the first thing you should know about negotiating between two parties is everything is fair game. When you approach the investor it is important you go to them with the problem and solution, not just the problem.

In this situation I would source quotes before phoning the owner and have a detailed plan of attack. I would also make sure you know what type of air conditioner the tenants would like and where it will be going in the property.

While the landlord may be tight on funds they also may not like the idea of air conditioning in the property. At the end of the day, your role as a property manager is to maximise income and optimise capital growth on the investment property for the landlord. If you believe this will help improve the value of the property for the investor then that would be the approach I would take.

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Leah Calnan

Lean Calnan

Metro Property Management director

Negotiating and compromise is the way I would go.

Perhaps your regular contractor who installs air conditioning units will agree to a payment plan over three or four months, providing payment is made from the monthly rental payment. I would look to see if there was a current fixed lease in place. The tenant may agree to sign another fixed-term lease, which may provide the owner with more security and encourage them to see if they can afford to make the improvement.

Often in these circumstances, telling the tenant exactly what is going on may assist the tenant to work with you. Another option may be that the tenant agrees to pay the costs to have the air conditioner installed and then they receive rent reductions each month over the next three or four months to pay off the air conditioner costs.

Is the tenant someone the owner wants to keep in the property for another year or two? If so, think outside the square and offer a different option to the owner.

You may be surprised by what you can negotiate.

Just don’t forget to put everything in writing, so there is no confusion for anyone.

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Suzannah Toop

Toop&Toop Real Estate head of property management

It is quite common for tenants to apply for a property without checking all of the features (including whether wardrobes, white goods or air conditioners are included). The approach a property manager takes to this scenario is critical and can be the difference between getting off on the right or wrong foot with the tenants. It is important for the tenant to know that, strictly speaking, the property was leased without an air conditioner and there is no requirement for a landlord to include one during the term of the lease. That said, we would let the tenant know we will put it to the landlord and see what options might be available.

Negotiating between landlords and tenants is what we do day in, day out. When discussing the request with the landlord, the most important thing would be to explain the benefits of purchasing an air conditioner and to find out what price they would be willing proceed at with this request. Retaining a quality tenant can save landlords a huge amount of money in the long run since downtime between tenancies is avoided. We would provide options to the landlord including asking for authority to start holding rent to purchase an air conditioner, and hopefully get a win-win for both sides.

Failing this, our property managers would discuss alternative options with the tenants, such as purchasing fans or portable air conditioning units that are an effective second choice – and they’re a fraction of the cost.

Do you agree with Suzannah's approach? Tweet it >>


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