Remember – Check the lease – it’s your income!

Investing in property can be a very rewarding experience but you need to be careful. I’m no financial guru but it seems that the best way to put a price on a property is to work out the return from rental as against the expenses associated with maintaining the property and the actual price. Ultimately this can be reduced to a simple return on investment type calculation. Sure, I recommend going to an accountant and a financial adviser before starting the conveyancing process and I have simplified by taking out any thought of capital appreciation, tax consequences and the like but that is how I would explain it to my young daughter (if she was at all interested).

In any event, you need to review the whole contract including the lease. The lease is what gives you an income from the property. Lots of people give a cursory glance to the residential lease attached as a document to the contract but fail to delve into it in any detail. For the purpose of this article, I will assume a residential lease rather than a commercial lease or a retail lease.

Here are 5 things you need to look out for:

  1. The Rent – How much should you be getting for a property the price of which you are about to pay? Is the rental amount in the lease at least this much?
  2. The Term – How long is the tenancy agreement? If you are looking at doing some renovations or upgrades, how long do you have to wait. Alternatively, is it hard to get new tenants if the term of the lease is about to expire? Are there any break provisions allowing the tenant to terminate and vacate the property early?
  3. Rental Arrears – if the tenants are up to date then this is beneficial. If the tenants are behind, it may indicate some significant issues. Delve into why they are late and the actions taken by the managing agent as a result of the arrears;
  4. The Bond – How much is the bond and is there any reason that the current landlord (the vendor) has for taking any portion of the bond;
  5. Make Good Provisions – Whilst in NSW the Residential Tenancies Act may apply in many situations governing the majority of residential tenancies (there are a few exclusions), review the provisions relating to the requirements of the tenants at the end of the lease.

Whilst the above are only a number of things to look for when conducting your “due diligence” in respect of an investment property, properly reviewed, they should highlight some red flags if you are not satisfied with the response. Make sure you have your lawyer provide you with a summary of the lease provisions for you to assess prior to entering into the contract. If you are already entrenched in the conveyancing process then review the lease to make sure you know your rights and are ready for anything that might arise in respect of the tenancy in the future.

If you have any queries at all about the conveyancing process or conveyancing in general, please give one of the experts here at ClickLaw a call. We would be more than happy to assist with any queries you may have.

John Kettle
Solicitor Director

ClickLaw Australia