For property investors and landlords is the question crucial—what can be passed on to tenants as compensation for damage and what is fair wear and tear? How can you avoid careless damage and manage wear and tear?
Expenses versus Cash-Flow
Compensation for Damage and Wear &Tear
Capital Gain or Yield — Investor or landlord business
Your investing strategy is keeping you on course towards your goals. As investor you might be focussed on capital gains (negative gearing is a popular strategy), as landlord business certainly you work for maximum yield (cash-flow strategy) to pay your bills. But all strategies can suffer a setback from damaged investment properties.
Profit is the lifeblood for any business. For property investors/landlords, apart from levies and fees, the ongoing expenses for maintenance and repairs are crucial for survival. For managing those costs you have to face the question—what can you pass on to tenants as compensation for damage and what is fair wear and tear?
Damage control and Wear and Tear?
Causing accidental damage to something happens to all of us sometimes. Maybe you have been distracted, not careful enough, or it just happened. It is not a problem as we get it fixed, right? Also when tenant’s car gets a dent, they go onto fixing it. But as a little example, when spelling red wine onto the landlord’s carpet, it is often different. I am not alone dealing with damaged tenanted properties. Also it is not always simple to separate damage from fair wear and tear.
For damage control implementing rules and passing them on by the tenancy agreement works for us. These rules are intended to protect tenants and landlords from unfair claims. Good practice is to record the move-in inspections signed up by both parties. We also explain our expectations to tenants and their obligation. The most important rule is to notify the landlord about damage or problems at the time they occurred.
Fair Wear and Tear
It is common knowledge that a fair wear and tear occurs through the ageing process and normal use. Think of fading of colours, fatigue and signs of aging like scratches that accumulates over time.
What is damage?
The simple answer is—damage is everything that is not wear and tear. The Tenancy Act makes tenants liable for any damage during their tenancy. That is the theory, in practice it only works if you can prove your case.
Accidental damage would be everything that happened by sudden and unexpected events like punched holes to walls and flooring, spilled liquid onto carpets, or any physical damage to house or appliances.
Neglectful damage happens over time through some sort of negligence. Think of water damage from condensation or mould growth by failing to ventilate the bathroom or cumulating rubbish by blocking sewage pipes in kitchen and bathroom.
How to avoid damage?
Also under normal circumstances damage is in every household something to deal with. Accidents just happen and it comes down to answer the liability question.
With neglectful damage is it more difficult. The cause relates to the abusive use of properties and appliances. In rental properties often is ignoring manufacturer’s guidelines (user manuals) the main cause for damage. We have seen damage from built-up ice in refrigerators, loose and leaky flexi-connection to tenant’s washing machine, blocked drains in dish washers, and even damage by using the stove for heating the kitchen.
If you want to avoid damage you need to identify the risks, and pass your expectations on to the tenant. As mentioned above, we use the tenancy agreement for clarity.
Tips for dealing with damage or wear and tear
Landlords have two options to manage maintenance, damage and wear and tear;
· Scheduling regular inspections and helping tenants to meet their obligations,
· Communicating clearly the rules and expectations
We use for each property rules that reflect the characteristics of the property, the chattels and risks identified over the past years. Some rentals are equipped with white-ware, some allow pets, and others are landscaped with gardens. The tenancy agreement has to reflect the specific of the rental house and support how tenants like to live within your rules;
· Report any faults or problems at the time as they occur
· Insurance taken out by the landlord is unlikely to cover tenants’ liability for damage and negligence
· Damage is everything beyond fair wear and tear including rubbish of any description entered drainage or waste pipes, water damage from plants in containers and water marks or mould caused by condensation
· Costs for damage repairs as a result of ignoring the manufacturer’s user guidelines are going to be passed on to tenants
· Rules for cat and dog owners
· Damage repair on tenants’ expense including removal of cumulated debris and excessive or seeding weed
Like tenants fixing their dented car, landlords have to fix damaged rentals. I hope that these examples give you an understanding how to deal with damage or wear and tear. We did not have a case yet to end a tenancy because of breaching the tenancy agreement (violating the rules), but certainly we would enforce it. Good luck.
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