Each month I receive a lovely packet of gold from my managing agents and this goes entirely towards the mortgage repayments I make. Some months however, the packet of gold is very small – more like a few coins. For example, I have had in the last 12 months two occasions where the rental income was less than 1/5th of the normal amount. The mortgage repayments were still the same. What caused this? What happened? How do I make myself more resilient to this?
The answer to what caused it is simple – bills. The managing agent pays those bills out of the rent, and here in Australia we’re slugged with council rates, water bills and strata fees (to manage the complex where the rental is). These have the alarming tendency to clump up together and hit all at once. If this lines up with other, out of band bills like air-conditioning services, then the packet of gold is small indeed. What happened next has been a mad scrabble to fill up the account to mitigate this shortfall and it’s a pit to be wary of if you’re a land lord. If you’re a relative beginner like me at this, then getting caught out can and does happen.
Building resilience to this has taken time. I contribute a certain amount each pay fortnight to my loan funds account – this is where all the costs for the rental properties is drawn from, and where the rental income is deposited. In order to mitigate these untimely shortfalls, I’ve increased that amount – not much but enough to cover the drop in income. In fact, a chunk of my tax return went into building this little nest egg in July and I recommend anyone getting into this game have some sort of fall back position like this. An associate of mine has a credit card with a large limit that he has dedicated towards rental property costs and that works for him. For me though, I’d rather have some cash there earning a piddly bit of interest rather than paying the bank for the privilege.
My accountant had suggested I simply pay a bit each month towards these costs, and that makes sense, however, for simplicity of accounting if the agent manages it all I get a single statement at the end of the year to summarise costs/income and that makes tax a *lot* easier. Having this cushion of cash in the bank also means I’m covered for the inevitable change in tenants – another cost to be taken into account, when the rent drops all the way to zero, and there is a pay out for advertising and a new tenant. I know that looking back I should have anticipated some of these things, but I reckon you have to live and learn. Thankfully I’m ahead of the game now and I hope these musings help you get ahead too.