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A bond for landlords: outrageous or ingenious?

June 14, 2019

Bonds. It’s the one word that can signify the difference between being reimbursed a month’s worth of rent or never laying eyes on it again, and bond refunding is (unfortunately for both sides of the equation) still an extremely prevalent issue.

Currently, there is a disconnect between landlords and tenants when it comes to bonds. This begs the question, could landlord’s paying a bond like tenants do, be a good idea?

We explain what a landlord bond might look like and what sort of advantages it could bring to owners and renters

How would a landlord bond work?

One potential model for a landlord bond—or more accurately, the landlord sinking fund—is for the Property Manager to withhold 10% of the weekly rental payments and compile the withheld money in a sinking fund until a nominated quota (e.g. $2,000) has been reached.

Once the quota has been achieved, the landlord will receive the full rental income amount, and the Property Manager can then attend to maintenance issues on the property by using a portion of the $2,000 in the sinking fund. Following any maintenance work, the deductions will recommence to top up the sinking fund to the $2,000 quota.

The current repairs process

Currently, if a maintenance issue arises at a rental property, there are usually (at least) four steps until the repair work can be commenced:
1. Tenant emails Property Manager
2. Property Manager gathers quotes for work to be undertaken (if it’s a minor job, it may get owner approval without quotes or estimates)
3. Property Manager emails quotes to owner and seeks approval to conduct work
4. Owner emails Property Manager with approval to conduct work
5. Property Manager gives tradesperson the all clear to commence work and updates the tenant

Even if the turnaround for each of these steps is only 2-3 hours, an entire day can pass before approval to conduct the repairs is granted, potentially leaving a tenant with an increasingly deafening dripping tap and a sleepless night. Plus, if a large maintenance job surfaces in the same month as the rates and strata levies are due, it can put even a very astute investor under the pump financially.

The repair process with a landlord bond

Using the landlord sinking fund idea, repair work could commence after only two steps:
1. Tenant emails Property Manager
2. Property Manager gathers quotes, approves work and pays from sinking fund

Benefits of a landlord bond

This model would most often result in issues being rectified on the same day (dependant on a tradesperson’s availability) as a Property Manager is made aware of them, and a much happier rental experience for the tenant.

Communication is key to any healthy tenancy, though, and keeping an owner well-informed about the goings on at their investment forms an essential part of a Property Manager’s job. Although the use of the sinking fund, by definition, wouldn’t require permission from the landlord, any Property Manager worth their salt would keep the landlord in the loop.

Potential risks

It’s important that, as an owner, you choose a diligent Property Manager and develop a good working relationship with them, as the sinking fund does present an opportunity for a Property Manager to not do their due diligence by their landlord by not gathering sufficient quotes for work undertaken. This would leave the sinking fund more scarce than necessary as well as frustrate landlords.

You should be able to trust your Property Manager to do the right thing by you, with an understanding of your circumstances and preferences when it comes to trades. A Property Manager who’s on the ball will be able to give estimates right away, reducing delays by having to source quotes for relatively straightforward work.

The verdict 

Setting up a landlord sinking fund might not work for everyone, but at face value, it appears to be a good mechanism for dealing with maintenance issues for both owners and tenants. It will ease cash flow for property investors if there is a need for larger maintenance work and empower Property Managers to act confidently on behalf of owners in liaising with trades and organising quotes.

Further, busy investors who own multiple rental properties may not have time to concern themselves with minor maintenance issues for each of their properties, so a sinking fund would be a simple resolution to manage their stress around being contactable at all times.