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Investorgate – Property Management Newsletter October 2015

By Dianne Boyle

Market Report

It continues to be a busy time for our team, particularly being down in numbers since Andy decided property management was not for him. It certainly isn’t a vocation which suits everyone however, this month we have Brittany Garner joining us. Brittany’s family are long-time residents of the Warkworth area and she is very enthusiastic about her new role. Brittany will undertake extensive training over the next few months so a number of our clients will have a degree of contact with her. We welcome Brittany to our team.

Property owners generally have a toss-up as to whether they will manage their own rentals, or have them professionally managed. Here’s a little scenario we experienced recently;

The property owners didn’t get a property manager initially because they felt they couldn’t afford to. Even though they had a “bad gut-feeling” about the tenants, they felt sorry for them and let them move into their investment property. When we took over the management of the property, the tenants were in arrears, there were more occupants in the property than was allowed and neighbour complaints about the tenants were mounting. We had to act decisively, but our options were a little limited.

We initiated our ‘Rent Arrears’ process and procedures immediately, but before we could begin any Tenancy Tribunal action, we needed to confirm details. We had to go through the owners bank   statements and records to sort out when payments were made, how much had been paid and how much bond had been collected. Without accurate information, the Tribunal process is useless. To make matters worse, it was a split-tenancy between two families making separate payments – and one was paying and the other wasn’t.

Mediation was a non-event and so eventually the matter had to be settled by the Tribunal, whereby the tenancy was terminated.

Once the property was vacated, we found holes in walls, a pile of rubbish under the deck, piles of rubbish around the property, bags of clothes, old torn couches, broken dressers, blankets, boxes of old broken toys and the house was unclean. Unfortunately, because the owners had no photos, no video or an inspection report on what the property was like at the start of the tenancy, we were unable to go back to the Tribunal to fight for clean-up costs.

At the end of the day, it has cost these property owners dearly – a cost that could have been avoided completely, or at the very least mitigated to a large degree, by using a professional property manager.

From the desk of the

The Reserve Bank is continuing to blame rental property owners for Auckland’s rising house prices. They say that investor activity has increased from 33% in 2013 to 41% in 2015.

“The NZPIF disagree that rental property activity is the prime cause of Auckland house price rises. Rental properties make up around 40% of all houses in Auckland, so you would expect that the proportion of sales would be around this level,” says Andrew King, Executive Officer of the NZ Property Investors’ Federation.

This is a supply and demand problem. Over the past year, net migration has increased by nearly 60,000, with many of the migrants settling in Auckland. It is obvious that there is a supply problem. Hitting investors to try and kerb demand is unlikely to yield the result the Reserve Bank wants. “We actually need more rental properties in Auckland as there are signs of overcrowding due to shortages,” says King.

Landlord Tips  

It’s always a good idea to have your properties returning market rents. To check what is happening in your area you can go to:

http://www.tenancy.govt.nz/rent-bond-and-bills/market-rent/

A yearly rent review with your tenants is a good idea via open communication often done during a property inspection. If you feel the rent is low, take with you a printed copy of your regional Market Rent statistics to back up your discussion with your tenant. There are a couple of rules here. A landlord must inform the tenant in writing at least 60 days before putting the rent up or 28 days for a boarding house, and the landlord cannot put the rent up more than once every 6 months. If you do not have a form for rent increases go to:

http://www.tenancy.govt.nz/assets/Forms-templates/Notice-of-rent-increase-handwritten-template.pdf

For more rules on rent increases view Part 2 Section 24 of the Residential Tenancies Act.

Home Buyers Need to Check for Unconsented Additions

Aucklanders buying new homes with unconsented decks or other additions should not assume that they won’t have to remove it, according to Ian McCormick, general manager of Auckland Council’s Building Control Department.

“From 1 July we are introducing a new policy that will be consistent across the region and not a mix of legacy council rules,” he says.

The rules around unconsented works have always been important, says Mr McCormick. “What doesn’t change is the fact that anything unconsented will need to have a Certificate of Acceptance (CoA) to meet the current NZ Building Code, not the code at the time of construction.”

“This is a very important consideration for home buyers, and for real estate agents. A ‘she’ll be right’ attitude doesn’t stop a major structural failure, such as the deck we saw collapse in Te Atatu last year.”

According to Mr McCormick, the new policy is about taking a pragmatic approach to resolving what can be challenging situations.

“The policy’s purpose is to ensure compliance across the industry at the same time ensuring that emergency repairs or minor oversights on otherwise compliant structures are not unnecessarily challenged,” he says.

To ensure the building meets the current building code, there is a requirement for all CoA applicants to attend a pre-application meeting with Building Control, providing as much information as possible.

The meeting will help decide the council’s response, including if there will be an infringement fee.

“If the council believes the construction would not have attained consent then there may not be a processing fee, but instead there will be a discussion about how the issue will be resolved, including how the infringing building structure will be removed if necessary,” he says.

The Certificate of Acceptance will indicate which parts of the structure have been assessed, and how those elements comply with the NZ Building Code.

Understanding ‘Rent in Advance’

Some tenants find this concept hard to understand, and some mistakenly believe that the first week of rent paid is held in trust for use at the end of tenancy, like a bond. It is important to note the first weeks rent paid is for your first week of tenancy.

Rent in advance concept is simple to understand. If you go into a shop and you select a can of drink from the fridge, open the can, drink the contents and then walk to the counter to pay you would agree you might find the store owner not pleased with your actions! The right thing is to pay for the can of drink first, then consume the contents after paying!

Paying rent in advance works exactly the same way. You purchase the time   period in advance, and then consume the time period by dwelling in the property. Once the time period is finished or consumed, you then pay for the next time period again before using it, by continuing in the lease and dwelling in the property. This is the meaning of rent in advance.

Managed by a Professional or Self-Manage?

(Excerpt from an insurance company’s newsletter)

If our landlord insurance claims are anything to go by, tenancies that are self-managed by investors go pear-shaped significantly more often than those managed by a professional.

On the surface, property management seems simple, so you can understand why some landlords are tempted to do it themselves – however, the complexities are soon revealed if something goes wrong!

Here are a few questions you can call on when contemplating going down the DIY route:

  1. Could you bring yourself to evict a family, or a person who has fallen on hard time?
  2. How would you go standing up in a tribunal and arguing a case?
  3. Do you feel comfortable with the tenant having your phone number and being on call 24 hours a day?
  4. Are you informed about tenancy legislation?
  5. How will you manage the tenancy if you go overseas or on holiday?
  6. Are you available to supervise trades people, at short notice, if required?
  7. How will you find out if tenants have previously been evicted or have a poor rental history?
  8. How will you verify that tenants are who they claim to be?
  9. Are you organised and assertive enough to chase up late rent immediately?
  10. Do you know the warning signs for a clandestine drug laboratory or marijuana grow house?
  11. How good are you at record-keeping?
  12. Will your landlord insurer cover you if you self-manage—and, if so, will the premium rise as a result?
  13. How much will you save, after tax, by managing your property yourself?
  14. Once the potential stress is taken into account, is your time worth more, or better spent, on other priorities?

No Sense in Removing Interest Deductibility

Rental property owners have continued to be the focus of all attempts to reduce house prices in Auckland. Some commentators have said we need to make it even harder for investors in order to stop house price rises and give first home buyers a chance.

Tax deductibility of expenses is the latest issue that has been raised. The argument is that because rental property owners can claim a tax deduction we have an advantage over first home buyers. They are calling for our ability to claim mortgage interest as a tax deduction to be banned. So how would this work out?

The fact is, rental property buyers do have a tax advantage over first home buyers, but it isn’t highly significant.

The NZPIF conducts a study into the difference between renting and owning the average NZ home. In April the average home was $154pw cheaper to rent than to own, and this was without the home owner making any principle repayments.

After all tax deductions were considered and including a 10% deposit, an investor who bought that average NZ home would have to top it up by nearly $6,000 to provide it to a tenant.

The investor doesn’t get the benefit of accommodation from the purchase that a home owner does. This cost means that an investor would be unlikely to pay more than market value for the property and would probably prefer to pay less.

But what about when bidding for a property? If an investor can claim a tax deduction for the mortgage interest, then their cost of borrowing is cheaper, so theoretically they could outbid a first home buyer.

The actual benefit is so small though, that it is unlikely to have an effect. For each extra thousand dollars that an investor bids, the extra interest cost is about $60 per year. The tax deduction at the highest marginal rate is $20 per year. So the actual benefit is quite small. Even if the investor paid $10,000 more than market value, the benefit per year over the home owner would only be $200.

This is not enough to say that the investors advantage is a reason why they shouldn’t be able to claim the cost of borrowing that is available to every other business or investment.

If the ability to deduct mortgage interest was removed from investors’, what would the cost be? Considering the average NZ home example above, The mortgage interest cost at 6.5% is $27,800. At a 33% marginal tax rate, this would add $9,170 to the cost of providing the rental property.

Rather than claiming a tax deduction of around $5,250, the investor would have to pay tax of around $5,500. All this would increase the cost of providing the rental to a tenant from around $6,000 per year to $16,700 per year. An annual cost of $10,700.

As the cost of renting this home is currently $154pw cheaper than owning it, the extra $10,700 cost would surely see a significant rise in rental prices as well as a lack of supply.

Saving for a deposit on your own home has always been difficult. How hard would it be if mortgage interest was no longer tax deductible for rental properties? Would tenants thank those who advocated for such a policy?

Andrew King,
Executive Director
NZ Property Investors Federation

Disclaimer:   In preparing this document we have used our best endeavors to ensure the accuracy of all the information provided. We accept no liability or responsibility for any errors or inaccuracies and recommend that all recipients make their own enquiries to verify any information given.

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