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Monthly Landlord Newsletters

April 2022

Propertyscouts Monthly Landlord Newsletter - April 2022

Pets.  Love them or hate them  

Just over 80% of NZ households have a pet of some kind.  And given that we live in God's own, chances are it’s a cat or a dog, not the kind of weird pet you sometimes see in other countries such as snakes, tarantulas, and monkeys.  So regardless of what you think of pets, the chances are here in NZ any pet is going to be ‘normal’ by our standards.  As a landlord that may not have you jumping at the idea of allowing your tenants to have a pet but maybe it’s time to reconsider.  Most landlords don’t allow pets – such as cats and dogs because they are afraid of the damage pets may cause to the rental property.  And yes, that should be a consideration for all landlords who are thinking about allowing their tenants to have a pet.  There are ways to mitigate the risk of pets, however, such as landlord insurance that covers pet damage.  Also, what sort of pet is the tenant proposing, and is your rental property suitable for such a pet?  By way of example, we wouldn’t be encouraging you to allow a tenant with a fully grown German Shepherd to rent a fourth-floor one-bedroom apartment in the middle of the central city! 

Here are six (brief) reasons why you should consider allowing pets at your rental property.  For more detail around these points click on the link at the bottom:

  1. Tenants with pets often stay longer
  2. Advertising that you are prepared to consider pets will ‘boost’ demand for your property making it easier and faster to rent.
  3. Tenants with pets are often happy to pay more.  Note you cannot charge a bond greater than 4 weeks rent to cover the risk of renting to a tenant with a pet. 
  4. Mitigate the risk of pet damage with specific landlord insurance that covers pet damage
  5. Professional carpet cleaning may be able to be included as a special clause.
  6. By advertising as ‘pets negotiable’ you can screen prospective pets before making a final decision.

Read more about allowing pets in rental properties

Speaking of pets

Save the Great Dane Society of NZ (SGDSNZ) have picked Propertyscouts as their major supporter.  As a result, they have agreed to donate a number of Great Dane Puppies for us to pass on to some of our awesome landlords.  We’ve carried out a secret draw and WAIT FOR IT!  You’ve won a Great Dane puppy.  We’ve already dispatched the Great Dane Puppy to you using the service ‘puppies to you’.  Your puppy should arrive any day now.  Being Great Danes, they do tend to grow to about the size of a small horse, and while they don’t eat grass a fully grown Great Dane can get through about $500 worth of meat a week, so we suggest that you take advantage of the early puppy stages while you grow to love your new pet and family member.

If this has sent you into a tailspin well, please take some time to check out today's date – 1 April 😊.    

Buying properties with others – Joint Ventures 

Getting onto the property ladder or adding to your property portfolio can be problematic, especially with property prices as high as they are at present.  Maybe it’s time to explore more unconventional methods such as a joint venture (JV) with family or friends.  According to Michael Vincent from Lighthouse Financial joint ventures can be a smart way to buy property.  Vincent said common reasons for joint ventures include situations where someone can’t financially get onto the property ladder or where one person has more deposit than another but insufficient income to buy alone or where parties have sufficient income and deposit but still need more in order to buy the type of property they want. So, while joint ventures can be a good idea Vincent says such arrangements can cause ‘rifts’ between the parties so open and honest conversations before diving into a JV are necessary.  He says that there needs to be an agreement in writing and that it should be reviewed by a lawyer.  An important issue to agree on upfront is how will the property be valued if one party wants to buy the other out.  It’s also important to work out how costs will be divided, especially if unequal amounts have been input.  Vincent’s advice is that ‘you should agree upfront on the share split at the start and what the profit split should be at the end’.  And if you make a loss, the costs need to be passed on in the same way’.

Family Trusts 

If you have some or all your property in a family trust in the belief that it’s protected in the case of a relationship breakup, it might pay to have a rethink.  There have been plenty of examples of trusts being legally challenged in order that the assets can be shared.  Well-known financial commentator Martin Hawes says that legal attacks on trusts are often aimed at showing that the trust is a ‘sham’.  If the trust can be shown only to be the person who settled it (set it up) then the assets may be available for sharing in the event of a separation.  By all accounts, it’s safer to go to the trouble of having a contracting out agreement prepared and signed by the parties even though such agreements can be confronting for couples – not to mention expensive!  Hawes said that while trusts may not be the ‘be all and end all’ for relationship property issues they can have other benefits:

  • Asset protection for those who want to protect certain assets if there is a business failure
  • Possible tax benefits for those on the highest tax rate (39 cents in the dollar) while the rate for a trust is 33 cents in the dollar.
  • Succession for those with large, complicated assets like farms etc.
  • Confidentiality.  They help keep what you own confidential to your family
  • Residential car subsidies

The Trusts Act came into force in 2021 and sets out very clearly the duties of trustees.  Hawes final advice in relation to trusts is that ‘good management is key to a good trust’.

Property Investor Insights care of Tony Alexander and Crockers

Key points from this month’s investor insights are: 

  • Reduced investor interest in selling and a small rise in plans to buy residential property.
  • Investor interest in developing their own property has decreased slightly again.
  • Demand for existing apartments has waned over the month.
  • Rising interest rates have yet to produce a lift in mortgage repayment plans.

The complexities of Covid  

The recent protest and ‘occupation’ of Parliaments grounds certainly showed what a complex situation a pandemic such as Covid creates.  The advent of social media means that the various theories around vaccinations, mandates, etc. become global rather than localised to just us here in NZ.  As a result, there are a lot of very differing views on Covid, its seriousness, and how and if individuals should protect themselves and others.  As Property Managers we need to remain ‘nimble’ when dealing with our tenants during this time, especially when it comes to accessing properties.  Some tenants have no issue with allowing access for the likes of routine inspections, while others can be very nervous.  This is no time for ‘strict’ policy and as Property Managers we need to be very mindful of genuine concerns our tenants and our staff may have when it comes to visiting tenanted properties.  At Propertyscouts we treat every situation requiring access to a property firstly in terms of our legal rights of entry (section 48 of the RTA).  We work with tenants to ensure that any access has as little impact on tenants as possible and where necessary work with tenants around the timing of access.    

Meth contamination is not always a ‘slam dunk’ for termination

You would think that if you could reasonably show that on the balance of probabilities a tenant has contaminated a rental property with methamphetamine during the term of a tenancy that it would provide reasonable grounds for termination of the tenancy.  Think again!  It seems that Tenancy Tribunal adjudicators are getting harder to convince that tenants have contaminated rental properties and that the tenancy should be terminated.  Perhaps the use of meth is just so common now, that it’s taken for granted that a lot of properties will be contaminated to some degree?  In a recent Tribunal ruling, the adjudicator accepted that there had been methamphetamine samples taken at a rental property in 2017 when the tenancy commenced.  Very low levels of contamination were found in several locations within the house, but they were so low that they didn’t warrant concern and weren’t considered ‘contamination’.  The Property Manager (not Propertyscouts) became concerned when they found that the tenant wasn’t living at the address, it was dirty and that her brother had been bailed to the address.  Otherwise, the tenant had been a very good tenant during the term of the tenancy.  The Property Manager arranged for a meth test which found a composite theoretical maximum reading of 34.9/100cm2.  15.0 μg/100cm2 or above has been deemed by the tribunal, and confirmed by the District Court, to constitute damage requiring remedial action.  When one reads the full decision, you could be excused for feeling that the adjudicator was ‘grasping’ at reasons to not find the tenant responsible for any contamination or that in fact, the property was more contaminated than it had been when the tenancy commenced in 2017!  In summary – in finding insufficient evidence for terminating the tenancy the adjudicator referred to the fact that it couldn’t be proved that the earlier meth samples taken were taken from the same areas as the 2017 testing, that the tenancy had been running for 5 years with no breach notices of any sort, nor any evidence of warnings issued and that by all accounts the tenant appears to have been exemplary. A more detailed summary of this case can be found by clicking the following link:

 https://www.landlords.co.nz/article/976520083/drugs-testing-not-enough-to-evict-tenant

Ask an Expert 

Q:  Needing some clarification here. A tenant is currently more than a month in arrears. This has happened before, and we have given him leniency as he is a contractor and gets paid in bulk amounts. He's been with us 2 years and each time has paid up when we sent a 14 day to remedy notice. However, the current scenario is that the 14-day notice is up with no payment forthcoming, and no reply to our messages which is concerning. On tenancy. govt we read that it says if a tenant is over 21 days in arrears and doesn't remedy we can apply to tenancy tribunal for termination. What should we do next?

A:  There are two areas of concern I have regarding the information that you have provided.  One is that the tenant is more than one month in arrears and the other is that you have had no response to your 14-day notice.  Both are concerning.  It’s also a concern that the tenant has previously been in arrears.  Sometimes for reasons out of their control tenants may not be able to pay rent when it is due and it’s right that landlords should allow some leniency – however, this should be the exception, not the norm, and whenever tenants are late paying their rent they should be reminded of their ‘legal obligations’ to pay their rent on time.  Given the situation that you have described, I would lodge a Tenancy Tribunal application immediately seeking termination of the tenancy.  You are able to do this if at the time the application is made the tenant is 21 days or more in rent arrears.  If the matter proceeds to a hearing, then provided the adjudicator is satisfied that the rent was in arrears by 21 days or more at the time the application was made they can order termination of the tenancy.  If they do order termination, then there will need to be some ‘discussion’ around how long the tenant has to vacate the premises.  Be sure that on the day of the hearing you have an up-to-date rental history so that you can seek an order for all of the outstanding rent arrears.  

Property market update 

Actually, we should change that heading to ‘Property Market Guesswork, but for simplicity, lets stick with update.  In last month’s newsletter, our heading for this section was - Worried about the housing market collapsing?  There is no doubt that the property market is slowing down.  FOMO (fear of missing out) has gone and there is evidence that buyers are getting twitchy about the possibility of paying too much – while sellers hold onto their price expectations.  This is resulting in less sales and an increased number of properties on the market meaning more choice for buyers.  As a result, prices are coming back.  We stand by what we said last month and what we have said ever since we started writing these newsletters – if you are waiting for a market crash (where property prices drop by 40 – 50%) then we think you’re going to be waiting a lot longer yet.  ANZ Bank has lifted its prediction of house prices falling to 10% from the 7% it forecast last month, it says its optimistic view is any greater drop will be tempered by household incomes.  Given the strong house price starting point, they describe such a drop as a ‘soft landing’ and would still leave house prices up a whopping 30% at December this year compared to December 2019, pre-pandemic.      

Do you understand the return you are getting from your rental property?   

Owning a rental property has been described as being akin to owning a business.  Everyone involved in business knows that to be successful you need to know the basics.  Real estate company Barfoot and Thompson say that for investors to be successful they need to learn some basics to help them understand returns, so they put together the following guide:

Capital gain:  Capital gain is the profit investors make when they sell an investment for more than they paid for it.  Some people buy investment properties to make a long-term profit - as prices rise over time. This strategy may be coupled with little or no profit in the short term, as expenses, such as mortgage repayments and insurance, also need to be taken into consideration.

Rental yield:  Yield comes from the rental money received from tenants. It's the rent a property can provide over a year, expressed as a percentage of its purchase price.

Gross yield:  This is the income return on an investment property before any expenses, outgoings or possible rental vacancies are taken into account. Gross yield does not take interest rates into account.  Gross rental yield is commonly used when looking at returns, as it is simple to calculate and lets investors easily compare properties with different values and rental returns.

Net yield:  This is the income return on an investment property after any expenses or other outgoings, such as maintenance and insurance, are taken out. Net yield is sometimes referred to as ‘rate of return’.

Top tip:  Although the gross rental yield is a simple calculation, it’s important to remember that it doesn’t take other factors, such as expenses, interest rates or periods of vacancy, into account.  For example, a property may have a high rental yield but may also have high maintenance costs, which may make the rental return low when taken into consideration.

High yield for cheaper areas:  It’s a general rule of thumb that yields are higher in cheaper areas. But the return always needs to be weighed up alongside other factors such as maintenance, tenants, expenses, and capital gain.

Calculating gross rental yield:  To calculate, take the annual rental income (weekly rent x 52 weeks)' and divide it by the property value. Then multiply this number by 100.

Example:  Property value $600,000 and expected rent $500 a week.
$26,000 ($500 x 52 weeks - annual rental income ÷ $600,000 (property value) x 100. Yield = 4.33%

Calculating net rental yield:  To calculate, take the annual rental income and minus the annual expenses or loss of rental income from this. Then divide this number by the property value and multiply this number by 100.

Example: Property value $600,000, expected rent $500 a week and expenses/loss $5000. $26,000 ($500 x 52 weeks - annual rental income) - $5000 (annual expenses/loss) ÷ $600,000 (property value) x 100. Yield = 3.5%

Expenses or loss of rental income can include: buying and transaction costs (property purchase price, legal fees and building inspections, any start-up loan fees); annual costs such as vacancy costs (loss of rent and advertising); repairs and maintenance; property management fees; insurance;
rates.

Having a Property Manager is like Insurance 

Well, according to Melanie Evans who is a property coach at Finax.  In a recent article in the Property Investor magazine, Melanie talked about learning the hard way that doing your own property management in order to save a few dollars can actually end up being more costly.  She compared having a property manager look after your rental property to being like paying insurance that sometimes feels like a wasted expense.  Then she reminded herself that insurance can be a lifesaver when things go wrong, and she referred to the time her family suffered a bad house fire and how the insurance covered the cost of the repairs and temporary accommodation.  Having a competent and trusted property manager looking after your investment properties is just like having insurance she said.  “You protect yourself from issues you’re not prepared for, especially when it comes to tenancy law.  There’s a reason they are paid well and employed full-time to do it.  It’s a career that requires unique skills beyond being the one who picks up a call from the tenant in the middle of the night or handles paperwork”.  Melanie went on in the article to say that by trying to save yourself the cost of a meal (say $30 a week) you’re choosing to take on a part-time job while paying yourself next to nothing.  You’re basically employing yourself to be a free servant to your tenants.  Well said Melanie – we couldn’t have put it any better.

Know of someone doing their own property management? 

Maybe you need to send them a copy of our landlord newsletter.  If they read our section on what Melanie Evans had to say about property managers being like insurance, they might just think twice about doing it themselves and being a ‘free servant to their tenants’.  If you recommend Propertyscouts to anyone out there ‘going it alone’ and they sign up to our services during the month of May we in turn will give you 3 months of free property management.               

Thinking of selling your investment property? 

We hope not, but if you are please get in touch as we may know of an investor who would be keen.  If you do decide to sell, then there are a couple of things to bear in mind.  If the property is tenanted on a fixed-term tenancy, then the property must be sold with the fixed term tenancy in place – unless you can negotiate an early end to the fixed term tenancy with the tenant.  If the tenancy is a periodic tenancy, then you need to decide whether the property should be marketed with the tenant in place or vacant.  Often this decision will come down to how good the tenant is at looking after the property.  Regardless, the tenant will need to be given written notice of your intention to sell.  If you decide to sell the house while it’s tenanted and the new buyer wants the tenant to leave, you’ll need to give the tenant at least 90 days’ notice.  Consider this when you agree with the buyer on the settlement date. If the new buyer wants to retain the tenant, then the tenancy details will need to be included in the sale and purchase agreement.

Disclaimer 

Given the opinions expressed in parts of the email, it’s important that we make it clear that the contents are opinions and observations and made in good faith.  We suggest that in all cases independent legal and financial advice is sought.  

 

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