Propertyscouts Monthly Landlord Newsletter - May 2022 | Propertyscouts

Is emergency or social housing an option for private landlords?

The answer to this is yes definitely, for some private landlords, but it won’t suit everyone. We all know about the ‘tax loophole’ this Government closed by removing the interest tax deductibility on rental properties. Don’t get us started – the loophole they referred to was a wisp of smoke conjured up by those in Government who don’t hold private property investors in very high regard or recognise the service we offer by providing renters with accommodation. We said don’t get us started!

Anyway, back to emergency and social housing. Yes, it can be a good option for some landlords as the rent is paid by the Government and any property rented out for emergency, transitional or social housing is exempt from the recent changes to interest tax deductibility. That means the ‘loophole’ we referred to above still exists and you are able to claim interest on any borrowing for the duration of the rental period. We don’t like to be party poopers but there are risks involved, so it pays to do your homework or make sure that your property manager does. Firstly, and we are trying very hard not to generalise here, but some tenants who are considered under this criteria may not be as good for your rental property as tenants taken from the general population. And there are insurance matters to consider as most insurers will need to know that you are renting under this category.

As usual when it comes to picking tenants for your property, do good due diligence and pick tenants who will be suitable for the property and whose circumstances will ensure that they will be good tenants.

You have livestock, you’ll have deadstock.

If you have ever had any involvement in animal farming then chances are you’ve heard the saying ‘you have livestock, you’ll have deadstock’. Farmers being the practical people that they are realise that you can’t expect things to go perfectly all of the time. So they factor things like animal deaths or illness into their farming operation. Landlords are a bit like farmers, and they should factor in things that can go wrong along the way with their rental properties. The two biggies that spring to mind are tenant vacancies and maintenance/repairs. The best way to ensure vacancies are kept to a minimum is to ensure that your rental property is presented in the best possible way that it can be and that the rent you are asking is designed to ‘meet the market’. No one likes to hear about maintenance or repairs that need doing at their rental property. And for some inexplicable reason maintenance seems to come in ‘waves’ which makes it all the harder to deal with and accept. The reality is though – maintenance is inevitable.

So, in order to keep the farm running smoothly and the grass growing well, here are our top rental property maintenance/repair tips:

If you have just purchased your rental property, then try to take care of all the ‘foreseeable’ maintenance before the property is rented. This will ensure less disruption to tenants, save on having to negotiate access to the property once it is tenanted and ensure the property is presented to the market in the best condition possible.
When you become aware of maintenance either from the tenant or property manager, deal with it as soon as possible. It won’t go away by sitting on your hands.
You get what you pay for. If you do a temporary patch-up repair of maintenance issues, then don’t expect them to last.
No one ever regretted paying for quality. Remember that the cost of repairs and maintenance is tax deductible so buy the best products you can afford and that are suitable for the property.
If you have good trustworthy tradespeople, look after them as they are like gold these days. Nothing ‘disappoints’ (not quite the word we wanted to use) a good tradesperson by having them quote on a low-cost repair.
Check back in with your property manager or the tenant to ensure that repairs have been completed satisfactorily.
If the repairs or maintenance issues impacted negatively on the tenants, then consider offering them some form of compensation. If it was a minor issue then a grocery voucher or similar might suffice. If the repairs were substantial, then consider negotiating a rent decrease with the tenants for the duration of the repairs and the time the tenants are impacted.

Did you need proof that residential property investment is a sound investment?

If so, then look no further than the fact that our rocketing rate of inflation has been matched by the increase in rents across the country. Compare that to money invested in the bank or share market over the last year or so and most would agree that residential rentals have been the standout investment, especially when the strong gains in property values are factored in. No one would agree that our rate of inflation is good and there are tenants out there who are struggling to afford the increase in rents but at least landlords can point to the fact that at this stage their investment properties are keeping pace with our rising inflation. Inflation hit a 6.9% high in the first quarter of this year and rents rose 7% year-on-year to the end of March, Trade Me’s latest Rental Price Index shows.

Ask an expert

Q: I’m going to Australia on holiday for 3 weeks and a friend told me I have to get a property manager to look after my rental property while I’m gone. Is that true?

A: Section 16A of the Residential Tenancies Act 1986 states that a landlord must appoint an ‘agent’ if they are out of the country for longer than 21 consecutive days. You’ve indicated that you are going to be in Australia for 3 weeks so if you are away for 21 or more days then yes you must appoint an agent who can act in your place while you are on holiday. Please note that the agent can be any person, it doesn’t have to be a property manager – although you should always try to appoint someone who is familiar with the property and who is also familiar with the responsibilities of landlords. Once you have decided who your ‘agent’ is going to be you must immediately notify your tenant of the agent’s name, contact address, an address for service, mobile phone number (if they have one), an email address (if they have one). Additionally, if a bond is held in respect of the tenancy, you must notify the bond centre of the agent’s details.

While it might seem quite onerous, this section of the Act is designed to ensure that tenants can contact their landlords, or a specified representative of the landlord, should they need to for the likes of maintenance etc. And it pays to bear in mind that any landlord who doesn’t comply commits an unlawful act and commits an infringement offence which is liable to a fine or an infringement fee of up to $1,500 - unless you have six or more rental properties, in which case the infringement fee could be up to $3,000!

Make sure that you claim whatever you can

With the loss of interest deductibility it’s important that landlords know what expenses they can claim. Like any other business landlords are able to claim operating expenses. Even the little expenses (like travelling to and from your rental property) add up so make sure you keep a good record of all your expenses and claim them!

Expenses you can claim for include:

Repairs and maintenance (but not renovations that substantially improve the value of the property)
Professional services fees, like accountants, lawyers or property managers, rates and insurance
Mortgage repayment insurance
Vehicle and travel expenses when traveling to inspect your property or do repairs
Depreciation on capital expenses, like whiteware, appliances or heat pumps
Legal fees involved in buying a rental property, as long as the expense is $10,000 or less.

Privacy Commissioner goes to bat for prospective tenants

Have you ever thought that a process or system of doing something could do with a bit of a shake-up but then along comes a Government Department that turns it on its head and completely over cooks it! Well, that’s what we think the Office of the Privacy Commissioner has done with their prescriptive new guidelines regarding the way landlords get information from prospective tenants. The new rules make no allowance for the quiet peace and enjoyment of the existing tenants nor the additional time and delay it will take for property managers to select a new tenant. As of March 2022, landlords run the risk of substantial fines for not following the prescriptive steps and the Privacy Commissioner has made it clear that they will carry out regular checks on how landlords are behaving. This will include ‘secret shopper’ activities to ensure that the right information is being asked, at the right time during the process and in a responsible way. Tenants are being encouraged to confidentially report landlords to the Privacy Commissioner if they feel that their rental experience has fallen short of what they expected.

Here is the new 4 step process:

Step one: Landlords are only able to ask the name and contact details of any potential tenant until such time as they have viewed the property. Gone are the days where a potential tenant enquires about a property, and you are able to ask questions to figure out if the tenant and property are a suitable match. For example, the landlord doesn’t want any pets – it is a breach of the guidelines to enquire if the tenant has pets!

Step two: Once the potential tenant has viewed the property and confirmed they are interested in progressing with an application you can ask for a ‘first level’ application. The information provided to you at this stage will enable you to ‘short list’ and you are able to ask for more information.

Step three: Once the tenant is deemed to be the ‘preferred applicant’ the landlord is able to carry out credit and criminal history checks and evidence of ability to pay the rent.

Step four: When preparing the tenancy agreement, you are able to ask for information concerning motor vehicles, guarantors, and an alternative address for service.

On the face of it, the new 4 step process doesn’t appear all that onerous but it will have unintended consequences of slowing up the overall tenanting process. It seems to us to be a case of common sense meets bureaucracy.

Property Investor Insights care of Tony Alexander and Crockers:

Key points from this month’s investor insights are:

Investor demand for more property has eased slightly, but intentions to hold for the long-term remain unaffected by rising interest rates and falling house prices.
There is a downward trend in the proportion of investors looking to expand their portfolio who will develop the property themselves, and a rising trend in the proportion who will purchase an existing property.
Investors increasingly favour fixing for shorter terms.
There is no clear sign that rising interest rates are causing accelerating plans to pay down debt.

Getting a loan just got a smidgen easier

In our February newsletter, we explained how the Government had done a bit of a flip flop over the changes they made to the Credit Contracts and Consumer Finance Act (CCCFA). We know that you’ll be getting sick of hearing about it but in a nutshell the Government made the changes with a view to rein in loan sharks (no problem there) but unfortunately, their changes inadvertently included other more legitimate lenders like banks. For a while, borrowers looking for bank finance were coming unstuck because of their takeaway or Netflix spending habits. Sanity has prevailed and banks now look at a borrower's ‘forward’ spending and therefore forward ability to service a mortgage not retrospective spending. Phew! In a recent NZ Herald podcast Frances Cook talked to Bruce Patton from Loan Market about the CCCFA and learnt some good tips and tricks when it comes to fronting up to banks for a mortgage in today’s lending environment.

We’ve put a link to the 33-minute podcast at the bottom of this section but if you don’t have time to listen here are some little gems we picked out of it:

Changes to the CCCFA will include lending institutions you approach for lending looking at your costs and expenses in the future, not retrospectively.
Banks are cautious at the best of times, evidenced by the very low number of mortgagee sales we see here in NZ.
Prepare relevant information in the form of a budget for the lender.
Think 3 months back and 3 months in advance when preparing a budget.
Make sure that you show in your budget you can afford the mortgage you are applying for.
Remember to include all debt like credit cards and the likes of After Pay.
Try to get rid of all short-term debt before applying for your mortgage.
Credit scoring is becoming a lot more prevalent in NZ. Credit scores go from 1 to 1000 with 1000 being at the top (good credit) of the scale.
There are about 3 main credit agencies in NZ. You can apply to them for your credit score, and they are obliged to provide it to you free of charge as it's personal information they hold about you. It pays to know your credit score.

An interesting section of the podcast dealt with the common terms for mortgage structures:

Fixed: Means the loan is locked in for a specific term. In the current debt market, Borrowers pay a slight premium for the certainty of a fixed-term loan. If you try to break the fixed term loan before it ends you can be charged a ‘break fee’ if rates have gone down since you took the loan out.

Floating: The interest rate is changeable during the term of the loan.

Revolving: Think of it as a big overdraft. Works on a floating rate. You can put money in or take it out of a revolving loan.

Offset: Like a revolving account but you are able to compartment accounts within the main account. It’s a good way to pay off a mortgage quickly and like revolving and floating is always at the floating rate.

Click here to listen to the full podcast

Changes to the Healthy Homes Standards come into effect on the 12th of this month

Amendments include changes to the heating requirements to reflect the higher thermal performance of homes built to the 2008 building code requirements for insulation & glazing and apartments as well as other minor changes to the ventilation and moisture ingress and drainage standards.

In summary:

The changes to the heating standard will generally allow smaller heaters to be installed in homes built to the 2008 building code requirements for insulation and glazing and apartments. The updated formula for these building types means that tenants will still benefit from a living room that can be heated to and maintained at 18ºC on the coldest day of the year.

The heating assessment tool on the Tenancy Services website will be updated to reflect these changes on 12 May 2022, when they become law.

To assist in transitioning to these new arrangements, private landlords of new homes built to the 2008 building code requirements for insulation and glazing and certain apartments will have until 12 February 2023 to comply with the heating standard.

The Government has also introduced more flexibility for properties with innovative and energy-efficient technologies. Developers can now use new and different heating technologies to comply with the heating standard. This requires a specialist to estimate the housing needs according to specific criteria including that the system must be able to heat the living room to 18ºC on the coldest day of the year. Also, geothermal heating systems that provide direct heat to a living room will also meet the heating standard. This will be utilised primarily by homes in Rotorua.

The Government is also allowing electrical heaters to boost the heating capacity to what is required when qualifying heaters installed prior to 1 July 2019 are short on capacity by 2.4kW or less, rather than 1.5kW or less. The trigger point to top up or replace existing heating installed before 1 July 2019 has been revised to existing heaters that are at 80% of the required heating capacity, instead of 90%. Over time, as heaters need to be replaced due to wear and tear, they will need to meet the full requirement of the heating standard.

Amendments to the Healthy Homes ventilation standard now support the use of continuous mechanical ventilation, which extracts moisture to the outdoors from kitchens and bathrooms. Continuous mechanical ventilation will meet the ventilation standard where they have been installed in homes that have first received building consent, and the system was part of that original consent, on or after 1 November 2019.

For retrofitted homes where installation of continuous mechanical ventilation happened before 1 November 2019, or if the mechanical ventilation system wasn’t part of the original consent, the system must provide ventilation for multiple rooms and meet minimum exhaust capacity requirements.

A minor change to the moisture ingress and drainage standard for moisture barriers has been made. It clarifies that landlords are not required to install alternative moisture barriers where installation of a polythene barrier isn’t reasonably practical.

Thinking of selling?

We hope not and if you are please get in touch with us first as we might just know of an investor who’s looking. If you are thinking of selling, then here’s a reminder about the Bright-line property rule care of IRD.

5-year bright-line period for new builds

A shorter bright-line period of 5 years has been introduced for new builds. The 5-year bright-line period applies for the initial owners who have acquired the completed new build within 12 months after the Code Compliance Certificate (CCC) is issued.
New builds purchased off the plans and new builds constructed on land already owned will also qualify for the 5 year bright-line period, provided these new builds receive their CCCs by the time the land is disposed of.

Bright-line main home exclusion

There are changes to the way bright-line applies to the main home when there is another dwelling for investment purposes on the same land as the main home. Where the main home is over 50% of the land, the existing main home exclusion continues to apply in the same way.

If the main home is under 50% of the land, any gain made on the sale of the property is apportioned between the main home and the rental property. The main home portion will not be taxed.
When a property is not used as the main home for periods of more than 12 consecutive months, the time apportionment rule applies regardless of whether the main home takes up more or less than half the land. The sale will be subject to bright-line proportionate to the non-main home use periods.

Making bright-line easier for customers

Customers filing in myIR and intermediaries filing in Gateway (i.e. Xero, MYOB) will have a Property attachment (IR833) in the return to be completed. The IR833 form will come pre-populated with property information including title number, address, date of purchase and date of sale.
Soon customers will also be able to respond to bright-line correspondence through myIR.

To help you determine if tax is payable on the sale of a residential rental property, use the Property tax decision tool on the Inland Revenue website. Head to www.ird.govt.nz/propertytax

Changes to how you deduct interest on rental income

The ability to claim interest on loans for residential property as an expense is being phased out.

These new interest limitation rules apply from 1 October 2021:
- For residential property purchased on or after 27 March 2021, you won’t be able to claim interest as an expense from 1 October 2021, unless an exclusion or exemption applies.
- For property acquired before 27 March 2021, the ability to deduct interest on existing loans is being phased out over 4 years, ending 31 March 2025.
Interest on any new loans drawn down on or after 27 March 2021 will not be deductible.
Special rules apply for refinanced loans, revolving credit and overdraft facilities.
- Refinancing up to the level of the original loan does not affect the deductibility of the interest and if the original loan qualified for phasing out, then that treatment remains the same.
- For interest on revolving credit and overdraft facilities, any interest on borrowings above the closing balance on 26 March 2021 will not be deductible.

For more information about the changes to property tax head to www.ird.govt.nz/property-interest-rules or talk to a tax professional.

Disclaimer

Given the opinions expressed in parts of this newsletter, 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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