HOW TO BE A SUCCESSFUL LANDLORD
Advice on how to successfully manage an investment property
Property Management Property Brokers Licensed under the REAA 2008 Property Brokers Limited MREINZ Licensed under the REAA 2008
www.propertybrokers.co.nz www.propertybrokers.co.nz
Why we have developed this book With years of experience working in the Residential Property Management industry we have designed this small booklet to give prospective investors a solid foundation when becoming a landlord. There is no doubt that the demand for rental accommodation has grown in recent decades and this trend will continue. This is one of the main factors as to why residential property investment is so popular amongst New Zealanders. No matter the economy, everyone needs a home to live in. Even so, residential property investment isn’t entirely risk free. As a landlord you need to limit your exposure to the possible pitfalls of residential property investment. We can help you achieve this. With over 3,000 managed properties throughout the lower North Island we have the expertise to give you the advice that you need to limit your risk when making investment decisions. If you have any questions at all on property investment or being a landlord feel free to contact your nearest branch.
Property Brokers Rental Division
Plan to invest Important questions to ask yourself are; why I want to invest in property? Are you planning to invest long term, or short term? Property investment has many forms, including; land banking, property speculation or as an income stream for now and your future. What is your expectation of a return on your investment? First of all you need to know what you can afford and what the likely return will be on each individual investment. The return on investment is more commonly known as the yield (income). Higher yielding properties will provide a better return. The yield of a property is directly related to the value of the property and the amount of capital you hold. Some properties for sale may be advertised with a high yield but make sure that you do your own research on them before you make a decision on whether to purchase. Questions that you need to ask before you make a purchase: • • • • • • • • •
What is the likely rental income going to be? What type of tenant will I attract? What are average rents in the area? What local amenities are there? Is rental accommodation highly demanded in this area? What size property should I invest in? What outgoings are there going to be? How much vacancy time do I budget for? Can I add value to the property at relatively low cost?
You need to be comfortable with your answers to all of these questions before you can proceed to the next step. Being overly optimistic in your calculations, can produce unrealistic expectations of the potential return on your investment.
Presentation of the property Your property must stand out to give it the best opportunity of renting quickly to suitable tenants. Your investment property will be subject to the laws of supply and demand. When there are an abundance of properties available, your property needs to be able to attract suitable tenants, over similarly available properties. Tenants are becoming more selective of what they rent and rightfully so. The first question you need to ask yourself is would you be prepared to live in the property? If you wouldn’t why would you expect your tenants to do the same? Take time in presenting you property. Make sure you are aware of how to attract your target market. Some useful tips that we have learnt are: •
Heating and Insulation – What does the property offer? This is the most common question we are asked by prospective tenants.
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The Property must look fresh. Repaint approximately every 4 to 7 years – Use neutral colours.
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It is a rental property – Additional features that add little or no value won’t provide a return on your investment.
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Look for what is wrong with the property not what is right. If you are trying to attract a family – Does the home have the basic essentials a family needs such as a bath? Is the section secure and fully fenced?
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Garden presentation – Suitable for your target market and low maintenance. The likelihood is that a tenant will not maintain a garden to the same extent as a homeowner.
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Ventilation – Can the property be ventilated securely in the tenants absence?
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House position – Is the house positioned well on the section that it enjoys natural daylight? Are trees blocking out the sun? Can these be removed or trimmed easily?
Picking the right tenant The best landlords will ensure that they are meticulous when selecting the right tenant. Consequences of getting this wrong can be disastrous. The most common mistake is when a property is overpriced the house remains vacant for an extended period. The landlord then panics, picking the first tenant that makes an application. The financial hardships and stress caused through dealing with a bad tenant can be damaging on you and your family. Make sure that you do your homework and you know exactly who is going into your property. Basic questions that you need to ask are: • • • • • • • •
Can they afford the rent? Ideally the rent should be no more than 40% of the tenant’s combined net income. Do they move around on a regular basis? Does their name change on a regular basis? Have they ever been to Tenancy Tribunal and if so what for? What is their credit history like? What reference have they provided? Are the referees who they say they are? Do the applicants seem desperate? Are the applicants forthcoming with the information you require?
Background checks will enable you to make an informed decision. Also listen to your gut feeling, if something doesn’t feel right, it is likely you will be right. However, make sure you’re not discriminatory against applicants. Be careful in giving feedback to applicants you have turned down, as the most innocent of reasons could be taken as discrimination. The maximum penalty for discrimination is up to $4,000.
Tenancy Agreements The Tenancy Agreement is the contract that sets out the terms and conditions of the tenancy. Poorly written or even a lack of Tenancy Agreements can again lead you into trouble. All relationships start with good intent, However some will deteriorate and end badly. A well written Tenancy Agreement is an assurance you are protected. Make sure that your agreement is clear and stipulates all the conditions that you want met. Spend quality time to ensure all parties understand their rights and obligations. They need to know what the consequences are if they fail to pay the rent on time or do not maintain any aspect of the property to an acceptable standard. The following information should be clearly laid out in the agreement: • Full name, address and contact details of the landlord and ALL the tenants • The address of the property • The date the tenancy commences • Tenants address for service (beyond conclusion of tenancy) • The amount of the rent and bond • Frequency of payments and account to pay into • List of chattels provided by the landlord • Whether the tenancy is a fixed term (end date) or periodic • How many people are allowed to reside at the property • Whether pets are allowed. • Who maintains the grounds and lawns • Whether subleasing is allowed or not • If tenancy is part of a Body Corporate the rules must make up part of the Tenancy Agreement On the agreement being signed make sure that each tenant is presented with a copy of the agreement.
Inspecting the property From the outset, you must regularly inspect your property to make sure that it is being well looked after and also to make sure that the tenant is comfortable with no maintenance concerns. Before the tenancy commences complete a full detailed inspection, ideally with the tenant present. It is also recommended that you take lots of photographs or make a video of the property – as proof of the condition of the property prior to the tenants occupancy. Make sure that this document is dated and signed by both parties. This document along with photos will ensure that any potential disputes at the end of the tenancy can easily be remedied. Throughout the duration of the tenancy you will need to regularly inspect the property. It is worth checking your insurance policy as this may state how often you do your inspections. Your inspections should be detailed and specify any areas of concern. If taking photographs, it is important that you are not intruding on the tenant’s privacy. Do not take pictures of tenant’s personal belongings. Give the correct notice period to the tenant in writing prior to an inspection. The tenant does not have to be present when you do your inspection but you must give them at least 48 hours written notice. We recommend inspecting the property at least 4 times a year.
Knowledge of the Residential Tenancies Act You need to have at least a good basic understanding of the Residential Tenancies Act. In 2010 there were a number of significant changes to the Act that have resulted in a number of fines that can be issued if tenants, and especially landlords, fail to adhere to it. Too many landlords are unaware of the consequences of failing to comply with the Residential Tenancies Act. Tenants too are unaware but they are becoming more educated. As time goes by, more landlords will face issues in Tenancy Tribunal and this is purely down to a lack of basic knowledge of the Act. The Residential Tenancies Act is a complex document that outlines what the rights and obligations are of landlords and tenants of residential properties. You also need to be aware of other legislative requirements. There are a number of bills and acts that can affect a tenancy such as; • • • • • •
Building Act 2004 Unit Titles Act 2010 Human Rights Act 1993 Fencing Act 1978 Fencing of Swimming Pools Act 1987 Local Council regulations
Act on breaches quickly This can often be the most difficult aspect of being a landlord as it involves confronting a problem. Eventually there will be a problem and the best landlords act quickly. Too often landlords are slow in dealing with basic problems such as rent arrears. They also make decisions more based upon emotion rather than as a business decision. If you are slow in acting on breaches you are indicating to tenants that you are not serious about your investment, and they may take advantage of this. The most common breach of a tenancy is rent arrears. As soon as a payment is missed by the tenant, act on it immediately. Call the tenant and issue a written 14 Day Breach letter. If a tenant has committed a breach and a 14 Day Breach letter is issued, remember to follow up on this at the expiry date of the breach. Ideally through quick and positive communication you should resolve any disputes. However, if this cannot be achieved you will need to apply to the Tenancy Tribunal for a ruling. The first process is to attempt phone mediation with both parties to establish a resolution. On acceptance, a mediated order will be written and sent to the Tenancy Tribunal where it will be sealed by an adjudicator. Failure to reach a resolution at mediation will mean the case will go to Tenancy Tribunal where the adjudicator will make a decision based on the facts presented to them.
Maintaining the property It is a fact that many landlords lose good tenants through a lack of maintenance carried out on the home that they are renting. Tenants get frustrated and move on to better quality homes. There are also wider legislative consequences that landlords need to be aware as failure to carry out basic maintenance may result in the tenant making an application to Tenancy Tribunal to get the work done and claim compensation. The tenants are your customers and that they are paying for a product that you are providing. They expect basic repairs to be carried out in a timely and professional manner. Picture this scenario, you check in to a four star hotel and you find that you have no hot water. You call reception to get it fixed and you expect it to be fixed promptly. Tenants are no different. Another contributing factor as to why some landlords struggle is because they fail to budget for repairs and maintenance. Properties depreciate and prudent landlords will work on a budget of approximately 10% of rental income being put to one side for maintenance on the property. You may not spend it all one year, but eventually there will be some large expenses. Failure to maintain your property will see it depreciate in value, attracting higher maintenance tenants who may end up being a burden. These tenants may cause further depreciation of your asset resulting in a downward spiral of less quality tenant attraction, unless costly repairs are made to bring it back up to standard. Maintaining your property will increase rental income and subsequently help maximise the value of your asset, all the while attracting the most suitable tenants to your property.
Do you have the right protection? Providing that you have adequate protection, residential property investment can be one of the safest forms of investment. However, many landlords try to save money or are unaware of what insurance they need or is available. This can elevate your exposure to potential risks as a landlord. You need to be aware of the different levels and insurance products that are available. Landlord insurance can protect you from loss of rent, malicious damage and legal liability. Landlord Insurance is an added insurance policy and not part of regular home and contents insurance. Property Brokers is part of the Real Estate Institute of New Zealand. This gives us access to one of the most specialised and comprehensive landlord insurance policies through Real Landlord Insurance Ltd. This policy is only available through a licensed real estate agent. However we would also recommend that you shop around and speak to either your insurance provider or broker. Methamphetamine production is a continuing problem in New Zealand society. ‘P Labs’ as they are more commonly known are extremely difficult to detect. Companies such as Meth Minder now offer products which can monitor signs of Methamphetamine production. It is also a great way of attracting quality tenants as they know that the property they will be renting is not a risk to their health.
Appointing a REINZ Property Manager No landlord wants to unnecessarily pay money for a service that provides no value to them. Engaging the right Property Manager can help save money through maximising rental income and protecting the asset value of your property. They will greatly reduce the risk with the skills and experience they bring in managing your property. Benefits of using a REINZ Property Manager are: •
Rental income can be paid monthly or twice monthly with supporting comprehensive monthly owner statements
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Properties will be marketed 24 hours a day via numerous media outlets when available to rent
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Repairs and maintenance will be undertaken by professional trades people at competitive rates
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Any breaches will be acted upon quickly
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Funds are held in a Trust Account – which is non-interest bearing and audited biannually
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A Financial Year End summary will be provided for your accountant
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Assistance with project management to maintain and even increase the value of your residential property portfolio
A key question to also ask yourself before you decide whether to engage an REINZ Property Manager is how much spare time you have and what is your time worth?
If you wish to spend your precious spare time fixing taps, emptying spouting, showing prospective tenants through homes, writing tenancy agreements, inspecting properties, dealing with disputes, knowing what the rental market is doing and checking rent payments then DIY Property Management is best for you. However if you would rather; •
Value your time and prefer to spend it with family and friends.
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Do not want the emotional burden of dealing with disputes with tenants.
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Want to sleep at night trusting your property is in professional hands.
Then I suggest speaking to an REINZ Property Management company. REINZ Property Managers work to a code of ethics that ensures you will be getting best quality professional service.
How to pick the right Property Manager There will be numerous Property Management companies that promise to offer a great service at an affordable price. Before you pick a Property Management Company use this checklist and ask the following questions. Property Leasing □□ □□ □□ □□ □□
How many properties do your Property Managers look after? On average how many properties do you rent each month? How do you market available properties? Do staff members personally show prospective tenants through properties? How do you select tenants?
Property Management □□ □□ □□ □□ □□ □□ □□ □□ □□ □□ □□
What is your process for dealing with rent arrears? What percentage of tenants are currently in arrears? Does your company have a disputes process? How often is your company in Tenancy Tribunal? Do your tradespeople have ‘Service Level Agreements’? How do you check that work has been done on my property? How frequently will you inspect my property? What training does your company provide for its staff? How frequently will I be paid? Does your company work with strict policies and procedures? What happens if my property manager is sick or on leave?
□□ What happens when the office is closed and there is a problem with my property? □□ Can you send statements and inspections to me electronically? □□ Can I access statements, inspections and rent payments via your website? Customer Service □□ □□ □□ □□ □□
Does your company offer a ‘quality service guarantee’? What references do you have from other clients? How frequently will you communicate with me? Does your company have a complaints policy? Does your company offer client nights and educational seminars?
By following this checklist, this will ensure that your asset should be well protected. If you want any further free advice on property investment please call into any of our branches for a coffee. Our staff will be more than happy to help you with your decision making.
CONTACT INFORMATION Taumarunui 27 Hakiaha Street Telephone 07 895 7123 renttaumarunui@propertybrokers.co.nz
Kapiti Coast PO Box 650 Paraparaumu Tel 04 974 6592 rentkapiti@propertybrokers.co.nz
Ashburton 217 West Street Telephone 03 307 9176 rentashburton@propertybrokers.co.nz
Te Aroha 152 Whitaker Street Telephone 07 884 9547 renttearoha@propertybrokers.co.nz
Pahiatua 129 Main Street, Pahiatua Telephone 06 376 8486 rentpahiatua@propertybrokers.co.nz
Westport 132 Palmerston Street Telephone 03 789 8777 rentwestport@propertybrokers.co.nz
Palmerston North 238 Broadway Avenue Telephone 06 355 5595 rentpalmerston@propertybrokers.co.nz
Hastings 306 St Aubyn Street West, Hastings Telephone 06 873 8394 renthastings@propertybrokers.co.nz
Greymouth 45 Tainui Street Telephone 03 768 7145 rentgreymouth@propertybrokers.co.nz
Feilding and District 120 Fergusson Street, Feilding Telephone 06 323 7417 rentfeilding@propertybrokers.co.nz
Napier 19 Clive Square West, Napier Telephone 06 835 0252 rentnapier@propertybrokers.co.nz
Rangiora 222 High Street Telephone 03 313 8022 rentrangiora@propertybrokers.co.nz
Rangitikei 266 Broadway, Marton Telephone 06 327 0069 rentmarton@propertybrokers.co.nz
Central Hawkes Bay 93 Ruataniwha Street, Waipukurau Telephone 06 858 7280 rentwaipukurau@propertybrokers.co.nz
Timaru Cnr Church & Sophia Streets Telephone 03 687 7166 renttimaru@propertybrokers.co.nz
Wanganui and District 51 Taupo Quay Telephone 06 345 7548 rentwanganui@propertybrokers.co.nz Foxton and Coastal Cnr Main & Clyde Streets Telephone 06 363 0030 rentfoxton@propertybrokers.co.nz
Dannevirke 45 High Street, Dannevirke Telephone 06 374 9102 rentdannevirke@propertybrokers.co.nz Masterton 84 Chapel Street, Masterton Telephone 06 370 0704 rentmasterton@propertybrokers.co.nz
Oamaru 157 Thames Street Telephone 03 434 1543 rentoamaru@propertybrokers.co.nz
Levin 1 Bristol Street Telephone 06 366 0880 rentlevin@propertybrokers.co.nz
South Wairarapa 85 Main Street, Greytown Telephone 06 304 8015 rentgreytown@propertybrokers.co.nz
Property Brokers Licensed under the REAA 2008
www.propertybrokers.co.nz