Lease renewals for a happy new year

Each December marks the start of our busy season as we work to renew tenancies for early next year.  We end tenancies in what we term ‘peak letting season’, when there is highest demand by tenants looking for properties.  This means our clients get the best rent possible and the best tenants possible, because we think carefully about maximising return on our clients investments, and use fixed term leases to great effect.  If your property management company doesn’t use fixed term tenancies, or doesn’t end them in the peak season of January to March, you need to be talking to us about getting better rents and better tenants.  It can make thousands of dollars difference to your pocket every year.

We are proactive on getting new leases in place for properties.  Right now, we are notifying our clients (landlords) about the up-coming end date of their leases, and asking they confirm they are happy for a renewal where we recommend it.  Why do we ask?  We understand the requirements and restrictions on fixed term tenancies as well as periodic tenancies, and we know sometimes plans change.  It is important we are kept abreast of such plans so we can manage the tenancies with our client’s best interests in mind.  Does your property management company inform you of upcoming lease renewals, and checks your plans coincide with their planned actions?  If not, you know who to call.

Once clients have been informed, we send lease renewal offers to tenants we’d like to have stay on at the property (N.B. not everyone is so lucky to get an offer of renewal – why keep less-than-desirable tenants?), and they have until a certain date to return the paperwork to secure the property for another year.  If they don’t, we confirm the end of the tenancy and send them information on what they need to do in order to get their bond refunded in full.  We simultaneously advertise the property to minimise vacancy time – there is no point in waiting until the tenants have left.  This is another way we maximise our client’s rental income.

It’s a good time of year for you to have a think about your rental property for next year.  Would you like it to perform better than it has?  Call us now on 04 4711880 to book an appointment to discuss your property management needs, and experience Rental Results Property Management Excellence for yourself.

Are your gutters clear?

It’s a good idea to check.  From the ground you can tell if they need clearing if you can see grass or other vegetation growing in them.  Also, if it is raining and water is coming off the edge of the gutter in a waterfall, get them cleared out immediately.  

What’s the harm if they are not clear?   Blocked gutters can allow water to flow under the roof and get into ceiling spaces and wall cavities, rotting framing and wall linings, causing mould and mildew, and other unpleasant and expensive side effects.  Water sheeting off the side of the roof can also undermine your foundation, causing cracks, subsidence, and other issues.  Underpinning the foundation is very expensive, so avoid it by clearing gutters.  

If your roof is too tall for you to tackle, ask a plumber to do it for you.

Do you have trees and shrubs at your investment properties?

Do you have trees and shrubs at your investment properties?
Tenants may have different ideas about landscaping than you do.  To prevent a chainsaw massacre, put a clause in your tenancy agreement that tenants are NOT to trim or remove trees or shrubs.  Establishing value of plants is very difficult, prevention is better than cure.
If tenants request permission to trim trees (some will), ask they use Dazzle to mark what and where they want to cut, and email you photos for your consent and to keep a record of what was agreed.  If they are serious about doing it, they will comply.  If you never hear again, make sure you check on your next inspection that they didn't go ahead anyway.  We know a landlord who had the unfortunate experience of a tenant 'trimming' a lovely garden full of established 5-7m high trees with a chainsaw.  To waist high.  Every single one.  Surprisingly, the tenant asked permission and received it first , there was mis-communication about what a 'trim' involved.  The garden lost a decade of growth.  So use the Dazzle trick to prevent this sort of problem on your property.

They’re a good tenant, but…

If I had a dollar for every time I heard this, followed with ‘they are behind on the rent’, I’d have enough to clear some of those rent arrears.

There have been some tragic cases.  

Try this one.  The social worker:  This landlord took pity on someone who suffered a tragedy in Christchurch earthquakes and put her in his property.  She never paid rent, and after six months, the landlord finally kicked her out.  She then disputed the amount of the rent, claiming it was $100 per week less than he had signed her up.  It’s still going through the Tribunal, causing the landlord considerable emotional and financial stress.

Or this one.  The automatic payment:  The landlord checked the rent came in every week for about 8 weeks for their new tenant.  At this point they relaxed, knowing the tenant had it sorted.  Three months later, their bank rings, their mortgage is in default.  The tenants seemed to have stopped paying the moment they stopped checking.  Tears all round, and no, they never recovered the debt owed.

Or the one where the landlord can’t afford property management. I call them the Conflict Avoider: That’s because his tenant had racked up close to $50,000 over a five year period.  That’s about three years of rent.  They also hadn’t inspected during that time, because, well, they’d need to discuss the rent arrears then.  So they had no idea what state the property was in.  On the plus side, they’d spent nothing on maintenance either.  Somehow, I think this will simply cost them more due to problems being left unattended.  Yep, can’t afford property management.  More like, can’t afford not to have it.

So, if you find yourself identifying too closely with these real life landlords, get help!  Call us now on 04 4711880, we can save you from the rent arrears blues.

Saving Fees Costs Money

So, our dream clients who are thrilled to bits with the increased rent we get them have their property in an apartment block with around 20 other apartments.  One of the other owners of an apartment in the block has worked with us on a number of issues with common property areas, and he was seriously impressed with what we had done to improve the property overall and make headway where his efforts in the past had not.  He had his property managed by another company.

'Well, if you like what we do, let us do it for you', we urged.
'I'd like to,' he responded, 'but I get a better rate for property management with the other company, they are several percentage points cheaper'.
Gulp.  How do we compare then?  We had to find out.
'How much rent are you getting for your property?' we asked.
He told us, and we told him how much we were getting for a property the same as his in the same complex.  He was impressed.
'But I get a cheaper rate with the other company' he repeated.
'How much do you make from the rent after your management fees are considered?' we asked him. 

He calculated and came up with a figure.  While he was doing that, we were calculating how much our other clients with the same property got in-hand.  Guess who got more?  Our clients, who paid more in fees.

Was he convinced?  Maybe.  Did he take action?  Not yet.  Is it costing him?  Certainly.  Is his cheaper management rate better?  Heck no, you get what you pay for.  Not only was he not getting as much in hand from his property, he wasn't getting any action from his property management company on the issues that bothered him for years.  Sure, he wasn't paying as much, but he wasn't getting as much either.  He really needed to figure out if a smaller piece of a bigger pie was better than a bigger piece of a smaller pie.  In this instance, his bigger pie meant a much bigger serve for him.  But he couldn't see it, as he was hung up on the percentage fee.

If you want to know how much bigger his pie would have been, it was in the four figures range, and went up from there.  Yep, percentage matters, but not as much as what you get for that percentage.

Dream clients

I have a group of clients I consider my ideal clients.  They live out of town and don't fancy the idea of sorting out anything to do with the property themselves.  They leave all that stuff to us.  They don't ignore it, they do know what is going on with their property, they just know they have the right people looking after it.  For them, it is about the numbers.

One of these clients wanted to sell their property.  They needed to improve their cash situation.  We'd done all we could by renting the property out at a good rental, increasing it every year for the last three years, but it wasn't enough.  So, near the end of the tenants lease, they put it on the market.  Some bites, but nothing of the sort to solve their financial issue.

We checked in with them as to whether they wanted us to lease out the property for the following year.  They decided they were likely to sell to an investor, so they agreed to re-rent the property for another fixed term. 

From our point of view, it was business as usual, with the real estate agent occasionally popping in to grab the key to show a prospective buyer through.  The property has security keys, you know, the 'do not copy' kind, and getting copies needs permission.  We ask the owner, our client, if they were happy for us to give the agent a key so it is more convenient to get buyers through. 

They respond with:
'That's a good thought, but we've withdrawn it from the market today'. 

This was the last thing we expected.  When we asked why, they responded with:

 "why would we sell when you guys are doing such a neat job and have increased the rental again!!!"

  Aww, shucks.  That's why we love them, and they love us!  Financial problem solved.  Happy client.  Happy property management company.

I have another story to tell about the apartment block this property is in, so read the next blog!

When to apply to Tribunal for Rent Arrears

Here's a useful process to follow for chasing up rent arrears.  It solves the majority of rent arrears issues in the first few steps, but still gives you the security of going to Tenancy Tribunal as quickly as practical so rent arrears don't get too out of hand.

Firstly, I'm going to assume you check rents the day they are due.  If you don't, start doing that now.  Keep forgetting?  Set a reminder up on your calendar to check them.  Never assume the tenant will pay, Sods law will have it that the minute you stop checking will be the minute they stop regular payments.  Some tenants are frustrating in that they don't have an automatic payment (AP) set up, but just pay when they remember to.  Don't put up with this.  Follow the plan below to motivate them to pay the rent in full and on time.

So, you've checked the rent on the day it's due, and it isn't there.  Step one is contact the tenant.  We use email or text on the first day, because the first reminder is usually all that is needed.  Something as simple as 'I notice your rent didn't come in today.  Please make payment immediately' does the trick most of the time.  Don't add 'or tell me if there is a reason why not' - there is no reason good enough.  Maslow says shelter is right up there on the hierarchy of needs, without it, nothing much else matters.  No rent, means no shelter.  Simple. 

Step 2: check the next day if rent came in, or the tenant has told you when they will make payment. If it isn't the next day, have your B-S-ometer on.  No one who doesn't have the rent today has twice as much next week, so don't agree to that.  Instead, ask how much they are short by today, and they should pay the rest of the rent to you immediately.  Sometimes just being $10 short in the bank account stops the rent leaving the account.  So get all but $10 rent now, and they can pay you the extra $10 on top of next weeks rent.  Much more affordable, and the rest of the rent is less likely to disappear too.

If the rent hasn't come on day 2, ring them up if you haven't already spoken to them.  I suggest something like this:  "Hi, your rent didn't come in yesterday and I sent you a text about it, but I see it hasn't come in today either.  Can you get to the bank today and sort this out?  I'm going to send you a 14-day-notice-to-remedy because rent arrears are a serious issue.  If you get it paid today, I'll cancel the 14-day-notice.  Thanks".  Note at no point have we asked why the rent wasn't paid.  Asking 'why' just puts people on the spot and compels them to tell us something that might be intensely private, embarrassing, or paints them in a bad light.  Who wants to do that?  No wonder people lie about rent arrears.  Don't ask, don't make them feel bad.  Guilty people tend to bury their head in the sand, not solve the problem, and you want the problem solved.

So, immediately issue them with a 14-day-notice-to-remedy-rent-arrears, that's step 3.  The funny thing about 14-day-notices is that they are actually for a lot longer than that as you must allow service time.  If you post them, it is another 4 days you need to add on, after the day you send it.  This means the date to remedy the issue may be 19 days away, and you already have a day or two of rent arrears, and worse if day one was Friday, as the weekend will be in there too before day 2 has started.  You can get a sample of a 14-day-notice from Building and Housing Group.

So, the 14-day-notice is out there in the world, now what should you do?  Don't wait around.  We run on the principal that if the tenants have been un-contactable, and they haven't sorted out the rent arrears, we are preparing to apply for Tenancy Tribunal.  If they miss their next rent payment, apply, even though the 14 day notice has not yet expired.

"What?  But I thought I had until the letter expired before I need to pay rent?" says your tenant.  Yes, the missed rent.  The current rent is still due on time.  If they have skipped their next rent payment too, you are pushing your luck to get now two weeks rent arrears paid, especially if they are not trying to keep to their obligations. 

By applying for Tenancy Tribunal early, you shorten your exposure to rent arrears.  Lets say you apply as soon as rent arrears exceed one week.  You potentially have another 14 days to go on the notice to remedy because you issued it on day two.  Tribunal staff receive the application and process it.  This takes around 3 days.  They may schedule mediation, this takes around 2 weeks.  If you don't resolve it in mediation, it will be scheduled for a Tribunal hearing, which takes another 2 weeks or so, if you are lucky and the load is light.  If your tenant hasn't paid any rent in this time, you are now facing rent arrears of 5-6 weeks by the time you reach a hearing.

Now imagine if you hadn't applied for Tribunal at the beginning of the second week of rent arrears, but instead waited until the notice expired.  You issue the 14 day notice on day 3 of the rent arrears, and the end date is 19 days away, bringing you to 22 days arrears.  You apply to Tribunal at this point, which takes 3 days to process, making 25 days, and then you are offered mediation which happens within one week because the arrears are so great, bringing the arrears to 32 days (but could be a week more), but you don't come to an arrangement, so it is put to Tribunal two weeks later, bringing the rent arrears to a whopping 46 days.  At the New Zealand national rent average of $350pw, that is $2300 rent arrears at the time of hearing.  I'm not exaggerating, the average claim at Tribunal is for around this amount.  The adjudicator will give the tenant several days to move out, increasing this amount by the daily rent rate of $50 for every extra day they are in possession.  If they don't leave, you need to get a bailiff to get rid of them, and they require the order to have been sealed for a couple of days before acting.

No tenant I know of who has been evicted for rent arrears feels any need to leave the property clean and tidy with all their possessions and rubbish removed.  They rarely return all keys too.  So, you'll be back to Tribunal to claim for all those things, or you just sigh, and give up.

If you haven't collected the maximum allowable rent of 4 weeks, you are really considerably out of pocket.  Even with 4 weeks rent, you will have some collection to do, and that costs too.  But that is the topic for another blog.

The point of this one, act swiftly on rent arrears.  Don't let them get out of control.  Use all the tools at your disposal.

What are your options when a lease is going to end, and you want to sell?

When you are going to sell your property, and you are coming up to the end of a fixed term tenancy, you need to think about how you are going to deal with the lease renewal.  You have what is called 'the effective period' which is 90 - 21 days prior to the fixed term lease ending in which you can renew or end the tenancy with your tenant.  If you miss this window of time to sort it out, the tenancy will become periodic.

Each choice has different benefits and disadvantages.  The options as I see them are:

1. Renew the current tenants for a one year lease.
Advantage: Certainty about cashflow.  A good option if you are not serious about selling, or confident of your chances of getting the price you want.
Disadvantage: Buyers may want to move in, and tenants are protected for duration of their lease, unless you successfully negotiate an earlier end with them.

2. Renew for a shorter fixed term, e.g. 3 months.
Advantage: Cashflow during sales process, buyers don't have to wait long to move in.  Good if you want to hedge your bets during the sales process, and possibly renew your tenants again at the end of the extended fixed term when you take the property off the market.
Disadvantage: Tenants may leave at end, and if you still own the house, and it can be harder to find great tenants at that time of year and rent may drop outside peak letting season.

3. Allow the tenancy to go periodic.
Advantage: If sold, just need to give tenants 6 weeks notice.  Good if you have a sympathetic real estate agent who works well with the tenants, and if your house is likely to sell quickly.
Disadvantage: Tenants can leave at any time with only 3 weeks notice, which means it may be empty while selling, and hard to re-rent while on the market to sell.  Which means your cashflow is detrimentally affected, possibly making you a motivated buyer.

4. Ask the tenants to leave at the end of the fixed term.
Advantage: Will be able to show buyers through without notice, can have short settlement if it suits the buyer.  Again good if you are confident of selling quickly, or have the funds available to wait for the right buyer.
Disadvantage: No cashflow, empty property could be vandalised or broken into (and there are a lot of things in an empty property to steal, smash or stain, don't be fooled into thinking there is not). If it is empty a long time, your insurance can be compromised.

It is best to talk through these options with your property manager, partner, and real estate salesperson so you can fully understand the pro's and con's of each option. I can't say which one will be better for you - it will all depend how keen you are to sell, and how many buyers are out there in the market with the money to spend on your property, and whether you want to have the back-up plan of re-renting it should it not sell (e.g. you don't get offers you are happy with, or you don't get any offers at all). In all, you would need to have a crystal ball to know which option is best. All of them involve some level of risk. I'm sure your real estate agent is good at what she or he does, but no one can promise a sale within a certain amount of time (unless you give it away for free, of course! In which case, we could take it off your hands...).

Selling with a Fixed Term Tenancy

We have experience in working with real estate agents when clients want to adjust their portfolio.  A common question we are asked when clients are looking to sell is 'what do I need to know about selling my property with a fixed term tenancy'.

Once you are certain you are going to list it for sale, make sure you inform your property manager as you have a legal obligation to inform the tenants, and your property manager should do that on your behalf.

The real estate agent will need to touch base with your property manager to get tenant details for access.  The property manager can also provide them with any details they need.

Your tenant has a fixed term lease which is likely to continue past the hoped-for sales date.  This means you will need to sell the property with a tenancy in place, or end the tenancy early by mutual agreement (otherwise known as ‘make them an offer they can’t refuse’ – could be expensive, or very cheap).

If you sell it while you have a fixed term tenant, and you can’t reach agreement with the tenant about ending the lease early, the options for dealing with it are either that the settlement date is pushed back until the lease end date (and you need to wait for your money until then), or the new owner becomes the landlord for the duration of the lease.  Obviously this will require some negotiation with the prospective purchaser as to their preference.

Of course, there is another option, offer the property to the tenant to buy.  You may want to get an independent valuation to set the price, and have your lawyer do the negotiating if necessary, or use an agent to facilitate the sale.  Let your property manager know if you want them to sound out the tenant as to this option, and potentially save you sales fees.

If you are a landlord with a fixed term tenancy and you are wanting to sell, get in touch.  Great property managers, like us, have good solutions.

The cost of not getting property management

A couple of things I’ve noticed about people who manage their own investment properties.  Firstly is they rarely get the rent they could.  They seem to take how much the rental appraisal says, then discounts off the property management fees to charge tenants lower than market rent.  What does this do?  Well it costs the same, without any of the benefits.  Personally, if I am paying for something, I like to get the return on my investment.

Secondly, self-managing landlords don’t inspect.  How do I know this?  We reference check every tenant we take on, and often ring two landlords per tenant, current and former, for a reference.  We always ask them how was the last inspection.  For most, the last inspection was the first inspection, when the tenant moved in, and just trusted them to tell them when something goes wrong.  

Unfortunately, most tenants don’t know what is a serious issue in need of attention before problems and costs escalate, and what is just a minor inconvenience to them.  Most landlords don’t know this either.  We’ve had a number of situations where a landlord is facing a serious repair bill because they just didn’t know how serious something was.

Having a systematic approach to inspecting properties top to bottom on a regular basis is the secret to lower maintenance costs, increased property values, and happier tenants.  Inspections should not simply be about whether the tenant has cleaned the oven lately – they should be a way of dealing with maintenance issues as they arise.  Most people don’t know this, and feel funny about invading the tenants personal space.  No wonder, if they are the cleaning police.

While checking cleanliness is important (and that’s a topic for another blog) doing inspections for maintenance and damage is vital.  Paying the rent is a fine attribute in a tenant, but if they have caused more damage than they paid in rent, you aren’t making money, are you?  Likewise, I am sure you want to know if they are doing something unlawful – better to move them out before trouble moves in.

If you think you might not be getting the rent you could, and you haven’t visited the property at least every 4 months (every 3 months is even better), pick up your game, or get someone suitable to do it for you.  You are paying for someone to neglect their duties if you continue as you are, and you’d fire that person, wouldn’t you.  Do yourself a favour, hire a good replacement, like, well, us!  www.rentalresults.co.nz

Should I sell or should I hold?

The thing most people forget about property investment is that it isn't really a liquid asset.  Yes, you can sell it, but it doesn't necessarily get snapped up, unless buyers can smell that you are desperate to get rid of it, and you accept a ridiculously cheap price to get it off your hands.  Classic case of smart buyer, desperate seller.

When people are thinking of selling a property, the reasons are usually these:
I need the money for something else (I can't afford it)
I'm going to invest the money in something else (this investment is doing badly and I can't afford it)
And the more direct people say:
This investment is doing badly (I can't afford it)
I can't afford the maintenance on it - it always needs something done to it (I can't afford it).

I'm usually a bit surprised by this, but then, I like to buy property with my worst case scenario in mind.  What if interest rates rise?  What if rents drop?  What if insurance costs skyrocket?  What if the rates go up?  What if it has long vacancies?  What if it is vandalised? What if it is damaged by tenants?  What if a meteor falls on it?

I'm yet to have the last one happen, though it would be pretty cool, hey? Particularly if it was empty and vandalised and damaged and rents dropped and interest rose, but my insurance paid out.  Can there be an Act of God if you are an atheist? I'm sure I could sell the story to Woman's Day or some such mag if insurance did let me down.

I've noticed though, that many people have a limited idea of what is 'can't afford it'.  For some it is "I'm not sure how I'm going to feed the family or fill the car this week" and that is hard to argue with, they are really making fundamental choices on priorities.  For others it is 'I had to put in $20 once to stop the mortgage bouncing, when we did the entire repaint and rewire and re-roof that year".  Really?  Doing OK then.

What if we looked at affordability in a new light.
If property values double in general every 7-10 years, then we could take this as a measure of whether or not the property was performing.  Simply ask these questions:
1. What is the current value of my property?
2. What is that divided by 10 to get my 10 year doubling*?
3. How much have I spent on the property this year in rates, insurance and repairs?
4. Is the answer to question 3 more or less than the answer to question 2?
Regardless of the answer, question five is:
5. Can I live with that?

If I was to plug in the numbers using a realistic rental property, it would go like this.
1. Current value = $200,000.00
2. Ten percent of that is $20,000
3. It cost $3,000 in rates, insurance and repairs each year.
4. $3000 is way less than $20,000 for sure.
5.  You mean I really made $17,000 in unrealised and untaxed capital gains?  Wow, this property investment thing rocks!

Wait, you forgot to ask, 'how much rent did you make?'  That question is important.  This property made $14,000 (or $270 per week).  But there was also interest on the mortgage of approximately $10,000 (5% of $200,000), so that was only a pre-tax profit of $4000.  Or $75 per week. In other words, profit.

If I add in the $325 of capital gains each week ($17,000 divided by 52 weeks), and I'm feeling pretty prosperous all of a sudden.  Hmm, I can afford that!

Now some years this story isn't going to be as rosy.  We've done a gross assumption that capital gain is linear for a start, but also If I repaint the exterior as I need to every 10 years I will have zero real or 'imagined' capital return that year.  Is winning nine times out of ten worth playing for?  I think so.  I'd need to re-roof every fifty years, which will also wipe out a years worth of return or gain, and reclad just as often.  So really, every fifty years, I make a profit for 43 years, and break even or slightly lose in seven.  Sounds pretty good to me.  If I knew I could never sell it, I still think I'd be happy.  What do you think?

I welcome your comments on this blog post.  It is just my opinion and certainly you'd be a fool to rely on it as any sort of financial advice.  Certainly it contains assumptions about capital gains, interest rates and costs and so on.  But I do hope it gets you thinking.


* Hopefully you know 'The Rule of 72'.  I've used 10% here just to simplify the math for me and others who can't be bothered with complex calculations, but I really should have said 7.2% in order to double the property value every 10 years with compound interest.  I'll explore the rule of 72 in a future post.  Promise.