Life as a Landlord

[Perry]

We seem to exist in some twilight ‘other world’ where the normal rules of commerce do not apply.

Except for tax. That always applies, no matter what.

[Peter Griffin]

Good Morning Peter,

Excellent article in the paper. You're doing a wonderful job of 'balancing the scales'.

---

EDIT

Article link.

[flyernzl]

Good Morning Peter,

Excellent article in the paper. You're doing a wonderful job of 'balancing the scales'.

Thanks you. Nice to get some approval in among all the abuse.

[Perry]

You have an ingenious double, flyer?

Kiwi plastic brick inventor Peter Lewis claims he was thrown on the trash.

[flyernzl]

Not I. I don't have a yacht (sold my 12'6" sailboat years ago!)

[flyernzl]

What’s Your Policy?

During our everyday lives we all need to interact with many businesses, some large and some small. As such, we will have invariably come across statements such as “Our policy is . . .” and “In order to comply with our policy, you must . . .” From the point of view of the organisation you are dealing with, this is good business practice. By establishing a pre-set group of specific policies they ensure that all customers are treated equally, that there is a standard response to commonly occurring situations, and the business is unlikely to be accused of breaking the law.


So when you operate your residential landlording business do you have a set of policies in place, or do you just wing it depending on the day and the mood?


Even if you work as a solo landlord it is good practice to formalise and codify your policies. These could cover quite a range of activities, from your purchase of properties through to the setting of rents, the selection and induction of tenants, how you handle the various problems that will invariably arise during a tenancy, the termination of the tenancy, and how you decide to retain or dispose of a particular investment property.

As a landlord, I look at a property that is being offered for sale on the basis of its actual or potential cash flow. The property may be an ideal development site, it might be a great renovate and flick deal, or it could be an amazing place for an owner to live in, but under my own investment policy I will reject all such properties if they fail to measure up under my personal plan of buy, hold long-term, and rent. Those investors who develop, renovate, or move their own homes can have those other ones thank you very much. This, of course, saves me a lot of time – I can reject 99.9% of properties that are on the market after just a few clicks of my calculator. Your particular requirements may be different, but that’s OK as they suit your needs not mine.

Similarly, I have a specific policy when I select tenants. Any tenants that do not measure up get my “I have to advise that your application was unsuccessful” response. I would sooner keep the rental vacant than allow someone who does not comply with my requirements take over the property. In the past I have sometimes compromised, and almost every time I have done so I have regretted it. The best assessment of someone’s future behaviour is how they have behaved in the past. People make promises that they will improve, that they realise now that they need to pay their bills, or will no longer annoy their neighbours, but few are able to carry these good intentions through to a long-term behaviour change.

I have found that the biggest advantage of setting policies for your business is that it makes you think. Instead of having to make fairly hasty decisions under the pressure of events and without much time to consider the implications, you can sit down at some quiet time, consider the way you want your rentals to run, and draw up policies that will help this happen. It is called forward planning, and it is something that most people ignore to their own detriment. Of course we all find thinking difficult, tiring, and something that we would sooner put off until tomorrow or next week, but believe me it does pay dividends.

By formulating and then adhering to these policies you also have a firm response to various requests that come your way. Frequently, when signing up a new tenant, I get asked “If we mow the lawns ourselves, can we get a reduction in the rent?” I am able to respond “Our policy is that all lawns are mown by contractors whom we pay, so we are not able to offer that option”. This response is invariably accepted without further argument. People seem to be willing to accept a policy that is firmly stated and consistently applied.

Of course, any policy needs to be updated to reflect current economic conditions and legislative developments. My own policy on selecting tenants used to accept that any minor bad debts, such as defaulted cell-phone or power accounts, of more than five years ago could be safely discounted if the applicant has had a clean credit history since that time. I reasoned that they had probably learnt their lesson and had reformed their behaviour. However, because Minister Twyford is working to make it so much harder for landlords to remove unsatisfactory tenants from a property, I have amended my tenant selection policy. Now, any recorded bad debts at all at any time means an instant fail. Only perfect tenants will, in the future, have any chance of gaining the tenancy. That is my recently updated policy.

Similar policies need to be formulated and applied to 14-day breach notices and termination proceedings. I work on the basis that any tenant might fail to keep the terms of the tenancy once, and if they do so I will work with them to help overcome that hurdle and help them back onto the path of righteousness. However, if they fall from grace a second time, that rings the alarm bell and I will then work towards removing them from the tenancy. Bad behaviour becomes a habit. Tenants are my customers, and like any business I prefer customers that are easy to deal with, understand and accept their rights and responsibilities and, yes, return the most profit with the minimum amount of my time and effort. When trouble does strike I hold the tenant up to the light and ask “Do I want these people to stay, or would it be better for all of our sakes if they went elsewhere?” The answer to that question will then determine the actions I take.

I am not a social worker or a charity. Like most private landlords I am in this business for the rewards it can offer me. In this country no-one can be forced to be a landlord, and within what is legal and acceptable I will set policies that allow me to offer a good service to my tenants and also provide a fair reward to me for my time and effort. It needs to be a win-win situation, and I will continue to set policies that allow me to achieve this outcome.

[Perry]

Effects From Causes? No!?

Dhil Twitford will respond as he did to his officials when they warned :


"Ahhhh assume that's not going to happen."

[mrsaneperson]

If only their was a "Like" button

[flyernzl]

Well that’s 2018 all wrapped up and stowed away. If I said it was all pretty much dull and boring, you’d know I was lying.

Throughout the year property people seemed to have retained their reputation as being down there among used car salesmen, politicians and other assorted undesirable low-lifers among both the general public and the body politic. For some reason it is perfectly Ok to be a motel operator or to own commercial property, but the minute you state that you are a residential landlord everybody hates you. It’s not so much that we misbehave, you understand, but apparently the real problem is that we exist.

So this, of course, leads naturally to a raft of regulations, restrictions and proposals that are designed to punish landlords, restrict their rights and impose further obligations on their activities. As well as imposing financial penalties that affect investment property owners and no-one else, legislation is underway that will effectively remove a substantial number of current investment properties from the rental pool. These are the properties that are unable to be upgraded to the proposed standards, properties that are perfectly fine for housing owner-occupiers but that are quite unsuitable and unhealthy for people who rent.

As the year progressed there did seem to be some small recognition that a few, perhaps even quite a few, of the more far-out proposals may not actually be such an amazingly good idea. Maybe they might even possible cause some undesirable side effects. Just perhaps there is some actual downside to this popular sport of landlord-blaming and bashing?

Unfortunately, among all the political posturing and promising, there can be a real reluctance to change tack. Even when the promised actions fail to lead to the expected outcome, politicians and their parties dislike to be seen to be backtracking. They may reassess, they may re-evaluate, they may ponder, but it is far too damaging to both their public image and private self-esteem to say “I was wrong. That is not the solution to the problem, and our actions may well have made that problem even worse”. We have seen this with the so-called “Ban on Letting Fees”, where all the regulation has done is drive that cost recovery in a different direction. As with banning gravity, you cannot legislate an expense out of existence. Someone somewhere has to carry the cost.

The biggest property-related story of the year is, of course, KiwiBuild. In reality, the Government has created a scheme that is wobbling, uncomfortably balanced on several fundamental misconceptions about both the property market and New Zealand society in general.

Among the chattering classes that cluster in the political and academic sphere there are many people who believe that there is a chronic shortage of housing, that housing costs have become unaffordable, that developers and house builders are creaming large profits, and that foreign investors and speculators are largely to blame for these problems. As a result, there was strong pressure to ban foreign-owned housing investment, fiscally punish speculators (which includes property investors and landlords), force developers to build affordable housing, and for the Government to act as the middle-man between builder and first home buyer in order to speedily fund new homes on greenfield sites and to remove the excess profit that builders were thought to be making.


Unfortunately, the implementation of many of these policies has not led us onto the sunny uplands of home ownership. As economist Tony Alexander has pointed out, housing costs as a proportion of average household income were 16% in the year to June 2008 and 16.3% in the year to June 2018. Statistically unchanged over 10 years. In truth, New Zealanders are not increasingly being priced out of the housing market. Some sort of foreign-buyer ban has already been enacted, but not only does this have awkward holes for Australian and Singapore buyers but the resultant compliance paperwork now adds yet another additional cost for all home buyers. More recent reports indicate that in reality the foreign buyer influence was already on the decline and was actually never a real factor in the market. However, it does make for good political rhetoric.

The dearth of any politicians now in power who have any actual private sector real-world experience comes strongly into focus when we see their belief that the Government can create new homes out of thin air. In reality, the Government can just do two things - it can reward or punish, and it can create roadblocks or it can remove them.

By offering financial carrots through subsidies and tax-relief or by imposing fiscal punishment through fines and heavier taxes any Government can attempt to change behavior. However, the private sector recipient may still decide to continue with their bad behavior regardless of that punishment, or they may consider that even with the new rewards the effort is still not worthwhile. The harsh reality within the building sector is that builders build for profit and for no other reason. If they are making those claimed large profits, then obviously they would build more. Also, no doubt, the existence of such profits would encourage additional players to participate. Market history over the last ten years shows that this is not the case. Where now are Universal Homes, Beazleys, and Neil Homes? Why are they not churning out whole streets of affordable first homes like they used to back in the 1960s? One reason only. Because there is no profit in it, that’s why. Thus Government involvement in order to remove that illusionary profit is naïve.


So at the end of 2018 KiwiBuild is a House of Cards going no-where. The houses developed under its aegis would probably have been built anyway, and the pricing is certainly no raving bargain. Those people who are in real need do not have the financial muscle to take advantage of the scheme and those who can raise the cash have other, possibly more attractive, options elsewhere in the market.

As media and social pressure rises to ‘solve the housing crisis’ I would expect that either there will soon be direct taxpayer subsidies offered to enable the needy and poor to buy in, or we will see KiwiBuild morph into KiwiRental, where the homes that are built are retained in state ownership and become part of the Housing New Zealand stock. The current drive to force private landlords out of the property market could well be one of the pressures behind this development. It will be interesting to see how this pans out.

[Don't believe the Hype]

KiwiRent - this way Twitford will become PM (property Manager)

[Davo36]

KiwiRent - attractive young boys at affordable prices. Oops! Not allowed to say that!

[Davo36]

Nice article Peter, you write well. In that you articulate things well. Something I'd struggle to do I reckon.

I do think KiwiBuild will struggle. However I guess their entity Ministry of Housing and Urban Development (https://www.hud.govt.nz/) that can bypass all of the planning regulations must surely have a way easier time getting houses built than those in the private sector who have to deal with all that nonsense.

And I think this relates to why Universal Homes et al are not building swathes of houses; To get planning permission to develop large chunks of suburbs would be nigh on impossible. And yes, very very expensive.

I do think foreign buyers did have a very large impact on NZ (especially Auckland) house prices. I don't believe the 3% figures at all. And I think it won't really be until the AML laws have been in for a while that we will notice anything. It's a pity the data was never accurately collected (the National government never wanted it accurately collected) because we may never be able to look back and say "Well actually the effect was large" or "Well actually the effect was small."

But the effect of foreign investors has been acknowledged in places like Canada, Australia, America and the UK. It's a simple fact that countries like China, the US, the UK, Japan etc. printed a snotload of money and that money went around the world looking for homes (literally in many cases) pumping the prices of all asset types. To pretend this didn't happen it to put one's head in the sand a little bit I reckon.

Yes our ban is imperfect, but a step in the right direction I think.

[artemis]

All you Kiwibuild naysayers will have to eat your words, and soon. Because a miracle is coming.

The official HUD Kiwibuild site tells us that ''1000 homes will be built by June 2019 and a further 5000 the following year before the programme ramps up''.

Plus we know that there are 33 completed and 77 under construction, so there's 110 and only 890 to go in Year 1. Mind you, might not be a grand idea to trust the numbers, because Mr Twyford says (answer to a Written Question) that the number is looking like 900 to meet the Year 1 target..

[artemis]

....
As media and social pressure rises to ‘solve the housing crisis’ I would expect that either there will soon be direct taxpayer subsidies offered to enable the needy and poor to buy in, or we will see KiwiBuild morph into KiwiRental, where the homes that are built are retained in state ownership and become part of the Housing New Zealand stock. The current drive to force private landlords out of the property market could well be one of the pressures behind this development. It will be interesting to see how this pans out.

Another good article, Peter.

There is talk by the government of a Kiwibuild shared equity scheme with an option being leased land with option to buy. Mr Twyford reiterates regularly - Kiwibuild homes are not subsidised so shared equity or handouts will be tricky.

Not mentioned is the indirect subsidy, being the cost of the Kiwibuild unit in HUD. We do know, however, that there are 5 employees there earning over $220,000 pa. The CEO will be one of those but on a much higher salary, even while he is on gardening leave. Add the rest of the employees and all the other costs .... That's a lot of costs your ordinary developers and builders neither have nor need.

[flyernzl]

The basic principles of property insurance are fairly simple. Let us say that there are 100 houses in a town, and looking back over many years we find each year one of those houses burns down and then must be rebuilt at the owner’s cost. So each owner faces a one-in-a-hundred chance of incurring that expense. Of course, at 1% those odds are fairly good, but if you are unlucky enough to be the one who’s house is burnt you do face a substantial and possibly crippling loss.

Humans hate uncertainty, so all the house owners get together and decide that every year they will each pay into a fund 1% of the cost of rebuilding a house. When disaster strikes, the unlucky owner of the destroyed house that year gets the payout to rebuild his property. By this means each individual owner has exchanged the uncertainty of a potential massive loss for the certainty of a relatively small one. Sure, you will lose a small amount of money each year when your house does not burn down, but your loss will be no greater than that even if it does.

That is the fundamental premise on which property insurance exists. The elimination of the possibility of a large loss by accepting the certainty of a small cost.

Of course, the actuality is for more complex than the theory. For starters, in the modern world the insurance scheme is run not by a cooperative of property owners but by profit-seeking businesses. These businesses of course have substantial overheads in staff, offices, paper, and systems, and also seek to make a profit from operating the business. Therefore the payout to the policy holders will be less than all the premiums paid in. That is business, and as the insured, we accept the reality of that.

However, over recent years, insurance companies have moved to limit and reduce their liability by unilaterally imposing various limits requirements and restrictions on the insured. Before the Christchurch earthquakes most property policies promised to rebuild the damaged property to its pre-incident state regardless of the cost. Since that unfortunate event the insurers have moved as a bloc to impose maximum limits on the payout. They, as experts in their field, are apparently unable to assess the current value of your property but you, as schoolteacher, a baker or an old age pensioner, are expected to know the actual current costs of rebuilding your property and each year advise the insurer of that amount, and that’s the amount on which they will base the premium.

As well as limiting the value of the claim, the insurers have also moved to tighten the rules around the validity of your claim. As a landlord, in order to make any claim acceptable, you must now be able to show that you have taken due care in checking out any tenants that you allow into the property, that you have maintained the property to an acceptable standard, and that you have carried out and recorded the results of a recent property inspection. From the point of view of a landlord many of these requirements appear to be based largely on the desire to be able to say ‘gotcha’ when claim time comes around.

Although the Residential Tenancies Act does not decree that property inspections must take place, it does lay out in some detail how and when such inspections should be carried out if you wish to do them. Tenants can and do find frequent inspections intrusive, and in the not so distant past I normally carried out inspections no more than twice a year. When my own insurer bought in a requirement that inspections should be at no more than six-monthly intervals I the upped this frequency to three times per year, with an inspection at four-monthly intervals. I found that, when told of the reasons behind this frequency, I usually got grumbling acceptance.

However, as from policy renewals this year I am now told that there must be no more than three months between inspections. I will find this requirement excessive, intrusive, and a lot of dammed hard work. The requirement is also based on a fundamental lack of knowledge on just now rental property inspections work.

There seems to be a belief among the desk-bound that it’s all quick and easy. You contact the tenant to say you are coming around, pop in, say hello, run a few checks take a few photos, and then after a chat and a cup of tea with the occupants you wander off into the sunset. Job done.

False.

The Act lays down in some detail that the notice of inspection must be given to the tenants at least 48 hours prior to the inspection, and you must allow for service times as well. In the case of written notice this service time could be four days, so you need to start the process about a week prior to the inspection date. Then, in the course of the inspection, you may find some deficiencies in the tenant’s behavior. That means issuing them with a 14-day notice to rectify. If you don’t happen to have that form handy so you can hand it over on the spot then you are faced with a further delay in starting that process. Then there may well be maintenance or repairs that are required, so after the inspection you will need to contact your tradies to carry out that work. They will not be sitting twiddling thumbs waiting for your call, you will need to join their queue.

So as a result of your inspection you are probably going to need to reinspect after 14 days have elapsed to make sure that the tenants have reformed, and then go back again some weeks later and check out the tradies work before you pay their bill. So that one day inspection actually starts a week earlier and may well run to four or six weeks after the event.

The reality is that a three-monthly inspection cycle is probably going to mean an almost continual interruption to the tenant, with both the landlord, the property manager, and various hangers-on disturbing the tenants and checking the property over many more weeks of the year. What happened to the requirement for ‘quiet enjoyment of the tenancy’?

Understandably the tenants will resent all the intrusion on their lives. I know that if I was in their shoes I would.