Getting out of Fixed term tenancy

[sandaz]

Hi,
we signed another 2 year fixed term tenancy with our tenants after the previous one had expired which still has 20 months left to run. We have a good relationship with our tenants, and they are good tenants and have never missed a rental payment.

With the market turning the risk of losing our jobs have increased significantly, and our risk exposure has increased to the degree where we now think we're best to sell the rental property and consolidate our debt. If either one of us were to lose our jobs, we would probably lose the house through a mortgagee sale as we have to top up the mortgage with more than the amount of rent we are getting. One os us lost our job at the end of last year but we managed to scrape some money together until we had found another job. This happening scared the crap out of us in terms of our debt levels though.

What are our options in terms of getting out of the FTT, and what is deemed acceptable in terms of "buying" them out to terminate? We have thought of giving them 3 months notice, 2 weeks rent for free and/or paying for their moving cost up to a limit.

[waiopehu24]

Negotiate... They sound like good tenants so explain your situation to them and try to come to an arrangement first of all... Negotaiting principles apply to this one.

[Dunning]

Options Options Options

Why do the tenants have to move?

Simple breakdown of options
Keep or sell
Keep:
A bit of a no-no if you personally feel that there is too much risk. Have you looked at refinancing it to reduce your payments? Extend it back out over 30 years is an option. Interest only. Increase the rent is another.

Sell:
Market isn't the best to be selling in but if your going to sell then there is another choice. Sell with tenants, sell without tenants.

Sell with tenants:
Makes removing tenants someone else's problem. You have income until sale date. Property looks more attractive to purchases if it has tenants.
Sell without tenants:
Have to remove tenants with associated costs. No tenants if the property fails to sell. Not only the cra* scared out of you.

[SuperDad]

Another option: you could apply to the Tenancy Tribunal to have the tenancy ended on the grounds of severe hardship (section 66 RTA 1986).

Perhaps the best option in the first instance is to talk to the tenants, and explain your situation. They may have been wanting to move anyway.

Paul.

[SuperDad]

One more thought: you say that "we had thought of giving them 3 months notice".

Notice of what?

FTT are not terminable by notice.

Paul.

[sandaz]

Thanks for all the responses so far.

I meant negotiate a 3 month notice period. From what I head heard the tenance tribunal makes it difficult to prove financial hardship if you're not in a severe position already as opposed to a potential one.

We had thought of selling the property with tenants, but as the term still goes for another 20 months have been told it will limit the potential market a lot as it's not a "cheap" rental.

[eri]

We had thought of selling the property with tenants, but as the term still goes for another 20 months have been told it will limit the potential market a lot as it's not a "cheap" rental.

what does it cost to list on trademe as a private sale, investment property with long term tenants?

try it and see

that way you get to see what kind interest there is in the house

the tenants get to stay

and you don't have to muck around with tribunals

[Glenn]

Most of the others have said what needs to be said re tribunal and so forth.
The big issue with all these terrible decisions is you never know when you will achieve a sale.
I have seen a few people terminate a tenancy so they can sell then find the property sits empty for ages till sold. This places the vendor in a very weak situation re price and they forgo so much rent.
It is also really hard to let a property when on the market.

Also an investment property is worth more with a good tenant on a fixed term. Well it is seen by some people as being better than an empty one or one with a poor tenant.

[sandaz]

I would agree with you Glen, as it only takes a few weeks of the property being empty to wipe out any benefits, especially with no capital gains as it is at the moment. Why it's such a shame that we're in this position with good tenants and all.

I think we need to sit down and discuss as to whether now is really a good time to consolidate debt, and whether it is not worth taking the risk at the moment. I wish it was a clear cut...

[SuperDad]

sandaz,

Are you worrying unnecessarily about something that might never happen - namely one of you losing a job?

Paul.

[sandaz]

That might be true, but with the economy looking the way it does, and both of us being contractors, the risk is considerably higher than if we were to have permanent jobs. Contractors are normally the first to get the cull.

I suppose it's about the risk we see ourselves being exposed to, and different people could see the level of risk differently.

Just out of interest, If our intention is to sell the property in the next 2-3 years in anyway, would you rather sell it now or hold onto it till then?

[Glenn]

I suppose it's about the risk we see ourselves being exposed to, and different people could see the level of risk differently.

Just out of interest, If our intention is to sell the property in the next 2-3 years in anyway, would you rather sell it now or hold onto it till then?

You would be right there. Almost impossible to give an answer. In fact the big risk is any of us could innocently give some advise and it could be wrong. How would we feel then if you acted on that advise.

For me I hate debt. I still do take out mortgages but unlike the general wisdom out there I pay them off.
Risk is always a non definable thing and mostly resides in our minds.
Despite that some people who do risky things do get hurt.
As you say the level of risk is always viewed differently.
Risk can be reduced with experience and with safety nets in place.
Trying to do tight rope walking with no experience and no safety net is bound to be fatal regardless of the state of your mind.

Personally I subscribe to the view that properties are going to continue heading down in value. I would think most other people believe that also.
So that makes it a fact, because if most people believe it then it will happen.

[sandaz]

If people were to give me their opinion, I wouldn't neccesarily follow it. I'd have to assess as to what is right for our situation and then decide. :-)

You're right, the only reason we managed to cover our expenses when one of us lost our jobs was because we had a safety net. Unfortunately it takes a while to build up, and it's much more difficult to save than it is to get in debt!

It is kind of a self fulfilling prophecy, the newspapers write about it and then everyone talks about it, so everyone thinks that's they way it should be.

But for the record, I also think it'll go down.

[brendan]

What area is the house in? How much are you renting it out for?

Perhaps an investor here might want to make an offer.

[sandaz]

The house is in Brooklyn, Wellington and is renting for $630/week. RV = $650,000. It's a low maintenance property with harbour and bush views, has 3 bedrooms and 2 bathrooms and double internal access garage.

The house was built in 2001, and last year we obtained the Code of Compliance by bringing the house up to the 2004 building code. All cladding and deck surfaces was issued 15 year warranties of which ~14 years remain.

It's in the popular Wellington Girls and Wellington Boys school zone.