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The challenges of investing in residential rental property

Over the last few months we have had far more than usual queries from our clients about whether they should invest in residential rental property.

This has come about as people see prices of properties soaring throughout the country, and as people own their own home, the thinking is ‘it can’t be that hard, you just buy a property and sit back as the prices go up and you make money’.

We totally understand this perception, so thought it was a good time to update you on the pitfalls of investing in rental property.

The rental property industry is continually changing and as a potential investor you need to be aware of all of these things.  Note – these comments are in no particular order!

  1. Meth testing on sale and during a tenancy  

Over the last three months, between us at Moneyworks we have sold two properties.  One was a residential investment property in Hamilton and one was Carey and Peters former home in Turangi.

Both of these sales contracts had a requirement for a meth test to be carried out (both properties passed).  However, the real estate agents made it clear that any evidence of meth in the results would have negative consequences for the sale of the property.

Cooking meth has a reading of 300, but smoking meth only has a few points.  One of the real estate agents said that he has a property in Hamilton that was under contract last year and in November the meth reading came back at 11.  This meant that someone had stored utensils or smoked meth by the wardrobe.

The consequences of this were that (although the reading was low), the tenants had to leave immediately at landlords expense (even though it was from a prior tenancy), and it cost the landlord $22,000 to repair the property.  As of late May, the property had not sold and was still empty – with no tenants.

The real estate agents believe that a meth test is likely to become a standard clause in the Sale and Purchase agreement in the next 12 months, as all purchasers are doing this.

As a landlord, you have a legal responsibility to make sure that the house is not contaminated with ‘P’, not just when you sell the property, but also between tenancies.  If you are suspicious of meth use in an existing tenancies, you can ask permission to test the premises, but you have to be very careful that you don’t go ahead with a test if the tenant doesn’t agree as the tenant has a right to the quiet enjoyment of the premises.  If you don’t have permission and go ahead with the test, you may be breaching the Residential Tenancies Act by undertaking an unlawful act.

The legal status of having a P (meth) contaminated house are outlined here:  https://www.tenancy.govt.nz/starting-a-tenancy/renting-affected-properties/renting-a-property-affected-by-methamphetamine-p/

The 61 page document stating the standards that apply to testing and decontamination of methamphetamine-contaminated properties are here:

https://www.standards.govt.nz/sponsored-standards/testing-and-decontamination-of-methamphetamine-contaminated-properties.

  1. Building report on sale of property  

It is very common these days for the purchaser to make settlement of the sale of a property subject to a builders report.

In 2012, the ADLS published a new (9th) edition of the sales and purchase standard agreement, with some significant changes such as the inclusion of a standard building report clause which the purchaser can choose to include by circling "Yes" at the appropriate place on the front page. This new clause affects both vendors and purchasers.

As well as picking up any issues that need to be remedied before the contract goes ahead, it is also used as a tool to withdraw from the sales contract.

If a leak is found in the property, the remediation can run into the thousands of dollars (even if it appears to be a small leak that no-one was aware of).  This is as a result of the nightmare ‘leaky building’ issues in New Zealand houses.

  1. Residential Tenancies Act http://www.legislation.govt.nz/act/public/1986/0120/latest/DLM94278.html

There are a wide range of rules around what can and can’t be done by a landlord and it is important to know this act and what your rights are.

For example, you can’t require your tenants to professionally clean the carpets at the end of their tenancy, as the Tenancy Tribunal has indicated that this falls into a clause in the tenancy agreement that can be seen to be unenforceable.

Exemplary damages can be awarded if you breach the Residential Tenancies Acta and the breach is unlawful.

For more information, check out this page https://www.tenancy.govt.nz/disputes/breaches-of-the-residential-tenancies-act/

  1. Landlord Compliance Checklist

Tenancy Services have produced this 8 page checklist to help you with fulfilling your obligations.  landlord-compliance-checklist

Interesting points to note are:

  1. Requirement/strong recommendation that you have a written tenancy agreement, including a pre-tenancy inspection report form.
  2. For a tenancy that started after 1 July 2016 – requirements around insulation levels in the property (see below).
  3. Requirement to have a record of the rent paid and bonds paid and lodged.
  4. Maintenance requirements to make sure that the property is of legal status to be rented out.
  5. Giving notice on a tenancy
  6. You cannot give notice to end a fixed-term tenancy early.

A tenant must give at least 21 days’ written notice to end the tenancy, unless the landlord agrees to a shorter time (it’s best for this agreement to be in writing).

A landlord must give at least 90 days' written notice to end the tenancy, but can give less time (at least 42 days’ notice) in certain circumstances.  These circumstances are:

  •  the property has been sold and the new buyer doesn’t want tenants (ie the buyer wants ‘vacant possession’)
  • the owner or a member of the owner’s family is going to live in the property
  • the property is normally used as employee accommodation and is needed again for that purpose (and the fact that this might happen was stated in the tenancy agreement).

5. Insulation levels in the property (for a tenancy that started after 1 July 2016)

Landlords must disclose the extent of insulation in their properties in a signed statement as part of any new tenancy agreement.

A landlord who does not make a complete insulation statement or includes anything they know to be false or misleading is committing an unlawful act and may be liable for a penalty of up to $500.

An insulation statement must include:

  • whether or not there is insulation
  • where it is – the extent and location in ceilings, floors and walls
  • what type of insulation product it is and, if known, its level of thermal resistance or R-value
  • what condition the insulation is in – for instance whether there is any damage or dampness and whether any is not secured.

If the landlord cannot get information about insulation in a particular location, the insulation statement must instead:

  • outline what information is missing about that location
  • outline why the landlord could not get that information
  • confirm that the landlord has made all reasonable efforts to get that information.

The insulation statement section of the tenancy agreement must be signed by the landlord separately, in addition to the signatures to the whole agreement.

Landlords must make all reasonable efforts to obtain the required information. This includes physically looking, engaging a professional to do an assessment and/or checking the council building file.

Landlords of income-related tenancies must provide ceiling and underfloor insulation that meets minimum standards unless they meet an exception. If the existing insulation does not meet the requirements of the regulations, the insulation statement must explain how the landlord will comply with insulation regulations within 90 days of the start of the tenancy, or explain how an exception applies.

All other landlords must have ceiling and underfloor insulation that meets minimum standards by 1 July 2019, unless an exception applies to the property.  This 20 page guidebook tells you what the requirements for insulation in the property as of 1 July 2019 will be: Insulation-requirements

For more information check out https://www.tenancy.govt.nz/maintenance-and-inspections/insulation/how-to-write-an-insulation-statement-for-a-tenancy-agreement

6. Smoke alarms

Working smoke alarms or detectors are compulsory in all rental homes. New smoke alarms must be photoelectric and have a long battery life, or be hard-wired.

The requirements for these smoke alarms under the Residential Tenancies Act can be found here: https://www.tenancy.govt.nz/maintenance-and-inspections/smoke-alarms/

7. Landlords insurance

If you have a rental property, make sure that you have it specifically insured as a rental property, the terms and conditions can be different (and the cost may be higher) than a normal house insurance policy.

Talk to your insurance company about their requirements for making claims. Some insurers need landlords to prove they’ve completed a thorough tenancy selection process before honouring damage claims.

 

For more information, here are other blog articles on this topic.

http://www.moneyworks.co.nz/managing-rental-property/

 

http://www.moneyworks.co.nz/residential-investment-property-taxation-issues/



 

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