Maintenance: How much to put aside?

We often get landlords querying the cost of maintenace on their investments. I know I have when my property was managed by someone else while I was overseas. We dont tend to notice the everyday cost of maintenace when we live in a house. I bet if we kept all the Mitre10 or Placemakers reciepts and added up the costs of the all weekend trips to the hardware store we would be shocked. We proabably dont think of the cost of the restrictor stays, new shower curtains or a new clothes line. Its probably just a household expense, something that keeps you occupied in the weekend. We dont think of the cost involved to get a tradie out to wash the building or to clear gutters. All these things we would be happy to do ourselves over the weekend for free.

So how much mainteance on a property is reasonable?

Nothing is going to last forever. You may have to repeat the fitout of your property ever 10-15 years. This will depend on the quality of the fittings you choose and the quality of your tenants! Other things like window and cladding mainteance will depend on the age of your home. The older your home the more likely it will be that the building shell will need repair.

There are the big ticket items that need to be done every 5-10. The house will need to be painted and carpeted every 7 - 10 years. The more the paint is looked after the longer it will last between painting. If you wash the house every year the paint will last longer. What does it cost to paint and carpet your property?

Fixtures and fittings all have expected lifespans (usually a year after the warrentee runs out!) You need to allow for new hot water cylinders and appliances.

You also need to allow to upgrade your home to keep it up to the standards expected by "good" tenants. 50 years ago a uninsulated house with no form of heating and one powerpoint per room was acceptable. Nowdays tenants want insulation, a heatpump and plenty of phone and power outlets. Homes that lack these may find themselves been overlooked by good tenants.

Selling Property with fixed term tenants in place

Lets take a hypothetical situation here, where you have your tenants are on fixed term contract to 10/3/2012, with the expectation if things work out, they would renew the contract annually. Due to the changes in the Residential Tenancies Act which came into force 1st October 2010, you must offer them a lease renewal at any time from 90 days before this date, so from the 10th December you should be looking at sending out a new fixed term offer. If you want to look at selling your property in the new year, you need to decide what you are doing before this date, assuming the property would sell to an owner occupier rather than an investor. Here are your options around the lease renewal process while the property is on the market:

1. Delaying re-contracting the tenants for a fixed term until the last possible moment - under the changes to the Act, this would now be 18th February (you need to confirm a fixed term contract 21 days before the lease end date). In other words, list it for sale late in the year, and if it hasn't sold by 18th February, take it off the market until the next year and fix the term of the tenancy contract again for a year. Downside is marketing a property for sale makes tenants nervous, and they may decide to exercise their right to not renew, and move out at the lease end date.

2. Allowing the tenancy to go periodic - this would mean you could give the tenants 42 day's notice that the property had sold and give it to the new owner with vacant possession, or the tenants could give you 21 days notice at any time. While this allows greater flexibility for your sales plans, the risk is the tenants give notice before you have sold the property, and you need to decide whether to allow it to sit empty, or re-let it, possibly for a very short term. The latter is not a great idea, as new tenants must be told if a property is on the market, and not many would like to take that risk of moving in then back out again in only 6 weeks time, so it may be hard to fill. Long and short of it, you lose great tenants, have a vacancy, have unknown tenants move in, and might still not sell it.

3. Put it on the market at any time of year, and if it sells, make the tenants an offer they can't refuse to move out on a date which suits the purchaser (officially known as 'ending a fixed term by mutual agreement'). No guarantees on this one as they could just refuse to move until their lease expires, or it could be very expensive. A friend of mine tell of when he tried this with the offer of "I'll pay all your moving expenses" thinking it would be a few hundred for a moving truck across town. The tenant decided to move from Christchurch, to Australia. It pays to be specific.

4. Offer the property to the tenants to buy (private sale). Saves you agents fees, and you can sell it to them at whatever date suit you both, the fixed term tenancy being ended by mutual agreement on possession day. Downside is establishing a fair price as you won't necessarily have competing offers from other parties as you would if you listed it with an agent, so your net result may be less than selling it conventionally. Of course, you could list it with an agent who sells it to the tenants, but this might also result in only the agent making something out of it... If you want to try a private sale, I'd recommend getting a valuation to establish price, and having your lawyer do the negotiation for you. (That’s my way of saying you will probably be too kind to the tenants at your expense).

Do talk to your property manager before you engage an agent - they should be happy to liaise with the salesperson regarding access and information they need about the tenancy, and should also discuss with them reasonable access to keep your tenants happy in case it does not sell. Your property manager should be able to recommend a salesperson they have found to be good.

Of course, you also have a legal obligation to tell the tenants the property is on the market. A client of ours who ignored our (oft-repeated) advice and listed her property for sale without telling us first found herself managing her own tenants through the sales process from out of town, and then having a very long vacancy when it did not sell (about 5 months!). Last I heard, she rented her property to Housing New Zealand. Shame, as it was a beautiful property. I am sure you wouldn't be so foolhardy.

What goes up... doesn't always go up.

Does the property market always go up? Some seminars and salespeople will claim it does, and produce graphs of property over the last 100 years to demonstrate. As a general trend, it does. But so does any other prices due to the force of inflation in modern economics. It also fluxuates, and this is normal. You can't have a 'general trend' if it only trends in one direction.

Wellington house prices are not currently continuing to climb, and depending on what you read, is actually dropping, which is a perfectly normal part of the cycle and not a cause for panic, but it is cause for strategic planning. There is some very good buying out there right now should you want to expand your empire further. My money is currently on 2013 being the turn-around year (the year I kick myself for not buying more property now). Last year I was saying 2012, so I reserve the right to change my mind!

Having a strategy is important, because it is a plan that overrides current market forces and fears. It is the motivation to ride out rough patches, and to act contrary to the crowd to see your plan through to fruition. If you change your mind every five minutes because of whatever the latest news article you heard said, you will not get very far because fear will rule your decision making.

The best investors don't plan for this year, they plan for the next 5, 10, 20 or even 50 years. You know the saying, 'will this be important in 100 years time?' to put your everyday faux pas into perspective? Imagine how powerful that would be applied to your property portfolio. Will the latest crisis actually matter a jot in 43 years time? Probably not. That is the power of a strategy and foresight.

What is Market Rent?

Not many people know how to assess market rent for their rental property. Talking to someone on Monday, I asked them "How much rent would you like to get for this property?". Their answer was "We would like to get $300 per week". I almost choked. We are renting a far inferior (and I say that with authority, I own it) property close by for $330. I assessed their property to be worth at least $380 per week, and frankly, it would probably exceed the $400 mark. In theory, I could rent it from them and make a tidy $5000 profit every year by subletting it. Sweet. That is how much money they would be giving away. Five thousand dollars. Say it slowly now. Five big ones.

Fortunately for them, they were smart enough to get an expert opinion about the properties market value, and they will be thousands of dollars a year better off.

Do you think you can't afford property management on your budget? Ask us for a rental assessment, it's free, and it could pay you significant dividends. More money for less work for you, that's the best combination of things ever!

Black Friday affects Tribunal

I spent a lovely hour in Tenancy Tribunal on Black Friday a few weeks ago, just me, the Adjudicator, and the Court Clerk. The tenant decided he had better things to do. Normally a hearing like this when the tenant doesn't show is pretty quick. The adjudicator worked through things very thoroughly, which was nice, though unusual when the tenant does not show to contest it. Due to this diligence, we used all the alloted time, and I didn't get a copy of the order before I left the court. He promised to write it up and send it out as soon as possible, which he did.

When I received the Order the following Wednesday by post, I was pleased to see we had won all of the essential points, and even had Exemplary Damages awarded to us. The bond was to be refunded immediately, something we were looking forward to very much.

However, the Adjudicator had made a mistake when adding up the figures, and there were two conflicting numbers on the Order. I phoned the Court Clerk to resolve it but reached voicemail. My explanation of the issue on the message I left was misinterpreted, and several voicemail exchanges resulted before I ended up faxing the Order back with big circles around the affected parts and a note to the effect of 'these numbers are different, why?'. More messages exchanged, and I found out she'd get the Adjudicator to fix it next time he was in, in about 2 weeks time. Sigh.

In the meantime, there was no sign of the bond refund, and plenty of time had passed so it should have been done. A call to the bond centre revealed they had no request from the Court to release it. The solution was to send in the order we had, incorrect though it was, in order to get the bond released. A couple of days later it was in the account.

Finally spoke to the Court Clerk, who had managed to see the Adjudicator earlier than hoped while he was at the court for another matter, and had the figures corrected and the new order was on it's way out to us. Why had the Bond Centre not been notified of the bond release order? The Clerk had forgotten to fax it through. Oops. Simply human error again. Perhaps it was the curse of Black Friday.

Do check your Tribunal Orders carefully to ensure they are correct (and that is different from just not being what you had hoped they would be) and follow up with the Court if they are not. Check your bond actually gets paid out to you, and contact the Bond Centre if it hasn't been refunded in a reasonable timeframe. It's your money, make sure you get it.