Bills and more bills!

At a property investor conference recently, a speaker was discussing how much to set aside for maintenance. One of the gurus the speaker studied suggested $500 per annum. The speaker thought this was on the light side by at least $1000. I tend to agree, although more is recommended, particularly if your property is older.

Last year, my partner and I spent $20,000 on R & M on our properties. To be fair, that included a total bathroom renovation including a new hot water cylinder, and insulation ceiling and underfloor in a couple of properties, and practically nothing on others.

What do I normally spend on my properties? It is really variable from year to year. On one, I had a new concrete drive and carpad laid. It was the first time any maintenance was done on the drive in the 11 years I had owned it, and it was pretty rough when I bought it. I inspected the same property last week, and I rang the plumber immediately, another hot water cylinder was needed. That's what I get for buying properties built in 1965 - all the hot water systems have reached the end of their lives now. It is optimistic to think it will be 2057 before I need the next one, they just don't make them how they used to. I also called the locksmith as one of the locks had stopped working, and noted the windowsills need painting just as soon as my tenant moves. That could be a long while away. In the past, I have insulated the property (about $2000 if I remember right), and installed a heatpump ($2500). Painted the interior (did it myself, cost couple of cans of paint and a lot of my evenings and weekends). Had the plumber clear the drains and gutters (did you know pohutukawa roots can climb drainpipes 2 stories high?), and a million other things that have long faded into away, some of which are coming around again, like painting the outside ($10,000 last time).

I want to change the embassasingly shoddy carpet, but my tenant tells me to wait until her kids are grown so she doesn't have to worry about ruining it. The last one is going to start school soon, so it's on the horizon. I will certainly need to replace the roof, the current one doesn't have much life left in it, and I do need to refit the bathroom soon. The current fittings are near 50 years old. If only a new bathroom would last as long! I'll need to update the wiring and put in new power points as it woefully lacks them, and pull down the old chimney to make the property safer.

With all I spend on it, am I making any money? Well, my tenant has been there for 7 years and 3 children with no sign of moving any time soon. They pay the rent every single week without fail. The rent has increased to just about double the value it was when they moved in. The house value has more than doubled since I bought it. I sleep easy at night knowing the tenants are taking care of things. The back section is big enough for me to put another house on, and I have the plans drawn. When the time is right, I'll do it to increase the rent and property value.

Have I been lucky? Nah, just good at recognising when money should be spent. It keeps the tenant happy and my property value high. Has the cash-flow management always been easy for me? No, not at all. That's why I have a revolving credit at the bank, and put some of my own money into the property. I like to have a buffer to ensure that if I have a big expense, or the tenant doesn't pay the rent, the council rates, bank loan, and insurance all get paid. I consider that to be sensible investing. It works for me.

Do you know what expenses you have coming up on your property? Does your property manager tell you about long-term issues that are creaping your way? Or do they spring them on you at the last minute - 'you must reroof now!'?

Worth a walk in the snow

When I was a kid, my dad used to tell stories of trudging miles in the snow to school, barefoot and sharing a coat with his brother, to demonstrate 'just how easy we had it'. I never thought to question just where this snow was alleged to have fallen. Well, I finally have my own snow story.

Wellington was treated to the most amazing snow storm for decades, and we had properties to let. Our open homes had been booked before the snow set in, but we were not deterred. I left the city 45 minutes early for a journey that normally takes 20 minutes. The radio was a constant source of anxiety “Wellingtonians are being urged to leave work early today in order to avoid the worsening conditions” and “Snow storm conditions are expected to close roads, power is out in…” and so on, for the whole long, slow journey. As I wound through the suburbs and approached the street the property was in, the snow had settled onto the road in a thick white blanket, and was even covering the tracks of the cars in front. Finally, I reached the street. One last hill to climb, and I would be there. Oh! No! My car lost traction on the steep incline and started to slip. Back, back, back I went to the bottom of the hill. The snow continued to fall.

I phoned the property occupant – yes, the prospective tenants had turned up, and they loved the place and wanted to talk with me about it. Well, that’s good at least. Now, do I stop where I am, or go up the previous hill I came down so I have at least a hope of getting home tonight? Normally I take the most sensible option, but it wasn’t clear which one that was with the snow still falling. I opted to drive back the way I had come and crested the previous hill before parking. Zipping up rain jacket, pulling on hat and gloves, winding scarf around my neck, I set out for the property on foot, grateful for sensible shoes. I trudged down the hill I now successfully drove twice, and up the steep part to the property itself. I could see why my car failed to get traction, my feet failed as well, and I almost ended up on my bottom. That would have amused the neighbours making a snowman. I noticed several other people had abandoned their vehicles to walk the steep road as well. If these prospective tenants still want it after seeing the issues with access, then great!

At the property I dusted the snow off my coat and met the prospective tenants. They were lovely, thought the property was divine, and had no trouble getting up the drive in their ute. In fact, they offered to drive me back to my vehicle. Fantastic, but I declined, stopping to talk with the occupant before trudging back out into the snow, again. Back on with the hat, gloves and scarf, zip up the jacket, and home safely at last. Within 9 days, our very keen tenants were moving in. Fortunately the snow had melted by then and I didn’t need to repeat my slippery walk.

Here’s to my dad, who told tall tales with real lessons. Some things are worth travelling through snow for. Although mine will never be as good as his - after all, I had shoes and my own coat on - I can tell it to my kids to show them how good they’ve got it. I might even embellish it, just a little.

Cheaper Better?

When is a good deal a really good deal? And when is it really too good to be true?

Someone who really values the effort we are putting in at their apartment complex to improve it for all the owners has not yet brought their properties over to our company, despite being more than impressed by us. Why not? “Because I only pay 6.5% management fee at the company I am with”. Fair enough. What rent do they get? “$660 per week for 4 bedrooms”. Each week they pay $42.90 for management, leaving them $614.10. Sounds alright, but let’s run the numbers for our clients at those apartments. We manage an identical apartment and we get $695 per week rent. Our fees are higher at 8%, but the money our clients get is $639.40. That is $25.30 per week extra, or $1,315.60 each year. Which is the better deal? The one with the higher management rate!

So when you are shopping around for property management, don’t just go on the fees. Find out how proactive they are about rents, because that makes a much bigger difference to your pocket. Want results? Get Rental Results!

Why trust is vital.

All relationships are built on trust. Frankly, I think relationships should start with healthy level of trust, and it moves up or down from there. Why start at an optimistic mid-point? It makes you a better person. It encourages the other party to live up to your expectation. And really, do you want to be that suspicious Gollum type? Precious…

If you are naturally the sort of person that likes people to prove their worth for you, do you homework first. Want to know which company is the best in dealing with tenant enquiries? Phone them up about an existing advert yourself, but please, don’t ask for a special viewing and not show up. You wouldn’t want someone wasting the time of someone working for you, so be considerate. Some companies blacklist timewasters, and you don’t want to be blacklisted by your preferred property management company.

If you are going to act the part of a prospective tenant, have a good story. Please don’t say it is ‘for a friend’ – your friend is unlikely to get the time of day if they are incapable of lifting a phone themselves. Why can’t they? Are they in traction? Gaol? Outer space? Just being ‘too busy at work’ does not say to a property manager the ‘friend’ will take the time to report maintenance issues or meet when necessary, so don’t be surprised if they don’t leap to lay down the red carpet. Does that seem a tough stance to take? We don’t think so. It is vital for us that we meet the actual occupants of a property. Too many stories abound of the pretty girl tenant who gives the property to her scary mob boyfriend. So bear in mind if you ring a property management company ‘for a friend’ – are they mindful of your properties security and who will be living in it? If so, you could be in good hands.

Leaving on a jet plane…

When you rent out your own home, there are some extra things to be aware of.

1. I’m pretty clean. Get a commercial cleaner to clean after you anyway. This way there is no disputes with the tenants at the end of their tenancy as to whether the property was clean or not. “But that was dirty when I moved in” is words your property manager hates to hear, and neither of you want to discuss your hair in the bath waste, so spend a few buck and save yourself time, humiliation, and hassle. When you are moving house you have enough to do, don’t risk fines at Tribunal for not having the property clean enough.

2. It’s good enough for me. Yep, I’ve lived with things thinking ‘I’ll fix that next weekend’. Guess what? It’s now that weekend. Fix it already so there are no issues for tenants. They won’t know to step around the rotting board on the deck, so you have a health and safety issue. As well, a property presented in good condition with no maintenance outstanding is more likely to attract careful tenants and it is easier to establish if something does go wrong who should be responsible for fixing it. If you’re not sure, ask your property manager for a list of things you must fix, and authorise them to deal with anything you can’t.

3. But that never broke down while I lived there. There will be a number of things that will wear out or break down after you leave the property, and that you had good use out of them is great for you. All items have a used by date, and they will continue to deteriorate while you are away. Expect to do a lot of small fix-it jobs if and when you return, and plan on repainting and/or carpeting some time soon. Time flies when you are having fun, but the property wears out all the same.

4. I remember it being a lot better than this. It is natural to idealise your own home – it is the sense of ‘home’ that makes it such a welcoming place for you. You also knew it best with all your belongings in the property, which make all properties look better. When you rent it out to someone, you need to separate ‘house’ from ‘home’, and this can be difficult. Be prepared. I know one owner found herself upset because the tenants arranged their furniture differently than she expected. Sounds silly until you’ve been there. Prepare to be a bit irrational, it’s normal.

5. That cost what?? A lot of those small things you would do routinely are either not going to get done or will cost you a lot to pay someone to do it. Think about how much it would cost to replace a light bulb. $1? Or $1 plus time to find out what kind of bulb needs replacing, phone tenants cell phones to tell them you are coming tomorrow, drive to pick up key from property managers office, travel to the shop which stocks the right light bulb, find the product, wait at the checkout, pay, manoeuvre through the carpark and traffic back to the property, park, take stuff you need to front door, clear a space to get the ladder into the room, set it up, climb up and remove the old bulb, climb down to get the new bulb out of the packaging, climb up the ladder insert new bulb, climb down, pack up ladder, dispose of old bulb and packaging, lock up property, return ladder to vehicle, drive through traffic to drop key back at the property managers office, go home to write up the invoice to send it to the property manager for payment? Phew, and that doesn’t even allow for parking meter money! Be prepared to spend more on maintenance than you think. Good trades-people are worth every cent.

6. Why can we only get a few dollars compensation from the tenant? They ruined it! Alas, that carpet may have cost you $5000 back in 1987, and you’ve certainly had good use of it. Unfortunately, there is a ‘lifetime cost’ for all items and it is measured by a set scale of depreciation, which varies depending on the item. Carpet has a deemed lifespan of 5 to 7 years only, no matter how well you cared for it. If it is older than that, it will be very hard to prove a claim of getting it replaced if it is stained. Good property managers try their best, but they can’t work miracles. Make sure you are insured to make up the difference if you need to.

7. The rent doesn’t cover my expenses! Whoever told you it would? Most people buy homes that would make bad investment properties as the yield isn’t good – I’m pretty sure the potential rent wasn’t a factor of your purchasing decision. Be prepared to top up the mortgage fund, and have a reserve fund for unexpected maintenance items - a burst pipe just won’t wait for you to save up. You also need to plan for what happens when the tenants don’t pay rent (it can happen to the best of people) or if the property is vacant. There is also the cost of finding tenants – advertising, credit checks, and any letting fees payable. Have funds set aside to cover those sorts of contingencies.

Hopefully you will be forewarned and forearmed about renting out your own home. It isn’t for everyone. Make sure you are aware of the pitfalls before you go down this path and know how you will cope when these things happen to you. And trust me, they will happen! It happens to me whenever I rent a house I have lived in, or even spent a long time doing up – an emotional bond makes it a bit more difficult.

Getting the best from your Trademe advertising.

Many people miss out on getting great tenants for their property because they don’t know how to attract them with a great Trademe advert. Follow these hints to avoid being one of them.

1. Accentuate the positive. People won’t infer from your advert what you have to offer them. Make it plain, and repeat if necessary. What is it close to? What do you love most about the property (if the answer to that is ‘the rent’ you might need to have another think).

2. Take great photos. Choose a sunny day to take photos on. Dark and dingy won’t get you great tenants. Light and bright is the way to go. If you don’t have a wide angle lens on your camera, get one. Most cameras don't take good indoor photos because the angle of view is too small.

3. Clean up! A building site or bomb site won’t attract neat and tidy people. If your current tenants have stuff everywhere, politely ask them to move it for the photos, or ask if they mind you doing it. You don't need to do a proper job of it. Dirty dishes can be hidden in the sink or oven, dirty clothes under the bed, or simply moved behind you when you take the photo. Better yet, take photos when the property is at its best, and re-use those as often as you need to.

4. More information is better than less. You are not writing a newspaper classified so you're not paying by the word, so make the most of it. Use adjectives! Don’t bother using abbreviations (for example: s/s, gge, br, wir), you don’t need to, and they can confuse people.

5. Know what to leave out. Do you need to mention noisy neighbours? Some things are relative, what bothers you won’t bother someone else, so don’t include stuff that may go either way.

6. Be honest. You do need to truthfully sell your property, so don’t say it has a heat pump when it has no heating at all. To do otherwise could land you in hot water.

The goal is to get people enquiring about your property. You want them to come to your property and see it for themselves. Why not list the open homes times there? Or how to apply? The easier you make it, the better the response will be, so the more applicants you have to choose the best tenant from.

See examples of great property adverts here: http://www.trademe.co.nz/Members/Listings.aspx?mcat=0350-&member=2388871

Not sure you can do this? Get help here: http://www.rentalresults.co.nz

Should you Spy on your Property Manager?

How well are they doing their job? Should you get a friend to ring to ask about renting your property and see how they answer the phone?

If you do, make sure they have a convincing back-story. A good property manager will ask them questions to see if they are suitable for the property, and a genuine applicant. If they say ‘hey stranger, whoever you are, just go around and peer in the windows, I’m sure it will be fine, I trust you’, or worse ‘come grab a key, show yourself through’, your property is not in good hands. The security of your property is important. Even if you think it is empty with nothing to steal, a thief will find something worth taking, and always the cost of setting that right is greater than any street value.

A good property manager will find out who will be living in the property. Them and their fifteen closest mates in your 3 bedroom property? If so, they should be gently told it is unsuitable for them. Why are they moving? Because they were evicted? If so, a good property manager will tell them speaking to their former landlord is an essential part of the letting process, perhaps they would like to explain the situation before the landlord is called. Why do they want to move into the area? People with connections to an area are more likely to be long-term tenants than those who are ‘just trying it out’. Are they working at the moment? While staying within the confines of the Human Rights Act, a good property manager should find out if they can pay the rent and their other bills. You are not a charity shelter. Rent should not be more than one third of their income. More than this, people struggle to pay week after week. This question also finds out if they will be working from home. Some properties just don’t suit home industry.

So, if you do have a friend snoop, make sure they are prepared to answer these questions, and convincingly. Great property managers have very well developed ‘spidey senses’ and can tell when someone is fibbing. Don’t get mud on your face by trying this and failing. You won’t build a relationship with your property manager. And frankly, if you don’t trust them, why did you hire them? Move on, they will thank you for it.

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.