When it comes to investing in property, there’s no shortage of information about how to do it. Search online and you’ll find thousands of books, podcasts, YouTube videos and ‘gurus’ telling you how to become a property mogul. However, despite much of what you read and hear, no two properties are ever the same, and the journey each property investor goes on is very different. The property portfolio’s age, size, features or even location, can all play an important role in determining the success and stress levels of the investor.
A big part of becoming a successful residential property investor is ensuring that you can hold property over the long term so that you can achieve higher capital gains over time. Whether you’re a first-timer or a seasoned investor, it is important to make sure you keep up to date with the current market, the changing trends and the laws surrounding residential investment property
Even the savviest investor can miss the occasional update or fringe law. So, as full-time property managers, we’ve created this summary on the things we find people are most surprised to discover about property investing and being a landlord. Read on to learn the top 10 things property investors should know about investing.
Looking to head overseas?
As a landlord, you might be lucky enough to earn a brief break and treat yourself to a holiday. This may have seemed like a distant dream during COVID-19 but as bubbles begin to open the thought of heading overseas becomes ever more realistic. However, many don’t realise that going overseas for an extended period of time can have a major impact on your obligations as a landlord or property manager.
If you leave New Zealand for more than 21 consecutive days, you will need to appoint a dedicated agent to manage your rental property in your stead. This is so the tenants have someone responsible for the property that they can go to if there is a problem. Landlords may appoint anyone as their agent, this can be either a property management company, a friend or a family member, as long as they are located in New Zealand. It is worth noting, however, that the agent should be someone who is fully aware of and able to fulfil all legal requirements, obligations and responsibilities of managing a rental property. They are acting on your behalf so it’s important they don’t accidentally breach the legal requirements of a property manager or infringe on the rights of your tenants.
Before you depart New Zealand, you (the landlord) will need to make the tenant aware of who the agent is, and how they can be contacted. This can be via a contact number or physical address for service.
It is important to note that failure to appoint an agent and follow the procedure is an unlawful act under the Residential Tenancy Act, and landlords can be liable for exemplary damages of up to $1,000. If you already enlist the services of a property manager then you will need to let them know that you will be leaving the country, even if you don’t directly manage the property yourself. More information can be found on this topic by reading our supporting blog ‘Heading overseas? Have you thought about renting out your property?’. And yes, it is possible to hire a McDonald Real Estate property manager on a short, fixed-term engagement to cover the period you’re overseas.
LVR restrictions for residential property investment
The LVR (Loan-to-value ratios) is the amount a bank is allowed to lend against a property, compared to the value of that property. Earlier this year, the reserve bank announced that a 40% deposit will be required from May 2021 for those looking to purchase an existing residential investment property. This was introduced as a way of protecting mortgagees from over-leveraging themselves and was also seen as an attempt to control rising house prices by reducing investor demand. More information about this can be found in the following blog - Reserve bank changes for investors.
However, LVR restrictions don’t apply to all bank lending. The rules actually state that no more than 5% of the banks’ lending can be to investors that have less than the 40% deposit. That means that if you have a deposit, but it’s not at the 40% required, you may still get a loan. The best way to get this sort of loan is through a mortgage broker.’
Building a new house as an investment may require a smaller deposit
Because New Zealand is experiencing a large housing shortage, the government is trying to make it easier for anyone (investor or owner-occupier) to build brand new properties.
Loan-to-value ratios (LVRs) already allow some borrowers to get mortgages on new builds with a smaller deposit than they would need for an existing property. For a new build, first-home buyers currently only need a deposit of 10% while property investors are currently required to have a deposit of 30 - 40%. This also limits the amount of capital you have to risk in order to become a property investor. A raft of government changes has attempted to make building a new home more appealing to property investors. While more stringent requirements for deposits, bright-line tests and interest deductibility have been introduced to make investing in already built properties less appealing, much of this is waived when discussing a new build. That’s right, the 10-year bright-line test stays at 5-years, the deposit requirement is lower, and the new interest deductibility rule is removed when the investment property has been built new. Combine that with their greater appeal for tenants, lower ongoing maintenance and guaranteed compliance with Healthy Homes, and a new build property is a very appealing option for many property investors.
Mortgage brokers keep up to date with the bank’s policies and understand how much of each bank’s lending is to higher-LVR borrowers. If you are in this situation, you should talk to a good broker. Most mortgage brokers are paid by lenders (in many cases banks), so their services are free to you.
Tenants are allowed to make minor changes to the property
If a tenant would like to make minor changes to a property to help the house feel more homely, a landlord must not decline reasonable requests. As long as the property is reinstated back to substantially the same state as it was in before the tenants moved in and all costs have been covered by the tenant then it’s no longer reasonable to deny these requests. Minor changes such as; curtains, picture hooks, baby-proofing, earthquake proofing, and adding cat doors are acceptable, but must always be reverted back to substantially the same condition at the tenants cost unless otherwise agreed. The tenant must put a request in writing and the landlord must respond to the request to make a change within 21 days. The tenant cannot make a change without the permission of the landlord but the landlord cannot decline a reasonable request.
A good example is a tenant asking to paint the interior of the house. As long as the tenant and landlord can agree on the colour palette a landlord would not refuse this request. It would be unreasonable to refuse this if the tenant were to ask but it would come with a caveat - that the tenant would need to have it returned substantially close to its original state at their own cost should the landlord stipulate that at the time of the request. If this isn’t done at the end of the tenancy and was clearly agreed in writing, then it would be possible to claim the cost of reverting the colour scheme back.
You might not need any cash for the deposit on an investment property
Equity is the difference between what you owe on your mortgage and what your home is currently worth. And in most cases, with today’s market being what it is, houses are worth quite a bit! If you have owned your home for a few years then chances are you have built up equity during the course of that time. You can calculate a basic equity value by taking the current value of the property and minus the outstanding debt, this equals your current equity. The total equity available can potentially be used as a deposit on your investment property, but some of the equity will need to be retained against the first property. If you would like to learn more about how you can use your home's equity to buy an investment property then check out this blog.
If you are looking to end a tenancy you may have to give up to 90 days notice
Since 11 February 2021, landlords can not end a periodic tenancy without cause by providing 90 days’ notice. Landlords are also unable to end a tenancy without grounds.
For example, one exception is if the property owner, or a member of the owner’s family, is going to live in the property within 90 days after the termination date, for at least 90 days. In this case, they can give the tenant 63 day’s notice and do not require any additional reasoning to end the tenancy. There are a few other ways a tenancy can be ended and you can find more information about the new law changes here.
Landlords can not end fixed-term contracts
A fixed-term tenancy agreement only lasts for a set amount of time. Therefore, if the fixed-term agreement is for longer than 90 days, the tenancy will automatically become a periodic tenancy when it ends. It is important to ask your tenant if they want it to become a periodic tenancy, as they need to give 28 days’ notice before the expiry date of the fixed-term tenancy agreement.
If the landlord doesn't want it to become a periodic tenancy, then the property owner will need to give a reason for ending the tenancy as well as provide the correct notice based on the requirements of that reason. The reasons are the same as for ending a periodic tenancy; such as the property is being listed for sale. For more information about fixed-term tenancy agreements, we suggest visiting the Tenancy website here.
The importance of a tenancy agreement
A tenancy agreement is a legally binding contract between a landlord and a tenant which sets out the rights and responsibilities while reducing the risk of future misunderstandings, all while keeping both parties on the right side of the law. According to the Tenancy Services website, ‘a tenancy agreement must be in writing, and the landlord must give the tenant a copy before the tenancy starts. However, even if there is no formal agreement in writing, the Residential Tenancies Act still applies.’ That’s right, just because you don’t have a tenancy agreement signed and in writing, you may still be bound under its laws and prosecuted for breaching its terms.
To help avoid any unnecessary fines or additional expenses that come with legal fees, it is important to make sure that an agreement is in place and both parties agree to its contents.
If you’re wanting to do minor renovations
Landlords that are looking to complete minor renovations on their property are able to do so, as long as they abide by the rules laid out by the tenancy agreement act. Whether the tenants remain in the property during the renovations or move out for a temporary time will need to be agreed upon by both the tenant and the landlord, and should be in writing. It is important to make sure that all the terms and conditions are documented and agreed to. The agreement should include:
- The expected time it will take to complete the renovations.
- Alternative arrangements agreed on for the tenants and their belongings. Such as a ‘rent holiday’ (reducing the rent for a specified time) or the landlord paying for alternative accommodation (if agreed that the tenant will vacate the property during the renovation work).
- Clarify who will pay for outgoings (such as power and water) at the property while under renovation.
- What will happen if the renovations are not completed within the expected timeframe.
If your renovation is not minor, it is important to know that a landlord can give 90days notice to a tenant, allowing the property to be renovated or repaired. Providing extensive alterations will be taking place, such as replacing a bathroom or kitchen, then it may not be practicable for the tenant to remain.
Decisions should not be based on emotions
You’re buying an investment property, not a home to live in. You don’t have to love it – or even like it. It is important to leave your emotions at the front door. Set a limit of how much you want to spend based on your desired returns, realistic earnings and additional research and stick to it. If the bidding goes over your limit, drop out of the race. It’s one thing to buy well, but buying at all costs simply isn’t smart investing. Allowing your emotions to cloud your judgment means you are more likely to over-capitalise on your purchase, rather than negotiating the best possible price and outcome for your investment goals.
Being a property investor is a smart way to grow long term wealth. Understanding the changes, laws and expectations is an important part of the journey and essential for being a successful landlord. However, it is also important to remember that landlords are not alone, help is available. This is why many successful investors invest in using a property management company to not only help keep them on the right side of the law but also keep their tenants happy. If you’re already a seasoned investor, or perhaps looking to invest in property in the near future our team is on hand to help.
Contact us today by clicking here or request a FREE no-obligation property appraisal by clicking on the link below.
