In the property market where capital growth is difficult to come by, being proactive by improving the property conditions or increasing the property value makes really sense for two reasons. Firstly for finance applications banks like it when the value of their held security increases and secondly the increase of the rental value results in better cash-flow.

What are the keys for successful renovations?

Actually, key factors for success might slightly be different depending on your strategies and the way you run the business. But meeting plan, time frame and budget relates to any investment strategy. I prepare and maintain for each property a long-term plan. When the time is right the plan swings into action without any delay. To make that working I implemented three business rules:

• Working out a plan in writing, including permits and compliance requirements
• Setting a budget, no over-spending (plan B includes cutting costs)
• Working only with trades people who deliver results and with good trading history

 Let me give you an example

I purchased on the peak of the market a townhouse with low yield as it was an equity deal. Now years later the market plunged to its record low, the only way out is pushing up the yield by renovation. The most important part was to minimize costs by planning in detail and keep the time frame for the work to a minimum.

How do minimize costs?

The improvement plan, required resources -  everything was waiting, for what? – The vacancy! As soon as I got the 21 days notice the project plan swung into action and all preparation work was done before tenants moved out. That included organizing material, hiring trained or experienced people, everything...

The first day of vacancy (Sunday) kicked off the project as below:

When planning the renovation expenses are often hard to predict. The best way to estimate renovation costs is to get at least two quotes and check offers at home improvement stores - look at different solutions, material and prices. I always adjust design and solution to price and material because that helps to reduce off-cuts. Finding the right material and the best solution are the biggest cost savers.

Yes, projects like this don’t always go clockwise. The budget is limited and the timeframe could be too short because of unforeseen circumstances.  But that should not endanger the project as you do have got a plan B – right?

What are the risks with renovations?

You know from experiences that developments and renovations are not without risks. And while there are numerous success stories, there are also many disastrous renovations as well. If you are attracted to create equity with your own hands, start small, gain experience by doing and keep your eyes wide open. The biggest risk is the human factor and when losing control.

If you are skilled to manage the project by yourself – you will be fine. You need a practical understanding, common sense or flexibility to face challenges and last but not least skills to work with a tight budget.

Be aware losing money with renovations is easier when depending on somebody else. Staying in control keeps you on track and on the road to profit. Good luck.

Klauster

And by the way the entire project was quoted $5000 by my master builder. I did the work by myself with total costs below 2000 Dollars – That’s investor’s joy!

If you want more details, open here the property link. 

I read recently in a newsletter from an agency recommendations for landlords “how much rent should they expect”. So I recalled all the discussions I had with my previous agent.

What does your property manager recommend?

Just from the start keep in mind agents take care of their own business. That is normal  otherwise they wouldn’t be in business, right?

Priorities for the agents are to limit their workload and to have a steady cash-flow. For them is good charging a rent slightly below the competition for more applicants, longer rent duration and less work.

For instance charging a property management fee of 8.5% +GST on a rent of $400pw gives them $2033 per annum on a rent of 20800. Charging $10 less below competition rent cost them 51 Dollars and the landlord loses 520 Dollars.

Again  – why would the agent push your business hard for a gain of 51 Dollars? For the agent is it much more efficient to reduce the workload and have another landlord paying 2k a year. Would you agree with that? 

Why would you charge top rents?

The margin on rents is slim and the difference of 500 Dollar more or less is one thousand Dollars, that pays quite few bills. 

Having higher rent but additional two week vacancy wouldn’t make any difference money wise, but would give the landlord time to keep up with maintenance, and breezing space is good for the property, too.

Keep in mind, quality accommodation is demanding but attracts better tenants. You keep your re-sale value of the property up-to-date. That is very important if you have to sell. Don’t forget upgrades in kitchen and bathroom are great marketing features for your rental property.

Mostly overlooked, the appearance of a property, landscaped front garden etc brings in good tenants. But on the other hand these people are busy and the street appearance deteriorates during the tenancy. If you as landlord can’t make a difference when it comes to impressing potential tenants your return on investment will suffer.

What do you think about higher rents and free services included? Adding benefits for tenants is a good strategy. It works for me very well such as free lawn mowing, providing vegetable patch and gardening, features like solar heating/ventilation/hot water or Internet, free of charge for tenants.

Don’t be foolish – 100% occupation works for below average properties, but not for top rentals. The stress on your rental creates more costs for repair than you would gain. Trust me on that!

What are tenants willing to pay?

I admit it is a tricky question. But it depends on YOU. Mainly three reasons for that;

• What area or location you are in,
• What sort of people you are targeting, and
• What is your long-term plan for your investment property?

Let me illustrate that with some examples:

• People who rent as lifestyle decision look for quality and understand “quality has its price”.
• People who look for a family home and cannot afford to buy one or are already saving money for a deposit look for budget accommodation.
• Renters pay different rents in the CBD, cities, suburbs and industrial areas with lot of jobs.
• If you hold a property for cash-flow reasons, covering holding costs or wanting to maximize the return on investment when selling, you will attract different sorts of tenants and that will change throughout your landlord cycle.

Are you with me?

Good luck

Klauster

Well, honestly the answer is NO, at least in my case. It has been a challenging year not only for landlords, actually for all of us, as we witnessed the ongoing global financial crisis where the centre moved from US to Europe. You can’t ignore - the world economy shows significant cracks and the banks are nervous. The interest rates remain low but lending criteria are very stringent if you try a home loan application.

This year will be remembered of New Zealand that won the Rugby World Cup 2011 and a year of NZ’s general election with same expected results and surprises.

No surprise as expected, the National Party leads for another term the government but still with 60 seats in the Parliament needs a coalition. Don’t get me wrong but these coalition games have always been a good reason not to deliver as promised and excuses for finger pointing. Why not having a ruling party selected by democracy that is accountable for their legislation? But the public opinion with 55.76% goes with MMP and has to pay for compromises with little results. 

In his victory speech, John Key was focused on "building a more competitive economy with less debt, with more jobs and with higher incomes". How that can be translated for landlords is not really clear to me as residential property investors already had to compensate this year increases in expense and loss by “zero” depreciation. Next year the increasing costs are driven by rising levies from the local government and GST on higher expenses for all sorts of services, petrol and mostly the increase in insurance premiums. Property investors, I know, have already taken all developments on hold this year and it will be even harder for businesses like plumbers, builders, electricians, cleaners, etc to survive. It has been ignored that New Zealand has a property driven economy and all small businesses depend on it.

Big surprise is that Winston Peters returns to the Parliament with more new MPs on his train. Now, we had already a shake recorded as 5.7 magnitude at 7.19pm last Saturday night. Cracks in buildings were recorded but that is not my only concern.

What is about you - did you achieve everything you were hoping for?

I am a big believer in positive thinking. But also I watch what happens around me and when I see that banks lower the fixed-term interest rate for one year below 6% than I can imagine what they expect from the next 12 months. So – be aware of it.

And for the end of this year there is something more - you can't be up all the time. So plan and take a break. Don't wait until December 31st to do this. Life is too short – so enjoy this Christmas season with all your friends and family. Despite of reading above, be optimistic and plan time to recover when life throws something in your way. You are prepared and in business for a good reason!

Merry Christmas and a wonderful holiday season!

Klauster

We are, like so many others in the Christchurch region deeply affected by the devastating earthquake and the upheaval in live as a consequence that has been accepted as an unforeseen disaster. But for landlords man made disasters are still to come, which are not so deeply devastating but more difficult to accept related to the tax law changes for investors.

That all happens in the shadow of the EU Finance Crisis where the EU is hoping that China becomes the driving force to mange what the industrial nations in Europe can’t fix on their own. China is now the undisputed centre, continuing to buy everything from everyone at good prices. You need to make your own conclusions how that might affect your business in New Zealand.

If landlords were waiting for a good time to sell, now it might be a good time. And for landlords decided to stay, now is a good time to review rents. The level of rental supply in my area is on the lowest level, I have seen so far. We have got waiting lists for our prime properties and so you should have too. We use as marketing tool the Internet and get our tenants using our website. If you need tips and help for Internet marketing, we are happy to pass on our experiences. You can even list your properties on Online Shop Bargains.

Remember as I mentioned, now is a good time for cash flow. Don’t miss as you will see more people retire off the back of this fiasco than any time previously I believe because the opportunities are unprecedented.

Klauster

Coming from a number of interesting discussion we had recently people are wondering whether they should stay in New Zealand’s property market or not and because of the uncertainty that the Referendum on the Voting System causes.

Now, I admit that are two different pair of shoes and fall together because of the time line. Regarding the referendum and I’m happy to see MMP system on the test. I have watched the political parties got into the Parliament and the impact on NZ. It has been the worst experience in my life with ridiculous legislations and minority strong holds. The FIRST PAST THE POST – system, I prefer, hope will turn the country into a performing one because the candidates who get the votes win to form a government without the need for coalitions. I would like to see accountability not coalition debates.

By now I can’t think of one good thing that happened to me as business, landlord or investor that has come from the current MMP system. And that is the point where the question comes from - Is New Zealand still a good place to invest in properties?

The worries that property related costs will climb because of the global financial market and internally of the disaster recovery related costs. But there are a lot of political concerns for instance why are landlords businesses treated differently when depreciating business assets etc? And then of course the ghosts of CGT, Ring Fencing, tenant biased law and rising compliance costs imposed by the local government are killers.

And further NZ economy depends on Asian market dominantly China and people ask what happens to NZ if the Chinese powerhouse runs out of steam? Certainly the potential to increase the family income would stop rents to catch up with rising costs. Yes that is a risk, too.

So I completely understand why so many people are nervous and stay away from properties. It wasn’t that long ago, where property values dropped so deep that home loans become higher in numbers than the rated valuation and income could not support payment to bank or credit institutions. Indeed no longer just only good news. 

But, let me tell you – I am interested in history – and I agree with people saying “history repeats itself”. That tells me, don’t give up your dreams, there are good surprises ahead. The good news really is, New Zealand is a country that deserves our support and it is up to you what you do with the freedom to own a property.

If you are like me, harvesting sun energy, wind power, rain water for my garden – believe it or not that is still “TAX” free. You will be just fine and enjoy the convenience owning a property and make the best out of it. The average household in NZ could do much better with brain. For instance I get rewards from my tenants, from my energy harvesting equipment and independence is good for enjoying life – That I wish you, too.

Klauster

Landlords who are providing Internet access when renting furnished or holiday homes are liable for the actions of their tenants. Similarly, you’ll be liable for the actions of guests using your home Internet account at home.

Infringing File Sharing - Amendment Act 2011 makes changes to the Copyright Act 1994 for cracking down on peer-to-peer file sharing on the Internet. The law comes into force on 1 September 2011 and by definition “File sharing” is:

- material uploaded or downloaded from the Internet, and

- using an application or network that enables the simultaneous sharing of material between multiple users.

The law says that the person who owns the Internet account (account holder) is liable, even if he or she wasn’t the person who broke the law. In other words for the landlord will it be hard to give evidence or reasons not to be guilty.

The process is to get two notices before the hearing of Copyright Tribunal. If your tenant signs a related clause in the tenancy agreement, you’ll be able to act accordingly. Otherwise the minimum penalty is $275 and goes up to $15,000.

As a landlord – good luck, be smart.

Klauster

Putting aside the human element around discussing for new tax and let me just talking as an investor, it would be interesting to see how additional costs can make housing more affordable.

Housing more affordable for whom?

I live in a house, my tenants do so, too. Does is really matter whether you rent or own?

Everybody pays for the convenience to rent or own, called rates, insurance, tax or rent – right? For a landlord business the rents have to cover business related expenses. So I ask you again – how can raising costs make housing more affordable and for whom?

Political debates about nonsense

The promoters of CGT say, tax will cause falling property values -  that makes housing more affordable (for buyers). Well, a dumb approach as we already learnt at school a price is a figure of “supply and demand”. (By the way, for the confused reader - when people speak about house values in New Zealand they speak about selling or purchase price.)

Let us speak about house price drivers

Raising costs by inflation have a crucial impact.  For instance the plumber has to charge more to pay his raising fuel costs and the developer pays more for labour, material and more importantly compliance fees to the local government. On top of all, we know about OCR rates, immigration inflow, rules given by financial institutions and banks, etc - everything makes housing more affordable or not.  If your family income is low, housing is not affordable. It doesn’t matter what your party tells you – you need instead of paying a new tax a higher wage or salary. Right?

What can you do when your employer can’t pay you more?

Or what happens with renters who do not want to buy their own home. Someone has to provide housing in public ownership or private ownership. If the government moves away from capital investment in housing for the poor private investors have to fund the housing stock. What then is the point of making property investments an uneconomic investment? But you as consumer can't do anything.

Who is impressed by the anti wealth policies?

Poor financial education by discouraging savings and penalizing those trying to house other kiwis affect the housing affordability more than anything else. I think here is something to be learnt from people spending money wisely. Impressed possibly are people getting paid by the government.

The political CGT debate is a misleading one

Any income from investment properties inclusive capital gains are already taxed on personal or company tax rate (look at your IR3, IR4 or IR6). For that reason the entire political debate is just non-sense. The major taxation problem is based on fuzzy concepts such as a purchaser’s “intention” when buying a property and all the related issues by lacking clarity. I don’t know any country that can compete in this point.

What is more dangerous than a tax based on zero capital growth?

The killing spread will continue with raising interest rates, because of the global market boiling Asia, Europe and the choked US housing market. Somebody has to pay for funds needed to satisfy earthquake related needs. Possibly after the election an old ghost called “ring fencing” will surface – and why? Because of  missing a long-term political vision for a healthy economy and more efficiency. Growing income, wouldn’t that be the right way to go? Profits, higher wages  =  better home affordability.

Would you agree with that?

Stay safe

Klauster

Triggered by so much public opinion about property investments I had already a look at the fundamentals of Capital Gains the other day. Yesterday I had a quite interesting discussion about it. In the nutshell the figures I used for explaining Inflation and Capital Gains by using figures from my family home don’t represent a common investment property. Right, I did it by purpose to show you how far New Zealand's housing standards are behind the developed world. No question about homeowner’s lifestyle that differs from renters - so we speak about different housing needs.

The National Housing Standard for investment properties is cemented on the level of state housing. With all the new regulations for investors everything above this level is over capitalized. That becomes very clear with the debate about CGT. Investors don’t get paid above this standard because of zero depreciation on business assets, difficulties to offset loss (LAQC issue) and get penalized with tax for spent money for pushing up capital gains on home improvements. How adverse for renters is that?

In fact TAX on selling investment properties is already in place. The experts who are writing articles about CGT should know that. For investment properties sold before 10 years ownership and homes for private usage that cannot be proved otherwise sufficiently to the IRD are already due for income tax on sale. Maybe 15% CGT is even better then being taxed on personal or business tax rate, would you agree?

The drivers for new tax might be another one – money and the taxman will take it from the only people who can save the nation by spending money wisely. CGT is based on capital gain. It would be fair to pay on capital gain and get a refund by dropping values, right? But who then will pay for government's bankruptcy?

As I read in “The Wellingtonian” issue 14th of July an article written by Gordon Campbell, the political CGT debate is about fairness and efficiency. You got it? Every business can depreciate business assets. That has been taken away from landlord's businesses. Landlords don’t get paid for house improvements and on tenant’s refusal a landlord can’t even pass on expenses above the market rent, why then would an investor pay for something with zero return?

As illustrated the removal of cash-flow for “mum & dad” investors has got consequences. Who will buy and own the next rental property for renters who want to rent as lifestyle decision or can’t afford buying a family home? I see it as another stroke to an industry already in deep trouble.

What do you think about?

Stay alerted.

Klauster

Media in election year are filled with misleading material pushed by the opposition parties and the political debate about the Capital Gains Tax. You as reader know, the discussions about the proposed Capital Gains Tax are not new but amazingly the quality of information hasn’t improved. In one point I think people agree that income should be taxed equally. So – let me start with the question is Capital Gain on properties income or not?

By definition “income is the sum of all the wages, salaries, profits, interests payments, rents and other forms of earnings received”. Capital Gain is not an earning received, it is an inflation driven value, and the total figure is called by my insurer “replacement value”.

I still have records about my settlement in Wellington when I paid for one liter petrol 69c. Today I paid approximately three times so much for the same amount of fuel. If I would purchase my house today, I also would have to pay three-times the amount as I did 15 years ago.  That price increase applies roughly to everything because these figures are driven by inflation.

On assets like gold coins, old-classic cars, and also properties the difference between the previous purchase price years ago and the actual selling price is by definition capital gain. Now everybody knows restoring an old-classic car or maintaining a property comes with huge expenses over the years, right?

For instance I paid for renovation on my house in average 5k and 3k for rates, insurance, repair every year. With these figures over the last 15 years I spent more than 120 thousand Dollars to keep up with the “replacement value”. Costs for improvements like central heating, double glazing, solar heating, etc summed up to additional unbelievable 86 thousand Dollars.

When I cumulate expenses for maintenance, renovation and repair that figure is much higher as the difference between the selling price today and the purchase price 15 years ago. The Capital Gain is for me something like a reimbursement for maintaining the replacement value, actually expenses I have been carrying forward for over 15 years out of my pocket. Where is the income promised by bright headed people to be taxed?

Now, you could argue, I have over-capitalized and the figures for an investment property would differ. Right - I've got a strong opinion on that, too. Here in this article I refer to value and Capital Gain - not more. All I'm saying is, when somebody invests money to restore an old car or spends money to maintain the value of an investment property, I can't see any income received on sale. And secondly why should the Capital Gain for a house or a car be treated and taxed differently?

The next article part looks at the investment property specific and fairness.

Any contribution to that confusion is much appreciated.

Stay on alert

Klauster

When I was writing the post about “Rent Increases – Who are the Winners and Losers?”  I came across an article “How much rent can you afford?” written by Amanda Morrall and published in the Herald, honestly it made me speechless. In that article she was saying that rents in New Zealand were 43% over valued.

To take an practical approach, in areas we rent few three bedroom houses with an average house price of 320k tenants paid in average  360 Dollars per week last year. Taking $360pw rent minus 4000.00 Dollars for maintenance, rates and insurance that produced a net yield of 4.7% by a fixed interest rate of 6.2%. If you take 6.2% minus 4.7% equal 1.5% loss on interests, I really ask me where the nonsense figure of 43% over valued rents comes from?

Being fair the writer tried to rectify that factually incorrect statement in a second article but struggled to say anything to clarify. The list of references to all sorts of unrelated articles made me wondering. Error is human I have no problems with that but I really ask me where that type of journalism leads to.

We realize that New Zealand is in the election year, so we don’t speak about the price increase by inflation, increase of insurance premiums because of recent disasters, and of course not the tax changes, the increase of City Council Rates, new Encroachment Fee structure, etc. What do you think who will pay for these additional costs? Of course people who live in houses pay for it, there will be no difference whether the expenses are called “rent” or something else like “homeowner’s maintenance, rates, etc”.

But something concerns me – the housing standards in New Zealand. There are initiatives, but would you invest in house improvements for rentals with zero return?  Let me be more precisely. The rent is regulated by “Market Rents”. If a landlord provides housing above market standards he can’t charge for that if a tenant disagrees. That restriction was accepted by landlords in the past because house improvements were depreciated by 2% (SL) and 3% (DV). Since April 2011 landlords can spend money for all sorts of house improvements like insulation, double glazed windows, decks etc but don’t get anything back from that improvement. So why wondering, when landlords hold back these desirable improvements? That leads to a long damp and freezing winter, I suppose.

Coming back to reality, the housing market is driven by demand and supply and shady journalism won’t increase the supply of housing that New Zealand needs so urgently.

We had recently two vacancies and experienced in the past 10 to 20 applicants. But this time we had to deal with twice as much, good for landlords but very bad for people with urgent needs.

In summary - it is clear to me that in 2011 home owners and property investors will not only be forced to budget by the new taxation rules but also because of potential rate rises later this year and increasing petrol tax after the election. As we know from the recession - societies with lots of small businesses suffer from “domino effects”, so  - guess who will suffer mostly.

Hope I am being very wrong!

Klauster