Accidental investors need to school up in the basics of being a landlord, or they risk capitulating in a weakened market, says author Andrew King.
King, who with Lisa Dudson, has co-written the new edition of Create Wealth: The Complete Guide to Residential Property Investment in New Zealand , says the slumping property market has created thousands of new landlords, and whether they sink or swim will depend on how quickly they learn the skills.
Early this year there was a huge influx of new sales listings on TradeMe, King says, as people tried to quit a slowing market when prices were at their peak, but recent months have shown a spike in new rental listings.
“My take on that is a lot of people have tried to sell their properties but have failed to get the price they expected, and so have decided to rent their place out until the market improves,” says King.
These accidental landlords may have bought another place in a bid to move up the property ladder, or were shifting to another city, or for school zones.
The problem is that many will find the rents they can collect do not come close to paying the expenses of owning a renter, at least a heavily geared one.
That means cash flow will be tight, particularly with interest rates so high, so they need strategies to maximise their cash flow.
Many will not stay the course and will sell out, King said, when hanging on could mean the difference between selling at a profit or a loss.
He picks the market comes back to life in 2011-12, coinciding with the time young KiwiSavers will be able to claim government subsidies on their first homes.
- Know the true market rental price for your property and ensure that is what you are receiving. You can do that by keeping an eye on adverts in the papers, testing the market by posing as a tenant, and using the online statistics provided by the Department of Building and Housing. Don’t be afraid to review your rents when the market moves.
- Know the tax deductions you can make, ensure you have the right documentation and follow through the claim. Deductions can include depreciation and expenses like the petrol used in carrying out property inspections, the cost of insurance, repairs and maintenance, land and water rates, and the legal costs in obtaining finance.
- If receiving a wage or salary, and your property is making a tax loss, you can apply for an alternative tax code (Inland Revenue form IR23) to receive tax deductions each pay day rather than waiting till the end of the year.
- Make interest-only repayments on your mortgage. If your rental property is making a loss, this is a way of keeping the short-term costs down.
- Find out if there are extra features your tenants want that you can provide for an increased rental return.
- Establish good management systems so you are as efficient as possible, and keep your property maintained. When you are managing a negatively geared property, every dollar saved is a dollar closer to holding on to your renter.
- Understand your legal duties as a landlord under the Residential Tenancies Act, and study up on what to do in a crisis (such as problem tenants), before a crisis strikes.
- Use a revolving credit account to get through cash-flow shortfalls. Take care and be disciplined, however. These can be a trap for the unwary.
- Mortgage interest costs are your biggest expense, so ensure your loans are structured so the mortgage interest is tax deductible.
- Don’t try to go it alone. There’s strength in numbers, and accidental landlords can find support, information and experience by joining their local property investors’ association. The annual fees can be claimed as a deductible expense.