Rental Property Profitability

While rental property can bring a lot of profit, it is important to keep in mind that every property is different and succeeding as a landlord requires commitment, hard work and a certain set of skills. In New Zealand, rents have risen at almost double the rate of house prices across the country in the last two years, which is very promising in terms of the profitability of rental property for landlords.

How much profit a landlord should make

To determine how much a profit a landlord should make, they should take into consideration a range of factors such as the property’s rental rate against the market’s rental rates and its expenses. As a general rule, the higher the rental rates are in the market, the higher a landlord can set the rent on the property, allowing them to maximise their profit potential.

Good rates of return on rental properties

A good rate of return on a rental property is, as a rule of thumb, 7% or more. A profitable rental property is one that generates enough cash-flow to cover running costs, mortgage payments and other issues that may arise.

Utilities

Utilities are services that constitute the minimum requirements for modern living in a property.

The basic utilities

The basic utilities are considered to be the following:

• Electricity
• Gas
• Water

Depending on the type and location of the property, there can be other utilities included too, such as rubbish and recycling services, security alarm systems and telecommunications. i.e. a telephone line and the Internet.

Internet access

Even though in most countries Internet access is not considered a utility, in New Zealand it has been recognised as such. The country’s government stated that, since digital technologies are essential to New Zealand’s economy’s growth, broadband is as essential as electricity, water and gas and will constitute “the fourth utility”.

Paying for utilities

A dilemma that often troubles landlords is the issue of who should be responsible for paying the utilities: should it be the landlord or the tenant? A landlord can either take it upon themselves to cover utility bills or charge their tenants for them. Both approaches have advantages and disadvantages.

Apartments where utilities are included often draw a lot of interest from tenants. When landlords choose to cover utilities themselves, this is reflected in a higher rental price for the property and provides convenience for the tenants.

On the other hand, there is the risk that tenants may exceed reasonable usage of utility services, in which case it would be more cost-effective for landlords to have their tenants sort out utility bills.

In either case, the issue of utilities must be clearly addressed in the rental lease. The utilities clause on the lease should list all utilities and state whose responsibility they are along with a thorough explanation of exactly how payments should be made if responsibility falls on the tenant.

In New Zealand, it is usually the tenants who pay for the utilities so landlords do not need to preoccupy themselves with the payment of utilities dilemma.

Maintenance

Average maintenance costs for a rental property

The average maintenance cost for a rental property is $82 per month. It is estimated that, over a year, the average is just under $1000. However, it is important to note that every property has different needs and it is possible that some will require none at all.

Peak periods for maintenance are March and August, during which many new tenants tend to move in. The winter months are usually more maintenance-heavy as people spend more time indoors, resulting in more wear and tear.

Charging tenants for repairs of broken household appliances

Tenants have a responsibility to keep the rental property and the appliances that come with it in good condition. Most tenancy agreements will specifically state that if a problem was caused by the tenant, they will be charged for this.

Repairs are the responsibility of the one who is responsible for them. The landlord will expect to be reimbursed for repair costs of intentional damage and the amount is often taken out of the deposit when the tenant leaves if it hasn’t been paid back before that.

Replacing broken household appliances

Landlords must ensure all household appliances are in satisfactory working condition at all times. If an appliance breaks down through no fault of the tenant, then the landlord must promptly replace it or carry out repairs as necessary. It is prudent to include a clause in the tenancy agreement that specifically discusses the subject of repairs and replacement of appliances.

Broken windows

Landlords must ensure conditions are safe for their tenants. A broken window can compromise a property’s security and, therefore, should be dealt with swiftly. If a window breaks as a result of improper fitting or an accident, then it falls upon the landlord to fix it. However, if the tenant is found to be responsible for damage to a window, then, according to landlord rights, they will be charged for any repairs carried out.

Carpet cleaning

While a landlord must provide a hygienic and habitable living space for the tenant, it is up to the tenant to ensure it is kept in such a condition. Carpets, if well maintained, preserve their good condition for many years and should only need deep cleaning at the end of each tenancy, which is a cost covered by the landlord. However, if a tenant stains the carpet as a result of a reckless accident rather than normal wear and tear, they will be the ones to bear the cost of carpet cleaning.

Other maintenance landlord costs to consider

Other than broken household appliances, there are, of course, many other maintenance costs that landlords should be aware of. These include:

• Redecorating: Properties have to be updated along with the times and will need freshening up every few years.
• Cleaning costs: When a tenant moves out of a property there will be a certain amount of cleaning that needs to be done, made more challenging and expensive depending on whether the tenants were smokers or pet-owners.
• Gardening costs: Properties with gardens will need a gardener to maintain the landscape and ensure plants’ health.
• Swimming pool costs: A swimming pool requires regular maintenance and upkeep, which constitutes another cost for landlords.
• Safety checks: It is the landlord’s legal obligation to carry out yearly safety checks on gas and electrical appliances. Landlords must provide fire extinguishers and smoke detectors and follow correct health and safety procedures, which create additional costs.

Rental property tax

Paying taxes on rental income

If you are making income from a rental property, it must be declared in your annual tax return. As with other income, you can deduct expenses like rates, insurance, and maintenance.

Tax-free rental income

If you make less than NZ$4,000 a year including your rental income, you will not pay any tax.

Insurance

Rental property insurance for a landlord

Landlords need insurance that covers damage to their rental property. There are many different types of insurance available to landlords, with the most comprehensive ones covering not only damage caused by natural factors (such as an earthquake, for instance), but also tenant damage, vacancy periods and even specific furniture or other home items. The cost of rental property insurance varies depending on which type a landlord gets.

Costs covered by insurance

Insurance can come in very handy when landlords are faced with costs due to damages. Some examples of the costs that landlord insurance can cover are the following:

• Structural damage to property
• Fire
• Water damage caused by a flood or burst pipe
• Boiler breakdown
• Malicious damage caused by burglary or vandalism
• Rent arrears

Damage by tenants

There are some types of landlord insurance that do cover damage by tenants. However, it is important to remember that there are clauses to this coverage. If the damage is accidentally caused by tenants, insurance will usually cover this (for instance, if an item is destroyed in a fire). Insurance policies, however, will refuse to cover damage caused by regular wear and tear. There is also a cap to the amount that insurance policies will cover in any situation.

Loss of rental income

Loss of rental income insurance is an optional cover type that can be added to landlords’ insurance for a premium. It covers the income that a landlord would lose if their rental property became uninhabitable due to an insured event (such as a flood or fire).

Landlord-tenant conflict

Reasons for suing a landlord

While there are several reasons why a landlord-tenant relationship could sour and for which a tenant could want to sue their landlord, in New Zealand it is actually the Tenancy Tribunal that disputes get dealt by. Common issues that the Tenancy Tribunal handles are the following:

• Illegally keeping the security deposit: If a landlord is withholding return of a tenant’s deposit or if deductions have been made from the deposit that were not agreed upon in advance.
• The landlord refuses to reimburse the tenant for a repair: If a tenant covers the cost for a necessary repair affecting health and safety, it is illegal for the landlord to not reimburse them.
• Unit is uninhabitable: If a tenant does not have running water, the heat is not working in the winter or they have mold or lead paint hazard, they can file a lawsuit against the landlord.

Harassment

A landlord using aggressive methods to pressure or intimidate a tenant constitutes harassment. Actions such as shutting off a tenant’s utilities thus making the property uninhabitable, refusing to perform repairs and property maintenance, raising the rent, improper notice and verbal and physical threats are considered harassment.

Trespassing

Landlords are required by law to inform their tenants in advance if they are planning to drop into their property. Even if access to the property is necessary due to an emergency, they must contact the tenants and obtain their permission. Entering a property without being authorised to do so may result in a landlord being charged with trespassing.

Calling the health department on a landlord

Landlord responsibilities include keeping a rental property in a habitable condition. If there are health and safety issues in a rental property that were not caused by the tenant (such as problems with pests, mold or lack of running electricity and water) and have been addressed with the landlord to no avail, then a tenant has the right to notify the health department.

Suing a landlord for emotional distress

A tenant cannot sue their landlord for infliction of emotional distress, but they can turn to the Tenancy Tribunal to deal with the distress caused by harassment or conflict over uninhabitable rental conditions.

Staying without paying rent

A tenancy agreement should clearly state when and how rent should be paid. If rent is overdue based on the terms of the agreement, the landlord will notify the tenant in writing that they have 14 days to pay the rent. If a tenant is more than 21 days behind in rent, the landlord can apply to legally end the tenancy. In those cases, most tenants are evicted within 90 days.

Immediate Eviction

A landlord cannot evict a tenant immediately. According to New Zealand law, landlords must invoke a three strikes eviction policy against renters by giving two initial warnings followed by a 90-day notice period.

Property Management Companies

Managing your own rental property

While it is certainly possible for a landlord to manage a rental property by themselves, they must take into consideration that it involves a lot of work and a certain set of skills. Managing a rental property by yourself means taking the time to find the right tenants, conducting maintenance and repairs, dealing with complaints and handling legal issues. If you are invested in learning how to become a good landlord, then managing your own rental property could be a great decision for you.

Property manager fees: What is reasonable?

While every property maintenance company has its own fee structure, as a general rule, property management company fees range between 5 and 10 percent of the rent, which is very reasonable for the provision of full-service.

Reasons why you should hire a property manager

Hiring a property manager is definitely worth it if you do not wish to be a hands-on, full-time landlord. Some reasons why you should hire a property management company are the following:

• Property management companies offer great on-call property maintenance services and are available 24/7 for dealing with emergencies that involve heating, plumbing or electrical issues.
• Property managers maintain good records, tracking everything from repairs to rent payments.
• Property managers can represent you in court when it comes to any matter relating to your rental property, and they have excellent knowledge of rental legal issues.

CGPM property managers

If you are asking yourself “What does a property management company do?”, the answer is everything related to your rental property! CGPM is a leader in property management in New Zealand, managing 200 properties of their own, in addition to acting as agents for many landlords seeking a hands-off experience, ensuring their profits are optimised.

If you are also looking for a hassle-free property rental experience, you have come to the right place. With a property manager license, a CGPM manager can give you expert-level advice on your rental property right now!