The pitfalls novice landlords have encountered over the years: how many have caught you out?

Without extensive experience and a serious approach to renting out property as a business, it is easy to make common novice landlord mistakes. At the less severe end, rent may go unpaid and unscrupulous tenants may prove impossible to evict, with landlords struggling to enforce their rights even in court. At the more serious end, homes may be damaged, sublet or used for illegal activities such as drug production and dealing, causing landlords enormous financial losses.

It is no exaggeration to say that letting a property is easy but managing it is difficult. New landlords should pay attention to the following nine essentials to avoid pitfalls, maximise rental returns and minimise risk: 

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1. Always sign a tenancy agreement

To protect the interests of both landlord and tenant, all arrangements with tenants should be recorded in a tenancy agreement rather than left as verbal promises.

A tenancy agreement contains important information about tenants' rights and landlords' responsibilities. Renting without a written tenancy agreement can have serious consequences. Any clauses added or amended during the tenancy must also be put in writing.

Before signing a tenancy agreement, make sure you fully understand it and that it includes all the additional clauses you need. Additional clauses are legally enforceable only if they comply with the Residential Tenancies Act.

For example, the following types of additional clauses are lawful:

• No smoking inside the house;
• The number of occupants must not exceed a specified limit;
• No parking in certain areas outside the house;
• No pets, and similar conditions.

The following types of clauses, however, are unlawful and are very likely to be deemed invalid, or even prompt legal action by tenants:

• Tenants must have the carpets professionally cleaned at the end of the tenancy;
• Tenants must give the landlord 90 days' notice if they wish to end the tenancy;
• Tenants must pay a bond equivalent to 6 weeks' rent, or 8 weeks if they have pets;
• Landlords need give tenants only one week's notice of a rent increase, and similar conditions.

As a landlord, if you are unsure whether a clause breaches the Residential Tenancies Act, always contact a professional to confirm.

 

1. Always thoroughly check prospective tenants' backgrounds

Even if tenants are eager to move in and can pay the bond immediately, check their backgrounds first. Taking the time to verify references, including employers and former landlords, is worthwhile and could save you from a costly mistake.

Before renting out a property, we recommend asking prospective tenants to complete a tenancy application form with their names and contact details,

identification such as a driver licence or passport, rental history and current address, landlords' and employers' names and contact details, and referees who can be contacted. This information helps landlords get to know prospective tenants and provides some assurance about their suitability. 

YIJU once received a reader's letter describing just such a case:

Mr Lü, who lives in New Lynn, owned a rental property and did not know that his first tenant used drugs. After moving in, the second tenant learned from neighbours that the previous tenant had used drugs in the yard and requested testing. The methamphetamine level was eventually found to be three times above the standard.

After spending more than ten thousand New Zealand dollars on cleaning and going through a series of complicated, time-consuming procedures, Mr Lü finally had the methamphetamine contamination removed from the house. But the losses did not end there: he had to refund the rent already paid, cover all the tenants' relocation and house-hunting costs, and pay NZ$8000 in compensation.

This happened because he had not checked the first tenant's background before letting the house, rushing to rent it out after just one meeting.

 

1. Always sign a property condition report

A property condition report is an important document detailing the existing condition of the house and any items included with it. Both parties need to sign it before the tenant moves in to protect their interests. If a dispute arises, it provides valuable evidence in court.

If this form is not completed before the tenant moves in, and problems arise that the tenant refuses to acknowledge, the landlord cannot deduct compensation from the tenant's bond.

 

1. Always understand your rental property thoroughly

Before advertising, you need a thorough understanding of your rental property, including its basic features and nearby rents, to determine which tenants it would suit best. A lasting, satisfactory tenancy requires both parties to be happy: the landlord with the tenant, and the tenant with the property. Rushing to let a property for fear of leaving it vacant can actually increase tenant turnover.

Setting an appropriate rent also requires a good understanding of prospective tenants. It is a balancing act: charge too much and the property may sit vacant for longer, with more frequent tenant turnover; charge too little and you will not earn a reasonable return.

Also ensure the rent is consistent with similar properties in the area, and review it regularly throughout the tenancy.

 

1. Always ensure alterations to your rental property are lawful

There are countless cases in New Zealand of unlawfully altered homes being rented out. The practice is itself unlawful and is not protected by tenancy law. If tenants take the matter to court, landlords stand to lose far more than they gain.

The council defines a lawful dwelling as having its own separate kitchen, bathroom and entrance. Yet in many cases, owners have converted two-storey houses with upstairs kitchens into a 'Home and Income' arrangement: the owners live upstairs and tenants downstairs. The owners have exclusive use of the proper kitchen, while tenants use a makeshift kitchen installed by the owners. This is, of course, unlawful, and a dispute could leave the landlord facing a substantial financial cost.

 

1. Always purchase suitable house insurance

There are two main types of insurance for landlords, which together can cover almost all the different risks that may arise when renting out a property.

One is house insurance, which can provide cover for malicious, deliberate or accidental damage to the owner's property and possessions, or theft by tenants, during the tenancy or after they move out;

It can also cover damage resulting from tenants' unlawful activities during the tenancy or after they leave, such as using, manufacturing or storing drugs, or holding illegal gatherings. Cover includes inspection costs after tenants move out, cleaning, decontamination and reinstatement costs, and lost rent. The other type is Landlord's Protection insurance, which provides broad cover. As well as overlapping with some house insurance benefits, it can compensate landlords for lost rental income.

Alongside specialist landlord insurance, contents insurance is also important for protecting both landlords and tenants. Movable appliances and furniture, electronics, luxury bags, watches and necklaces, for example, fall under contents insurance. Landlords and tenants are therefore advised to each purchase their own contents insurance to protect against losses.

Last year, the Auckland Tenancy Tribunal heard the following dispute:

A tenant sublet a house without the landlord's knowledge. The subtenant then produced cannabis inside, causing a fire that severely damaged the house. Fortunately, the landlord was insured. The insurer covered house repairs costing as much as NZ$400,000 and the landlord's NZ$20,000 in lost rent. As a result, apart from more than NZ$20,000 in unpaid rent, the tenant involved had to pay only the NZ$800 insurance excess.

It must be stressed that landlords need a lawful tenancy agreement. If a property is rented out privately without an agreement, the insurer has the right to decline all claims.

 

1. Always inspect the property's condition regularly

Before tenants move in, screening is paramount. Once they have moved in, regular routine inspections are key.

Regular inspections are very helpful for maintaining a property. First, they encourage tenants to clean regularly. Second, they help identify repair and maintenance needs promptly. For example, tenants may not worry about a minor dripping tap, but a landlord who pays the water bill cannot afford to ignore it.

Inspections also provide insight into tenants' current circumstances and are the most direct way to spot unusual behaviour. For example, knowing the household's composition means that obvious signs inconsistent with it should raise suspicions, helping prevent larger problems.

 

1. Always carry out repairs and maintenance promptly

Small problems left unrepaired can develop into major ones. Prompt maintenance and repairs keep a rental property in good condition, helping attract and retain quality tenants.

Above all, never underestimate the cost of repairing or maintaining a rental property. Set aside part of the rent for routine maintenance such as cleaning and appliance repairs. Also anticipate major work, such as repairing structural damage or replacing appliances, and budget accordingly.

 

1. Failing to treat your rental property as a business

This is the biggest mistake landlords make. Buying a house is easy; managing it is difficult. The purchase is a relatively straightforward process, but holding onto the property and managing it well afterwards is much harder! If you treat renting out your house as a hobby, you will not do it well or maximise your investment return.

If you lack specialist expertise or sufficient time to manage the property, consider seeking professional help.

Barfoot & Thompson is the real estate agency that knows Auckland best.

In Auckland, 1/3 of homes are sold through Barfoot & Thompson, 

putting it far ahead of all other real estate agencies.

 

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