You may believe you can save money by managing your property yourself! This is a phenomenon unique to New Zealand residential property owners where perhaps due the “do it yourself” attitude 80% of rental properties are self managed. In contrast even in Australia the reverse is true where only around 20% of property owners manage their own rental properties.
Unfortunately, the belief can often be counter productive when self managers discover the hidden costs and the risks they are taking by not using an experienced specialist residential property manager.
Here at Quinovic Parnell we see self managers losing money and can often turn around the losses.
Here are some of the risks of self managing:
1. Rent too low
Self managed properties are more likely to be rented below market value. This is due to a combination of factors including:
You are unlikely to have good comparative data on market rentals which a good local property manager will have from continually letting properties in the area.
You may be less likely to review the rent regularly due to simply forgetting, fear of losing a good tenant, or having too personal relationship with the tenant and not wanting to upset them.
For a long term rental this can have a huge impact on long term cashflow. Rents should be reviewed at least yearly, and adjusted when appropriate even for good tenants.
2. High Vacancy rates
A self managed property is at greater risk of higher vacancies. There are several reasons for this and is mostly due to a lack of professional relationship with the tenant and failure to treat the property as a business.
So examples of this we have often seen include:
Self managing landlords being reluctant to start viewings at the property before the tenant moves out, because the tenant is not wanting to co-operate with this. This is a sure loss of around 3 weeks rent – almost a year of management fees.
If a tenant is vacating in the peak season (which includes the January holiday season) you may not be back from holiday to deal with handling enquiries and viewings in a fast efficient way.
Not controlling the tenancy. For maximum return on most properties, fixed term tenancies with renewals in the peak period are recommended. However, if you succumb to pressure from the tenant to change to a periodic tenancy, or allow a non-peak termination date, or forget to renew the fixed term so that it becomes periodic, this highly increases the risk of a longer vacancy at the end of that tenancy.
You may find it difficult to insist on the terms of the lease even in difficult circumstances such as where the tenant has been made redundant, a family breakup or a forced relocation. Unfortunately, letting a tenant off a lease when this is not required can be very expensive.
3. Cost of damage and cleaning
Self managing landlords are often not able to be firm enough with tenants on an ongoing basis to establish standards for, during and at the end of a tenancy. One part of this is failing to complete a thorough property condition report for each tenancy which involves hundreds of photos and a detailed written report that takes several hours to complete. Following this process and providing the tenant with this report sets a bench mark and is a strong indicator to the tenant of the detail that will be checked. If this is not done, and not followed up with regular inspections (we recommend 3 monthly), then there is increased risk of the property being allowed to deteriorate, and arguments at the end of the tenancy on cleaning standards and ‘wear and tear’. It is essential to establish a history with the tenant of being firm and insisting on a high standard of cleanliness so that this becomes the expectation.
At the end of a tenancy a tenant will sometimes put pressure on you to release the bond even before the end of the tenancy or very soon after, for example if they are leaving the country. However, succumbing to this request can result in difficult to recover costs for rectifying damage and cleaning issues which are found later on. It can sometimes take until a new tenant moves in to check that everything is working as it should. For example if the power has been disconnected it is difficult to check that appliances are all working.
Your insurance may become invalid if inspections are not carried out at least once every 6 months. A high standard of cleanliness (above the level legally required) cannot be insisted on legally, but there is a high chance of achieving this with regular inspections and setting a high expectation of the tenant. If a history of high expectation has not been established then the tenant may consider minor damage and cleaning to be ‘wear and tear’.
4. Rent Arrears
Rent needs to be checked on the due day and action taken immediately if rent falls into arrears. This can happen even with a previously reliable tenant due to sudden loss of income due to redundancy or illness. Arrears are most likely to happen in the holiday period when most people are not even thinking about their rental property at all and are on holiday. Timely and professional action is essential to ensure that appropriate legal action is started and the issue is resolved before the debt mounts.
This is not a pleasant process but essential to prevent the risk of losses in the thousands which can accumulate in a matter of weeks.
Another common issue arising with self managing is that arrears are not treated seriously enough. We have seen many examples where tenants have accumulated thousands of dollars of arrears and the landlord has failed to take decisive action due to repeated promises and some irregular payments from the tenants. A firm policy to follow the legal process of 14 day notices and application to the Tenancy Tribunal in case of arrears, is essential to prevent large potential losses that are very difficult to recover.
5. Breaking fixed term tenancies
Approximately 20% of fixed term tenancies will be broken at the request of the tenant. We have seen so many examples of self managers letting tenants off their tenancies and making concessions that are not required resulting in significant vacancies. If managed professionally a new tenancy should be started with no loss of rent (not even a day), and expenses such as advertising, credit checks and a new property condition report covered by the outgoing tenant.
A formal documented process is essential to ensure that the outgoing tenant accepts responsibility for the tenancy and expenses. This is time consuming, but essential to prevent arguments later over who pays for what. Tenants may advise they want to move, then change their mind and you are left with costs if they have not formally agreed to them.
6. Selection of a tenant
Tenants with adverse rental or credit history generally will not even approach Quinovic properties because they know they will get checked out and will not be successful. Self managers are at much higher risk of attracting unsuitable tenants. High quality tenants also often prefer to rent through a professional property manager as they know they can demand a professional level of service. Quinovic has many tenants like this who will not go self managed properties due to past bad experiences with unprofessional service.
Thorough reference checks and credit checks must be completed in all instances. You are more likely to be more tempted to take a tenant at face value as you are not letting properties all the time with constant comparisons.
It is also important that the process of offering the tenancy is formal and clear. We see many examples where inadequacies in this area result in misunderstandings and tenants pulling out at the last minute resulting in a loss and unexpected vacancy.
7. Inadequate Documentation
The standard Building and Housing tenancy agreement is non-specific and missing a number of important issues that should be in any tenancy agreement.
If proper documentation is not used throughout the tenancy this massively increases the risk of misunderstanding and not being able to hold the tenant to account, and with subsequent loss to you. Proper documentation should be used for all records including the initial tenancy agreement, record of inspections, record of variations and extensions to the tenancy, and proper notice being given at the end of a tenancy.
If for example you forget to renew a fixed term tenancy before it expires, the lease enters a 3 month ‘no-mans land’ where the tenant does not have to give notice at all. This is currently under review and is expected to change to a situation where if no agreement is made then the tenancy will automatically default to a periodic tenancy. Allowing this to happen is likely to result in later loss as the tenant then only needs to give 3 weeks notice, and can do so at any time of the year.
Is it really worth the risk and stress???? Join other self managing owners who have referred their business to us for peace of mind.
For rental appraisals, rental market advice, or property management, please contact us - Mary Vinsen or David Vinsen at Quinovic Property Management Parnell.