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COMMENT: The compliance struggle

For many property investors, the end goal is setting themselves up for retirement – but new requirements are making that harder. Investor Dale Young explains how his retirement project is turning into a compliance nightmare...

Wednesday, June 26th 2019, 7:17AM 8 Comments

Eighteen years ago my wife and I started worrying that we weren’t saving enough for our retirement.

After reading some books about investment properties, we decided to take a gamble and take on some rental properties in locations close to our home.

Over 18 years we purchased nine properties in Manurewa and Takanini and rented them out to families and couples.

We manage the properties ourselves and we get to know our tenants very well. We have been pleased to see several of them move on to buy their own homes.

Five of our properties have had the same tenants for over five years, and one couple has been with us for more than 15 years.

Through the years we have spent many weekends cleaning, painting, landscaping and doing general maintenance while tenants are in place or between tenancies.

Our properties are two and three bedroom “Universal” type homes: hardiplank or brick with decramastic roofs, about 30 years old.

Our current rents are $360 to $450 per week and our total income in rents is just enough to cover mortgage repayments, rates, insurance and some minor maintenance.

When it comes to paying for big ticket items - like new stoves, carpets, fencing and kitchen rebuilds - we pay for these out of our own savings from our day jobs, not the rent.

We have had security window catches fitted on all of our properties, so that they can be safely ventilated.

And our tenants seem very happy living in our affordable, warm and dry homes in South Auckland.

Now, our homes were all insulated when constructed with 75mm to 100mm blown cellulose fibre (recycled paper).

This is globally recognised as an eco-option that is highly effective, with R value of 2.6 per 100 mm thickness, just fractionally under the new level required which is R2.9 for ceiling insulation in Auckland.

They all also had foil underfloor insulation where possible. This provides suitable R value insulation but is no longer in favour due to potential electrical short issues.

But the Government’s new Healthy Homes minimum standards require that ceiling insulation be at least 120mm thick. This means that all of our previously compliant homes needed reinsulating.

We had to sell one of our homes so that we could remedy the rest, which cost between $2,400 and $3,700 per house.

To add insult to injury, we are told that we are not allowed to claim the cost of the insulation work as an expense against our income. This beggars belief!

Clearly the additional expense is only incurred because we are in the business of renting homes.

This government mandated expenditure for a small change in insulation value is an unavoidable cost of being in the business of renting, so surely it must be deductible?

The additional work only provides minimal extra insulation and doesn’t increase the value or resale ability of the properties. To my way of thinking it achieves very little for the $24,000 that we have spent.

Recently we were contacted by MBIE demanding that we send a copy of our Tenancy Agreement and of our Insulation Statement for a recently tenanted property.

We were threatened with significant fines if we couldn’t comply. We sent through our documentation and received back a terse critique with further threats of fines.

We are now facing more costs due to the need to install kitchen and bathroom ventilation as well as significant capacity fixed heating into our already warm, dry safe houses.

The cost of this is estimated at $6,000 to $8,000 per house, so we’ll need to sell another house to fund these upgrades.

We have less than two years to get this work done for what will be our seven remaining homes with their 20 - 25-year mortgages.

If 60% of Aucklanders are living in rental accommodation, then it follows that they all have to rent from someone.

While there are undoubtedly some landlords who break the rules and take advantage of vulnerable people, I’d suggest that the vast majority of landlords are simply hard-working members of the community trying to save for their retirements and for their families.

The almost daily landlord-bashing stories in the news media leave us feeling like the scourge of society. And the ongoing governmental interference in our relationships with our tenants is pushing us to sell all of our properties and get out of the business.

Our existing tenants can’t afford to buy their own homes – so where will they live once we exit the market?

Tags: compliance healthy homes house prices housing market insulation investment landlords property investment property management rental returns rents retirement

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Comments from our readers

On 26 June 2019 at 11:13 am AT HOME said:
Hi Dale, I feel your pain everyday as I deal with investors who like yourself are good hard working honest people just trying to get ahead in life. Not only are New Zealand investors being targeted by the current Labour led government with Phil Twitford leading the charge, they are also being targeted by the media as you have mentioned. But thee is also more and it is far worse, investors are up against adjudicators who fight the cases for the tenants and rule in their favor knowing full well that most will not appeal their unfair decisions as it costs $1100.00 and who will spend that when its a ruling that costs you less.So they get away with it usually using wording like " I find it more probable than not..."even when the evidence is weak or even non existing in some cases. And that is such a subjective ruling that is always filled with tenant favored sentiments. Labour has to go to stop this madness.
On 26 June 2019 at 11:19 am Janice111 said:
That was a really good article written by Dale Young re:'The Compliance Struggle'. I think he and his wife amassed too many properties in a relatively short period of time. I think quality over quantity. Many of the things they say are now mandatory or will be soon should have been in existence from the get-go. They not just "nice to have things" they actually help the integrity of the house structure by keeping away moisture, mould, dampness,etc. In time I think Landlords will accept the changes. It just boils down to 'people don't like change' whatever it is! We've been Landlords for 7 years and have 3 properties and want to buy a 4th next year. We have 2 mortgages, do all the work ourselves and our regular jobs finance our properties expenses. I think you've got to not mind it otherwise you will find it a long haul. I love reading others experiences. Janice.
On 26 June 2019 at 11:31 am Peter L said:
A sad but common story.

The tax deductability of the insulation improvements is a fraught issue. The fact that it is a requirement to be able to stay in the business does not actually make it a deductible expense.
That unfortunately is the correct application of tax law.
Just because something is compulsory does not make it deductible.

Building owners who are required to earthquake-proof their existing commercial properties are unable to claim that cost as a tax deductible expense either.

The Property Investors Federation approached the Government when this legislation was announced with the request that insulation improvements be classed as deductible.
This request was turned down.

In reference to the final statement in the article, the academic/socialist belief is that all rentals should be either Government or Social Housing. Private landlords should not exist.
Thus when you say "we shall exit the market" their response is "great, that's exactly what we want!"
On 26 June 2019 at 11:50 am adhammer said:
If you have insulated your houses prior to 1 July 2016 and(it sounds like they do)they meet the Building Code requirements in 2016(that includes foil insulation), thus as per the RTA Act, you are NOT required to bring them up to the current Building Code or the NZS 4246 2016(this was published in August 2016)or the EECA Standards(They have nothing to do with the Building Code).

And dont be fooled by these people saying "if you don't replace your ceiling insulation when we install your sub-floor insulation then we can't provide you with the certificate that you are required by law to have...." that is B.S, they are not the L.L who is required by law to provide the L.L Statement NOT the contractor!!

We are in a business of renting property, housing the homeless and making a profit. Unfortunately we are also in an industry of con-artists(the construction industry)so be aware of these people who are not certified in any shape or form, nor do they have qualifications, trying to bully you into replacing insulation that actually meets the RTA Requirements. Beware of the Property Managers who partner with these fligh-by-nighters so they can clip the ticket!!

These people just try and baffle you with B.S so be on your toes and do your homework so we can drive these con-artist away and save yourselves a fortune and a lot of stress. Happy investing
On 26 June 2019 at 1:23 pm Alan W said:
Another aspect that has come to light for us recently is the tightening of bank policy on interest only loans. We currently have 5 rentals with an overall LVR of around 40%, so we're certainly not over-committed. However, over the past few years BNZ has been playing games, firstly not permitting any expansion by limiting loan money (we now only deal with them through a financial adviser because they no longer even answer our emails), and secondly insisting that some of the interest only loans become principal and interest, which apparently needlessly commits us to subsidising the loan costs from our other non-rental income, which at present is meagre. It appears that, despite a history of never missing a loan payment over the past 40 years and attempting (unsuccessfully it would seem) to persuade the bank that our rental housing business is actually a business and is not related to us personally, they seem to want us as retirees to have non-rental income. Why would we develop a rental business if not to support us when we retire? So it would seem that the BNZ is in the business of social engineering rather than investing money at realistic interest rates. They seem to want us to return their money, so that is exactly what we will be doing, selling 3 houses, repaying all loans and living off the proceeds of the remaining 2 rentals, which will require a small amount of work to bring them up to the 2021 standards. It would seem that both government and banks have a lot to learn about the housing of those who choose or are forced to live in rental accommodation.
On 26 June 2019 at 1:35 pm Old Lady said:
Some interesting thoughts, Dale, but my understanding of the tax deductibility of an insulation top-up is different than yours. As I understand it, if there is pre=existing insulation, (as was the case in a rental of mine which didn't meet the new standard) then replacing it/topping it up IS repairs and maintenance. (How could it be anything else???) I'll agree that the standards required are a dreadful financial burden to some of us, but things are not quite as bad as you say. If you haven't got proper bathroom and kitchen ventilation in your rentals already, then YOU SHOULD HAVE. Same goes for the heating. Your story sounds as if you are a little over extended.
On 26 June 2019 at 5:14 pm Kramster said:
While there maybe an argument that this insulation is legal and up to standard, the reality is that its probably not that effective anymore and won't be performing to it's original specification. In my experience the older types of insulation (pink batts included) slowly compress down over time. I have an 80s Keith Hay rental similar in construction to yours with same spec original insulation. I topped it up with 3.6 on top and underfloor. I don't live in it but tenants said massive difference.

Luckily for me, I upgraded insulation (subsidised), added heat pumps, extraction fans etc. before it was even mentioned being compulsory and raised the rent accordingly while I could depreciate it and pass through losses. I will be unlikely to spend money on my rentals now apart from essential maintenance, ring fencing of losses is counterproductive in terms of improving the quality of rental stock IMO.

I've fallen into the trap in the past of not keeping rents up to market value. Easy to do when you've got long term tenants that keep paying the rent and don't complain. I suggest time for a rent review.
On 27 June 2019 at 11:48 am adhammer said:
I only had a very quick look over the last comment and it was obvious that we need to be referring back to the Building Code. It is there for a reason, to protect honest hard working people from the con-artists as well.
For those who are unaware the basic model of the Building Code states that all construction work needs to comply with: (a) Structure= 50 Years (b) envelope= 15 years (c) services,linings,coatings,fixtures = 5 years
Insulation actually falls under structure 50 years!!! So if your product was installed and complied with the Building Code in say 2015 it is good until 2065!! If it has failed, go back to the manufacturer and get them to replace it. When they replace it, it will need to meet the current Building Code...get it? You shouldn't be paying for replacing your existing insulation my friends because insulation hasn't been around 50 years!!!.
Furthermore, Winstone i.e Pink Batts are no fools and recognise their obligation so taking advantage of what they are liable for(because they actually stand behind their product) and put a Lifetime Warranty on their product.
If you have had one of these "experts" come around "for free" to give you a report on your insulation and they are saying it is less than 70mm etc and "this is what it will cost to have it replaced" say thanks, take the report to the manufacture of your product and ask for it to be replaced. If you get any resistance, refer them the NZ Building Code and ask them to show you how their product complies with the B.C

Regards Aaron Dalton R.QS & LBP #BP108670

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