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In Trouble With Rental Properties - What To Do?

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Contributor:
Mary Holm
Mary Holm

Question:

I have purchased three rental properties (all in good areas) over the past three years. In each case I put in a 25 per cent cash deposit (saved by working weekends as long as I can remember) and borrowed the balance. The mortgages were amortised over 15 years.
 
Over this same period I have worked almost every weekend improving the properties (hopefully increasing values and rents) and working part-time (on top of my regular job) to pay for renovations and improvements.
 
Unfortunately these tough times mean rents have progressively been reducing, and my tenants are getting further and further behind on the rents.
 
I have been through mediation with each and every one of my current tenants as well as several who have since moved on. It usually takes two months, and in every case my tenants have been instructed to catch up on the rent by paying $10 to $15 extra a week. Often the tenants move out shortly after this.
 
With part-time work drying up and tenants failing to pay rent (as well as doing considerable damage to my properties), I have decided to sell. Agents tell me (and advertising confirms this) the properties are now worth 15 per cent less than my mortgages. So what now?
 
I am in arrears with the mortgages and can't sell the properties. I accept the loss of my deposits ($427,000), but the shortfall on sale will be another $200,000 or so, and I don't have that.
 
And now the Government - and public opinion - think I have had it too good and should be punished.

Answer:

Mary Holm: What a nightmare. But there are a couple of rays of hope. Firstly, it seems unlikely you will be directly harmed by any government changes.

If depreciation of rental property is no longer permitted, I assume the Government will make some allowance for those whose buildings have depreciated when it comes time to sell, and it sounds as if you would qualify. Or maybe you'll be able to claim capital losses. Talk to an accountant.

You could, of course, be affected by falling house prices as a result of the government changes. But not necessarily. More on that in the next Q&A.

And you may be able to wriggle out of your plight by extending your mortgage term.

Your average deposit was about $142,000. If that is 25 per cent, your average house price was $568,000, with a mortgage of $426,000.

Let's say the mortgage is at 6 per cent. With a 15-year term, monthly payments are $3595, according to the mortgage repayment calculator on www.sorted.org, nz. If you changed to a 30-year term, the payments would be $2554. Or if you changed to interest-only, they would be $2130 - much more manageable.

It's worth discussing this with your lender. While interest-only or 30-year mortgages are not good ideas over the long term, they could get you through the crisis until house prices grow again - which they always do in the end.

Speaking of house prices, your expectations seem extremely pessimistic. Your numbers suggest your average house is now worth $362,100 - lower if we allow for some repayment of mortgage principal. That's more than a third below the purchase price. Has that really happened? If so, your "good areas" are clearly far from good.

Which leads me, I'm afraid, to a few lessons you and others might learn from this:

* It's lower-risk to own rental properties in a range of neighbourhoods.

* You bought all three houses over a relatively short period, at what turned out to be the top of the market. It's far better to spread purchases over many years. Then at least some of the purchases will end up being in good buying years.

* To paraphrase Oscar Wilde in The Importance of Being Earnest, to lose rent from one tenant may be regarded as a misfortune; to lose it from all your tenants looks like carelessness. Some tenants have also damaged your properties. Clearly you should have been fussier about tenants.

To give you credit, you paid 25 per cent deposits, which is much higher than many landlords and should have given you a good buffer.

Do talk to your lender about ways to keep at least one or two of your rentals. And good luck. After all your hard work, you deserve a break.
 

Mary Holm is the author of bestselling books on KiwiSaver and personal finance. She is also a highly praised seminar presenter. Her written advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following that advice.     

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