KEY POINTS:
For thousands of inexperienced investors burned by Blue Chip and similar property schemes, the words "guaranteed rent" sound alarm bells.
But what if you could get guaranteed market rent for your investment property 52 weeks a year regardless of vacant periods _ with the security of knowing the
Government was backing the lease?
It's not too good to be true. Changes to Housing New Zealand (HNZ) policies make the proposition of leasing a house to it more attractive than ever, especially for investors wanting to avoid the hassle of being a hands-on landlord.
Housing investment specialists Home Investments (2008) Limited calculate that on a property costing $460,000, bought on 100 per cent finance at 8 per cent interest and leased to Housing New Zealand, an investor could expect an eventual weekly profit of around $386. The property's increased value in 10 years would be $879,837.
Further encouraging news for would-be investors comes from National, which has confirmed it will retain existing tax rules and deduction provisions for rental property owners.
HNZ is the country's biggest landlord _ it owns or manages 68,000 properties throughout the country.
However, just under 3000 of the homes it rents out are leased from private property owners.
It leases privately owned properties in areas where there is high demand for affordable rental housing _ mainly in Auckland, but also in Christchurch, Nelson, Napier, Wellington, Tauranga, Hamilton, Whangarei and New Plymouth.
Gone are the days of state houses being clumped together in ghettos and tenants having chicken coops in their kitchen cupboards. In the new Northridge subdivision in Tauranga, for example, there is a ratio of five HNZ houses scattered among 100 regular residential properties. The state houses are built to the same high standards as the other homes so they blend in imperceptibly.
HNZ spokesperson Michelle Williams says it has a "pepper-pot" approach to housing and works hard to avoid owning large numbers of properties in any one area, preferring a mix of state and private ownership.
"A 20 per cent state: 80 per cent private ownership split would be optimal," Williams says.
"We also work hard to ensure tenants are a good fit for a property and community."
There are many reasons property-investing consultant Tanya Kwasza believes properties leased to HNZ make excellent investments _ starting with the fact that HNZ leases give the security of rent for the lease term at market rates even if the property is vacant.
The market rental rates are assessed by an independent valuer and can be reviewed on an annual basis by either party.
Property lawyer Megan Williams of Steindle Williams says she hasn't heard of anyone having any issues with the leases _ other than landlords occasionally having to prompt HNZ to initiate the yearly rent review if it "drops the ball".
Generally, lease terms on an existing property are from five years.
Leases on new constructions or buildings that are yet to be built can be up to 10 years.
Leases can include a right of renewal for a further five years.
You can sell the property at any stage during the lease period, but not with vacant possession _ the lease will continue with the new owners and on the same terms and conditions until it expires.
When the lease ends, HNZ returns the property to the owner in its original condition, aside from fair wear and tear.
There is also protection from the costs of property damage by the tenant being passed on to the landlord _ without having to go through the Tribunal process.
If tenants damage a property, HNZ arranges for its repair and charges the tenant for the work.
Kwasza says it is virtually a passive investment for the landlord, who usually has to do nothing more than make a phone call a year to review the rent structure _ they never have to meet the tenant.
In assessing whether a property is suitable to add to its rental stock, HNZ takes into account its location, size and proximity to schools, shops and public transport.
It may recommend some modifications before agreeing to lease it.
Most leased properties are two, four and five-bedroom stand-alone houses. Two-bedroom units are frequently rented to elderly people who tend not to cause much wear and tear, Kwasza says.
Generally priced at around $300,000, she says they make "great starter investments". Investors in the top 39c tax bracket usually invest in the larger homes.
HNZ will also consider leasing properties yet to be built. It is sourcing relationships with preferred contract suppliers, such as property developers, designers and builders. Those considering building a property and leasing to HNZ should consult it first about its specific requirements.
And Kwasza is "passionate" about the high calibre of the new HNZ properties: "They're beautifully built by top builders."
The bulk of HNZ's new property developments are in Auckland, which has the highest population growth and the greatest need for housing.
At the end of last month, there were more than 10,000 applicants on HNZ's waiting list, and Williams says, given the economic climate and pressure on the labour market, the number of people applying for a state house will increase.
More than 50 per cent of HNZ's waiting list is in the greater Auckland region and it is looking for properties to lease constantly.
However, it is struggling to find investors willing to buy properties to lease to it because of nervousness in the market following the Blue Chip fiasco and the uncertainty surrounding the credit crunch.
Leasing properties is a cost-effective way of acquiring new properties for HNZ, which wants to acquire 380 more in the current financial year and 360 in 2009-10 through its leasing programme.
Investors can approach and deal with HNZ direct, or go through companies that will organise the leasing of property through HNZ for them.
Home Investments, run by two ex-All Blacks _ Kevin Boroevich and Bernie McCahill _ is one company that provides this service.
The company buys a property from a developer and sells it to a new owner with a HNZ lease in place.
Its website gives a calculation showing a 5.2 per cent yield on one of its properties costing $460,000.
For a person earning $75,000 a year, buying this property with a 10-year lease, Home Investments estimates an average weekly cash outlay of $133 to top-up the rent on the property (assuming 100 per cent finance at 8 per cent), but an estimated weekly profit of $386 once the capital growth estimates and depreciation considerations are taken into account.
It also estimates the property's increased value in 10 years as $879,837. The company charges no fees; as it makes its profits from house sales.
Even the president of the Auckland Property Investors Association, Sue Tierney, has a property _ in Weymouth _ that she leases to Housing New Zealand and recommends them as part of a balanced portfolio.
She was attracted to the investment because she wanted to add a new property to her portfolio, and says she has found the people she's dealt with at HNZ "fantastic".
While HNZ's management may be "dearer than the norm" at 8 to 10 per cent, Tierney says nothing beats knowing the rent will definitely be paid _ and on time.
"I've never panicked about whether I'll be able to pay the mortgage."