When Sanjay Raj completed the renovation of a rundown duplex in New Plymouth three years ago (profiled in last month’s Renovation story) he asked a local property manager about using it for social housing. The manager contacted the Salvation Army, who now lease the properties, used for emergency housing.

Raj initially signed a three-year lease with the Sallies. It expired earlier this year, and has recently been renewed for another two years. The arrangement works extremely well for Raj and the Salvation Army.

“We have had no problems at all,” he says. “We haven’t had to do any repairs [due to damage], just regular maintenance.”

Raj is one of a growing number of investors who are choosing to lease their homes to community housing providers (CHPs).

It’s an option that has several benefits. Number one, social housing is exempt from the interest deductibility removal, which means investors can still claim interest as an expense at tax time. The property is leased for a set period of time, and the tenancies are managed by the CHP that holds the lease. And you have guaranteed year-round rental payments, whether or not the house is tenanted.

In a country in which homelessness is becoming more visible on our streets (recent census data shows over 100,000 people either homeless or living in uninhabitable homes) there is great satisfaction in being able to offer housing to those in need.

But that’s not the whole story. All investment options have pros and cons and leasing to a CHP is no exception. Investors need to be educated and aware before they make the jump into the provision of community housing as there can be significant traps for those who don’t do their homework.

‘If people are able to put down roots it is much better for everyone’ Vic Crockford

How It Works

Community housing providers utilise a range of models in their provision of housing. Some focus solely on housing while others offer wraparound services that help support the tenants. While some CHPs own their own housing stock, recent skyrocketing housing prices have seen more reach out to investors to help fulfill a significant need.

Investors can partner with local CHPs to provide long-term or transitional housing, which is managed by the providers themselves. Kainga Ora also offers investors the opportunity to partner in providing social housing, primarily via a build-to-lease programme where developers can sign up new builds with the organisation as long-term rentals.

Community Housing Aotearoa is the peak body representing many community housing providers. Vic Crockford is the organisation’s chief executive, which has over 100 members, including community housing providers, plus partner members like local councils, consultants and developers.

She explains that community housing providers are registered and regulated through Ministry of Housing and Urban Development (HUD) and given public funding to help facilitate provision of community housing.

In recent years, as house prices increase and the need for affordable rentals grows, HUD has stepped up their support of community housing providers. Income-related rent subsidies (IRRS) allow tenants in Kāinga Ora or CHP homes to pay just 25 per cent of their income to housing providers, with HUD topping up the payments to market rent. This is paid to the organisations, then passed on to the property owners.

Crockford says that private investors can be particularly useful in this market if they are prepared to offer long-term rentals to those who are rental ready but have dropped out of the market due to the extremely high cost of housing.

“People are falling out of private rental housing – not because they’re a bad tenant, or they can’t pay the rent, but because of on-selling for example, and they end up in transitional and simply cannot find another home,” she says.

Investors who are prepared to offer very long-term housing (25 years or longer) are offering an incredibly valuable service to vulnerable members of our society.

“Our providers would all be looking for commitment by the investors for long-term leases. If people are able to put down roots it is much better for everyone.”

A Journey Of Mixed Results

Investor Isle Wolfe has had mixed results from partnering with community housing providers.

Her decision to support social housing was born out of a desire to give back to the communities she invests in. Over the last three years – prior to the tax incentive – she has handed most of her Whangarei-based investments over to CHPs.

And it has been an emotional but rewarding learning curve.

“New Zealand’s social issues are extensive. I have witnessed enough of them to know that intensifying cost- effective housing supply is the fastest way to pull people out of garages and into real homes,” she says.

The idea started when her gardener asked to tenant one of Wolfe’s rentals as she was preparing it for renovation.

“He and his wife with a newborn were living in an in-laws’ garage, with their older children allocated to relatives’ homes since they could find no place to live together. I had to turn away so he didn’t see me tear up.”

It then dawned on her she could improve the performance of her rental properties while providing a subsidised solution for families in need.

“I’m fortunate to have a pioneering property manager who is community- focussed and navigated me through forging new CHP relationships.”

The government incentive, which offers owners of existing builds the chance to claim back mortgage interest, is being taken up at a rapid pace. But supporting infrastructure for landlords and tenant risk is left wanting.

“It came to light from my insurance broker that my CHP rentals are not insured. Sure, my insurers had not explicitly enquired about my tenant type, but they would argue it was material information they should have known upfront.”

This information came too late. A CHP tenant had simultaneously wrought $20,000 worth of interior damage. Up until this point not a single issue had arisen from any of Wolfe’s CHP-housed properties.

“Via a WhatsApp video call I saw blood throughout the house.” The police had to remove the occupants so Wolfe’s property manager could assess the damage.

While the CHP is honouring the tenancy agreement to return the property to original condition, it has not been plain sailing.

“My manager and I have been nudging the CHP to progress the work. I have not been allowed to use my trusted tradespeople, yet the provider can promise no deadline for completion.

“If I hadn’t been covered by a perpetual rental income clause in the tenancy agreement, I would have already endured eight weeks of missed rent on top of the damage to my security.”

Landlords who have not disclosed details of their social housing tenancy, along with procedures to vet subletting occupants, are largely flying blind without insurance.

Insurers have a “get-out-of-jail” duty of disclosure clause whereby the landlord is expected to reveal any information of material nature to their insurer. Wolfe recommends all landlords, when considering CHP housing, check their insurance and seek cover where they find vulnerability.

CHP Perspective

Nicola Fleming is the manager of Housing First Christchurch. The organisation is the umbrella body for six Christchurch CHPs in the area, and she says there is an urgent need for more housing stock.

“We currently have 160 people in our community housing, but there is a waiting list of 84 people who all meet the definition of ‘homeless’,” she says.

The organisation has two housing specialists, who search for homes via Trade Me, word of mouth, and annual meetings with interested investors.

Housing First Christchurch prefers to have homes scattered throughout the community, rather than large blocks of community housing together. The houses need to be clean and dry, and up to Healthy Homes standards.

While Fleming acknowledges there are real benefits for investors choosing to lease their homes to CHPs, they need to be aware of the risks.

“Most of the people we house are great, but investors need to be aware that some of these people have very high and complex needs. Some will be smoking meth in the houses, and damage can occur to properties. And sometimes it’s not possible to get insurance to cover this damage.”

Insurance Issues

“There is one major downfall with social housing, and that is insurance.”

Sharon Cullwick, executive officer of the New Zealand Property Investors’ Federation, hits the nail on the head when it comes to the most significant danger of leasing to a CHP. As the CHP is leasing from an investor, who is then subletting to one of their clients, the normal landlord insurance is not appropriate.

Fleming says she has encountered situations in which significant damage has been done to a property and insurance companies have refused to pay out. “We are actually thinking of creating a flyer to pass on to investors who are thinking of leasing to us outlining the risks there can be with this sort of lease option.”

Andrew Bruce is a well-known Auckland investor who has leased his properties to several CHPs. He agrees it can be hard securing insurance for homes used for this purpose.

“I go through an insurance broker to get insurance for this property, and the insurance premiums can be very high.”

He uses commercial insurance because finding an insurer who is prepared to offer landlord insurance for homes that are subleased to unvetted tenants is almost impossible.

“But although the premiums are high, it all balances out,” he says. “There are no property management fees, guaranteed rental payments, and the CHP deals with the tenants themselves.”

Raj also uses commercial insurance for his New Plymouth duplex. “It’s about 60 per cent more expensive than regular insurance, but it is made up for by no breaks in tenancies and guaranteed market rent.

“And we are giving back to the community, which is very important to us.”