Should you invest in rental property?

Should you invest in rental property?Owning rental property, like all investments, comes with negatives and positives. You likely know people who have had success with this form of investing. But there are likely also people in your circle who’ve had negative experiences. However, it’s very possible that your friends and family members aren’t going to be as vocal about telling those stories.

There are many positives. That’s why there are so many people around who swear by owning rental property. It’s regularly repeated that your tenant will pay off your bond for you. Within a few years, the bond will be paid off and you’ll have an asset. In fact, property prices in South Africa have increased by almost 10 times in the past twenty years. That’s a really solid return on your investment.

One of the biggest advocates of owning rental property is Robert Kiyosaki, author of best-selling book Rich Dad, Poor Dad. He famously said: “Real estate investing, even on a very small scale, remains a tried and true means of building an individual’s cash flow and wealth.”

As positive as Kiyosaki is, there are some real concerns about owning rental property. Here are some that you should keep in mind.

Know your facts
Buying a rental property can either be a good or bad investment, depending on the property you buy. And making that decision depends on your knowledge about this sector.
“What I have seen in some of the less seasoned buy-to-let investors that I have met is they often come short not because the property was a bad investment, but because they didn’t know what they were doing,” says John Loos, household and property sector strategist at FNB Home Loans.
“In other words, they didn’t have a good grasp of their legal rights and obligations because tenants can go bad. They didn’t know how to manage the property and manage the tenants,” he says.
That’s why you should consult law guides around buying and selling a house before making any decisions.

Tenants
This is arguably one of the most important factors to consider when starting out on this journey. Tenants that you can trust and rely on will be key to your success. You’ll need to be sure that your tenants will look after the property like it’s their own and that they will take pride in their surroundings. The last thing you want to happen is to see your brand new property being ruined by inconsiderate tenants. There’s a lot of damage they can do. Far too many landlords have absolute horror stories to tell about the damage that’s been done to their property.

Property manager
Speaking of mitigating risk created by tenants, it might be a good idea to make use of a property manager. The real upside to many landlords of having a property manager is that they can manage all of the administrative details. The downside is that they’ll take a certain percentage of your profit. You need to think carefully about what your time is worth and whether you’re willing to take care of those admin tasks.

1% rule
Before you set about trying to find a property to buy, you need to think about the 1% rule. You need to be sure that the rental you receive from the tenant will be at least 1% of the purchase price. Not sure how to work that out? Take a close look at the purchase price and chop off the last two zeros. That’s the monthly rental you need to charge. For example, if you buy a small flat for R500 000, you should be able to charge R5 000 rent each month.

Extras
When it comes to property, whether you’re renting it out or living in it, you need to be cognisant about the probability of extra costs. These are often expenses like rates, taxes, maintenance and upgrades. It’s important that you keep these in mind when you’re calculating how much you can afford to spend on the property and how much rental you should charge.

If you’re willing to work with these negatives, you could soon be on your way to buying your first rental property. And who knows, that could lead to many more.

Listed property
If you’re not willing to bother with the negatives of owning a rental property, maybe listed property is for you? This is an ideal option for when you want exposure to property without the hassle of managing tenants. Choosing his option on the share market can be a safer alternative than choosing to invest in a rental property. After all, if you have just one bad tenant, that can negatively impact your finances for a very long time. In South Africa, there are commercial, retail and residential listed property options.