What you need to know before buying an investment property

Buying a rental property is something which many people aspire to. And it’s true that there are many benefits to owning rental property. But, like with all investments, there are also negatives. It’s possible that you know people who’ve had success with renting out properties to tenants. But there are also people you might know who have had negative experiences. It’s just that you’re not as likely to hear those stories.

 

Many people swear by owning rental property. Their argument is that your tenant will pay off your bond for you. Within a few years, your bond will be paid off and you’ll be left with a large asset. The good news for investors is that property prices in South Africa have increased by almost 10 times in the past 20 years. That’s an excellent return on investment and one you won’t find often in investment accounts.

 

A well-known rental property enthusiast and advocate 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.”

But, when it comes to rental property, there comes a time when you need to remove your rose-tinted glasses. There are some very valid and legitimate concerns. If you’re thinking of starting to look at rental properties, here are some things you need to be on the lookout for.

 

1% rule

One of the most important things to remember when considering buying rental property is that you’re sure the rental you’ll receive will cover the cost of the bond. It should be at least 1% of the purchase price. Not sure how to go about working that out? Take the purchase price and cut two zeros off the end. That means, if you’re considering buying a R500 000 home, be sure that you will receive R5000 in rent each month.

Extra costs

It’s important that you keep the probability of extra costs in mind. These are expenses like levies that you might not have otherwise considered. By applying the 1% rule to your purchasing decision, it’s likely that you’ll be in a good place financially. In that way, you’ll be able to have your bond covered and possibly other expenses like rates and taxes, insurance and future upgrades paid for. Your property could sit empty between tenants, meaning you’ll have to pay their rent for those months. Even worse, you might have to evict a terrible tenant, which could lead to you having to shoulder the burden of paying lawyer’s fees and other legal costs. And, as mentioned later, you might have a tenant who does significant damage to the property, meaning you’ll have to pay for repairs. These costs are important to consider so that you know how much you can afford to pay and how much rental you should charge.

Tenants

Another key to success when becoming a landlord is having the right tenants. You need to know that your tenants are going to take pride in their surroundings and won’t damage the property. After all, the last thing you want is your new property being ruined. Far too many landlords have absolute horror stories to tell of tenants who’ve done unthinkable damage to their properties, causing many thousands of rands in damage.

 

Property manager

It’s important that you decide whether or not you’ll make use of a property manager before going too much further down this path. There are obviously both pros and cons to this decision. The ultimate pro is that they’ll handle all of the administrative details. The con is that they’ll take a cut of your profits. You need to be sure of how much time and effort you’d put into managing the property yourself and whether it might be worthwhile letting a professional deal with your tenants. But, whether or not you are the person who’s dealing with the tenants, it’s important that you know your rights and responsibilities as a landlord. It might be a good idea to read through some helpful tips for landlords and law guides around buying and selling a house.

 

If you’re able to make the best of these negatives, you could be on your way to buying your first rental property and becoming a landlord.