Investing in a rent producing property can yield outstanding returns for an investor. But like any investment, making basic mistakes at the outset of an investment can prove very costly.
Jonathan Kohler, CEO of Lansdowne Investment Property offers six simple rules for buy-to-let property investment that can save an investor from making a blunder of their investment and make great returns.
Take time to find the right tenant
Having a good tenant in your rental property that pay on time every month and never default on their payments is critical and the key to high returns on a rental property.
By screening tenants before they take occupation of the property will help an investor choose the best tenant with a good track record, credit history and can afford. With the help of a reputable managing agent, good suitable tenants can be screened beforehand and all legal paper work completed before the tenants can take occupancy of the property. It is also key to ensure that an agents credit department is independent from the agency. The deposit paid by the tenant will safeguard against any damages made to the property during the rental agreement – so it’s critical to have this in place.
Focus on the right rental income
A property that is in a good area with high demand for rental properties will yield excellent returns on rent every month. Keep your investment properties in the property price sweet spot R800 000 to R1 million and you will increase your chances of the property always being tenanted, and easily sold at a good price. A 1 bedroom apartment has a far better rental return percentage than a 2-bedroom apartment, in fact a 2% difference which is substantial. It is also important to remember how much bigger the market is that can afford to pay on average R7 000/month for rent.
Close the gap – minimize your repayment shortfall
As an investor, the less they have to pay money from their pocket to make up for the difference in either monthly bond repayments or levies the better the investment.
A shortfall payment which is the difference that an investor has to pay monthly to make up the total amount required by the property should be as low as possible. On a good investment, an investor should start seeing a surplus from the rental income collected after 24 to 36 months if all due diligences were made prior to investing in the property. Annual rental escalations which should be incorporated into lease agreements will also assist in reducing the overall shortfall that an investor has to pay out of their pocket monthly.
Take time to do your due diligence
As there is an increased trend to buy in Sectional Title developments, investors looking to buy any property, whether for yourself or buy-to-let, do your homework and ensure that the Body Corporate and Trustees are all financially viable. Also, from an estate management perspective, be sure to ask and assess the types of service providers are used. Many investors tend to neglect their rental properties and only conduct maintenance when things in the property are falling apart. Property management and estate management services are offered, by Lansdowne Investment Property for example, to help keep property in good condition and tenants paying on time.
Location, location, location
Buying in the right location is critical, and in the right property development. Sometime property developments in the same area, often in the same road, can deliver vastly different returns. Buying a house if often one of the biggest investments made – speak to professional who have the best inside knowledge.
What makes investing in real estate one of the best investments worldwide, is its ability to yield good capital appreciation over a period of time. The capital appreciation is only realized when the property is sold and it also based on the property purchase price. Keep your investment properties in the sweet spot and you will increase your chances of the property always being tenanted, and easily sold at a good price. Dependent on what you buy the property for, market value, or a distressed seller (cash flow or put an offer on another house to sell their house). Check the valuation of the property to ensure your capital appreciation – linked to purchase price, not necessary to what it’s doing in the market.
“A rental property should always be competitive in price and must be well maintained. If a good tenant is placed in the property and the property is well looked after, then the owner will get the best out of the property and tenants will be willing to pay the asking rental charge,” says Kohler.