Read this before you even consider buying that property!
Regardless of what the bank thinks you can afford you should know exactly what you can afford. You should be able to cover all the costs associated with the property (the bond repayments, rates, levies, insurance) and still be able to save and invest money in the case of your tenant not paying the rent. For example if the expected rental return of this property is R5000 per month and the total cost of the property is R6000 per month you should be able to cover the R6000 and still have enough money left over at the end of the month to invest elsewhere in the case of your tenant not paying you the R5000. If your tenant defaults on their rental payments to you you cannot be caught unprepared. If you are unable to cover the cost of the property within your salary every month you have to have a large emergency fund dedicated to this property and preferably stored in the property’s access bond. Not many buyers generally reach these criteria of affordability, most are one rental payment short of big problems. Our eyes are bigger than our brain when it comes to property and we always tend to find “a better investment” in every property we look at even though we are stretching ourselves to afford it.
When I first bought my flat my total costs were around 28% of my gross salary and around 36% of my net salary. Realistically I would not have been able to afford it if my tenant decided to stop paying me or I had an extended vacancy. In hindsight it was risky not waiting so that I met my own affordability measure. A year and a half later and the total costs on the flat are still relatively the same as they were a year and a half ago but the total costs are now only around 16% of my income (excluding the rental income). This is a much more manageable figure if something had to go wrong.
You are buying a business that requires work. If you think you can simply buy a place, let an agent manage it for you and it will be a successful business my opinion is that you are fooling yourself. No one is going to look after your interests and your property better than yourself. My experience with agents is that they are reactive in nature and only work when asked to. This is a stressful kind of environment and does not work well for any business. Managing your own property not only allows you to save money which can be put back into the business but it also gives you complete control of your relationship with your tenant. Managing your property yourself gives you greater control over the outcome of your business. Cutting out the middle man will mean that you can make decisions faster and service your tenant’s needs directly.
Although managing a property can be a very simple business with the right tenant, it can also turn into a very tricky businesses if things turn sour. Here are a few things you will need to ensure in order to be on-top of your game when it comes to managing your property:
Ensure you get the right tenant in your property by setting high standards and doing comprehensive screening
Create a contact list of go to specialists, contractors or handymen which can help you solve maintenance issues when required
Develop a systematic and methodical approach to administration such as invoicing tenants, filling documentation and tracking income and expenses for SAR’s monthly
Keep in contact with fellow property investors who you can call for advice or input on relevant topics
Develop a basic understanding of legislation that relates to your business such as the Rental Housing Act 50 of 1999
Develop policies on important processes that can be clearly communicated and easily followed such as policies in the event of a late payment from a tenant and inspection processes
It may take many years to see a profit. Profitable businesses do not appear overnight. They take time and dedication to create. This is a long road and one that will challenge you, especially in the short-term while you have to put additional money into the business in order to cover expenses and resolve problems. You are able to do a lot of homework upfront to ensure that what you are buying will become profitable in a few years but unexpected things can happen, vacancies can cripple your income for the year and but you need to do what is best for the long-term business. Two months’ rent lost is most likely better than a terrible tenant who may need to be evicted down the road.
You are actually investing in your tenant. Speak to any commercial property companies or landlord’s, their business is dependent on their tenants business. One business cannot run successfully if the other’s business does not. This is no different for residential property. The difference is that you are in the business are securing a safe and working home for your customer. This means you need to build a strong relationship with your tenant built on mutual respect. Respect their home and ensure that they respect the lease agreement.
Investing in your tenant to me also means trying to keep an excellent tenant for as long as possible.
An excellent tenant is one that:
pays on time and in full
responds timeously to communication
looks after your property
respects the lease agreement and you as their landlord
To me an excellent tenant should be treated as such. I have been lucky enough to have an excellent tenant in my property for the last year and a half. This has meant a rental increase of only 5.88% in my previous lease renewal to keep up with inflation. If things continue to go this well then these kinds of increases are here to stay, and I’m okay with that.
This investment can end up a hundred different ways. You can do your absolute best to put who you think is the best tenant ever into your property but their circumstances can change in a minute and can leave you with a costly headache. Your property’s value may be stagnant for many years leaving you with an illiquid pile of bricks that no one is interested in. No one can ever foresee this. Your return in the end will be determined by some luck, but it will also be determined by the work you put in. The work you put in and the homework done upfront is what you can control and this is what will ultimately have the biggest impact on your investment over the long-term, so naturally this is where your focus should be.