Buying a house with the intent to generate rental income from it can be a great passive investment move, but it is also more complex than many may think. Before taking on the decision to become a landlord, there are several factors buyers need to consider.
“While generating income from a rental property is a great way to bolster personal wealth, it can also lead to some financial troubles if tenants are not properly vetted and expenses are not properly budgeted for,” warns Regional Director and CEO of RE/MAX of Southern Africa, Adrian Goslett.
To help investors decide whether they are ready to become a landlord, RE/MAX of Southern Africa provides a few key considerations that should be made before signing any offers to purchase.
How much debt are you carrying?
If your tenant ever happens to default on payments, you do not want to be in a position where you will be unable to make the necessary repayments on your debts.
Have you factored in all the costs?
Once you learn how much you can charge in rental income for the property, you still need to take into account what your expenses will be and subtract them from the income to find out what your bottom line will be. Remember to include any applicable fees, including insurance, levies, cleaning, maintenance and repairs.
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The Seeff Property Group says going from property owner to landlord requires legal and operational know-how.
While a private individual renting out their own property or an Airbnb unit does not need to register with the Property Practitioner’s Regulatory Authority, they must comply with rental, consumer and tax laws. The rental income must be declared as part of your annual income, but you can deduct valid expenses incurred in connection with the rental.
Seeff provides some guidance for beginner landlords:
Treat the property as a business
Approach the rental in a business-like manner and ensure the property is fit for rental purposes and well maintained. While an Airbnb unit may require extras, keep the property basic for an ordinary residential purpose. More “frills” do not equal a higher rental.
Understand the law
The Rental Housing and Amendment Acts apply as well as the CPA (Consumer Protection Act). Important legalities include providing a written lease with a start and end date, rental amount, payment details, use of property and conditions around default or breach.
Rental deposit and termination
The deposit must be invested in an interest-bearing account and cannot be used for anything during the lease. It must be refunded seven days after the end of the lease. Under the CPA, the tenant can cancel giving 20-days’ notice, subject to a cancellation fee.
READ: Do’s and don’ts of evicting a tenant
Properly screen tenants
A proper credit and background check is vital before the tenant takes occupation. Using a rental agent can assist with this as agents are skilled and experienced. Be careful of “stories” and keep it professional. It is difficult and costly to evict, so take extra care upfront.
Do not overcharge on the rental
Keep your rate competitive to minimise vacancies and losing money. A high rental may result in the tenant eventually moving to cheaper accommodation. Take care when tenants pay in advance for a period, they often don’t pay again, and it turns into an eviction nightmare.
Who pays for what? Aside from the rent, the tenant pays for the use of utilities such as water, electricity and refuse. Property taxes and levies are for the account of the property owner or landlord. The same applies to any special levies.
Property use and conduct rules. Include these in the lease and focus on aspects such as pets, noise, visitors, maintenance, and circumstances which can lead to eviction. Sectional title and estate conduct rules must be attached to the lease and the tenant made aware including use of communal space.
Inspect and maintain
A property condition report must be attached to the lease. This requires inspection by the landlord (or agent) and tenant, and signed by both. An outgoing inspection is necessary to agree on repairs and the cost which can be deducted from the deposit.
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Written records
You must maintain written records of all transactions pertaining to the lease including rent collected as well as expenses for maintenance and other incidentals for tax deduction purposes. Verifiable records are required should SARS call for any proof.
Hire a rental agent/property manager
Rentals are complex with many legislative pitfalls. It requires hands-on management often best done by a professional. What you will pay to a rental agent or property manager may well be worth the money spent as they are property professionals whose business it is to know rentals, how to screen tenants and manage rental property to ensure your asset is looked after and you can maximise the return on your investment.
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