With so much being written about the rental market and how much money you can earn, especially from the holiday rental market, it might be tempting to buy a property for the rental market without proper research.
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Rental agents from the Seeff Property Group recommend that those who want to invest in a buy-to-let property must first do their homework because it can be a costly mistake. While property is generally regarded as an excellent investment, not all properties are suitable for the rental market. There is also a big difference between residential and holiday rentals.
Residential rentals are usually popular in areas close to transport networks for work access, amenities and schools. Holiday rentals are usually sought in areas close to holiday hot spots, business nodes or large event areas.
The most in demand residential rentals tend to be apartments with up to two bedrooms, and townhouses or houses with up to three bedrooms. Properties must have the basics, but note that rental rates for each area falls within a scale, and added extras might not get a higher rental, or it could mean the property is vacant for longer. Unfurnished is usually more popular.
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Residential rentals are generally for a year, but can be shorter or longer, depending on the property and landlord. There is usually fixed monthly rent which cannot be increased arbitrarily. The landlord must maintain the property and attend to emergency repairs such as a burst geyser. A deposit is usually taken which must be invested with interest for the benefit of the tenant. It cannot be used for anything including maintenance.
A lease agreement must be drawn up and signed by both parties stipulating the terms of the tenancy. A property condition report must also be signed by both parties upon occupancy and again when the lease ends to determine if there is any repairs needed for the tenant’s account.
The most sought after holiday rentals tend to be compact apartments or homes, fully furnished and equipped with self-catering basics at a minimum. These properties require more administration as you will need to manage the listings as well as the bookings. There will also be more cleaning involved as you will need to prepare the property for the next occupants.
Maintaining your rental property will ensure it grows in value, and will also mean that it will be in demand with tenants, thus keeping it occupied. Keeping a good tenant who pays their rent on time is vital. Even if you have a long term tenant and an agent who manages the property for you, it is important that landlords maintain good relations with the tenant.
READ: First-time homebuying: Common mistakes and how to avoid them
The great thing about investing in a buy-to-let property is that you can finance it with a mortgage loan from a bank while the rental income can help you pay off the loan. It is also advisable that you use some of the rental income to build up a maintenance fund to take care of emergencies.
Before committing to the property purchase, you should also research the general rental rates in the area to ensure a realistic expectation of the rental income that you could earn. Rental income is subject to tax and must be added to your annual income, but expenses associated with the property such as insurance and repairs can be offset against the income. Costs related to improving the property are, however, not deductible for tax.
Be sure to buy within your means so that you are in a financial position where you can pay the mortgage should the property stand empty for a period. While you can pass on the costs of water and electricity and basic utilities, you will need to pay the property taxes as well as any levies related to the complex or estate. Other costs such as internet or satellite television can also be passed on to the tenant and included in their monthly rental payment.
The landlord or property owner is also responsible for insuring the property. The tenant will need to insure their own contents. If the property is furnished, then the landlord or property owner should also insure the contents as well for safety.
READ: Becoming a property mogul in South Africa
Craig Mott, Business Development Manager for the Rawson Property Group, also shares the top 4 techniques used to build these high-performance portfolios that deliver mogul-worthy returns.
Mott says, some of the world’s wealthiest individuals founded their empires on property investment.
Don’t overlook an opportunity
“The best property investors keep a constant finger on the pulse of the property market,” says Mott. “They’re constantly on the lookout for optimal conditions and aren’t afraid to leap when an opportunity presents itself.”
Currently, Mott says the market is ideally positioned for portfolio expansion, with excellent lending rates and a wide variety of stock available.
“We’re seeing a lot of savvy investors using this time to fill gaps in their portfolios and implement strategic expansion strategies,” he says.
Build strategic partnerships
Becoming a property investment expert doesn’t happen overnight. That’s why most successful investors have a property professional on their team.
“Building a relationship with an experienced real estate and/or rental agent opens a lot of doors for you as an investor,” says Mott. “Not only can you get early access to prime, as-yet-unlisted properties, you also get up-to-the-minute advice on the latest investment best practices, legislative updates and property trends.”
Understand what success looks like
Bigger isn’t always better when it comes to property investment. According to Mott, the key metric to look out for is not overall portfolio value, but rather whether your total returns equal or exceed those of equivalent monetary investment funds.
“If, for argument’s sake, the same money would have performed better in a money market – before capital appreciation – you can’t regard that investment as being successful,” says Mott. “Of course, property investment is a long-term venture, so don’t be overly swayed by individual properties’ short-term performance. At the same time, don’t put all your eggs in the capital appreciation basket – investment properties shouldn’t need to be sold before they deliver profits.”
Never take performance for granted
Done right, Mott says property can dramatically outperform almost any other asset class. If it’s not living up to its full potential, it’s time to update your strategy.
“There are always going to be properties that don’t perform as expected, and these can drag the overall returns from a portfolio down,” he says. “Don’t fall into the trap of hanging on to this ‘dead wood’. The most successful investors do regular checks of each and every property’s performance. Those that consistently deliver below expectations, and cannot easily be remedied, should be sold to increase cash flow or finance more promising new investments.”
READ: Five property investment strategies for the novice investors
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