There are many factors which influence whether rental properties are a good investment, from the location, sales price and profit expectations. Here’s what to consider when purchasing an investment property.
Buying a home is considered to be one of the smartest financial investments that one can make and is the best way to build wealth. On the other hand, Samuel Seeff, chairman of the Seeff Property group, says that investing in rental property can become a financial nightmare.
According to Seeff, being aware of what to expect when deciding to purchase an investment property is essential – especially as a first time investor.
SA property is a great investment to make:
Aside from investing in your own residential apartment or home, there is also the option of building a portfolio of properties through investing in additional assets which can be used to rent out. By doing so, you are able to earn rental returns or yields while your investment grows year on year.
According to Seeff, rental property in particular, seems to have grabbed the attention of homebuyers as an attractive investment option to make.
Seeff says that in most cases, you cannot go wrong with investing in local property, unless of course you happen to overpay for it, buy in the wrong location or purchase a structurally unsound property. However, he warns that when it comes to secondary properties, there are still a number of pitfalls that can make the investment process a complex procedure.
Rental investments – what to consider:
Investing in a rental property may sound like a simple process, but according to Seeff, there are many hidden nuances, logistical, legislative and financial factors that buyers need to be aware of when choosing to invest.
So while a second income may sound attractive and may tempt you into investing your money into a rental property, Seeff advises buyers to be cautious and take great care.
Seeff shares a helpful guide on what first time investors should consider:
- The importance of good timing:
Market performance, good economic growth and timing are important factors to consider to ensure the success of your investment.
Seeff believes that rental accommodation is likely to grow as the escalating costs of living, combined with a weak economy, may drive more consumers toward the rental market.
However, he also cautions that the poor economic outlook could alternatively reduce the performance of rental accommodation. This is because rental rates tend to remain flat as consumers simply cannot afford to pay more.
“This is just one of the aspects to consider as the costs of a rental property almost always tends to be significantly higher than initially budgeted for. For novice investors, this can be financially crippling,” he says.
- Doing your research:
As a prospective buyer and/or investor, it is essential to do your homework first before jumping into the investment market.
Conducting a thorough investigation is important – consider factors like the choice of area you would want to invest in, as well as the costs, time and hassle that can come with owning a rental property.
Speaking to a local and reputable rental agency for the area you have in mind is important. By doing so, you will be able to attain helpful advice on what type of property is in demand and at what rental rates.
According to Seeff, “Often property owners think they can get more for their property versus the market reality. While some properties can achieve quite high rental rates, this may not be the case for all properties or at all times.”
- To furnish or not to furnish:
Another consideration to deliberate over is whether you will lease out the property furnished or unfurnished.
Whilst you may be able to achieve a higher rental for providing furnished accommodation, long-term tenants tend to prefer unfurnished rental homes.
Alternately, for holiday and short-term rentals, consider basic furnishings as well as extras such as satellite television and Wi-Fi, as these have become essential items to include.
Security is also an important factor for any rental property.
“Be sure to always focus on durability and take into account the additional maintenance and insurance costs that would come into play with furnished accommodation” says Seeff.
- Maintaining your investment property:
Maintaining your rental property in comparison to your primary home, can be quite a costly expense.
According to Seeff, it’s important to remember that tenants are only using your property for a short period of time and as a result, they may not always take the extra care needed to preserve the property and its assets.
It is also likely that you would have to take on the responsibly and expenses for the maintenance of the wear and tear of the property’s structure and fixtures, as well as any additional repairs that may be required – unless otherwise stated in your lease agreement.
- Tenant sourcing and management:
Tenant sourcing and management is another area which can become problematic.
A crucial part of a successful rental property is of course finding the right tenant and letting the property on good terms.
Given the legislative complexities, it has become a necessity to employ the services of a reputable rental agent to assist with the managing of your property and its occupancy, says Seeff.
This includes navigating through the vetting process of the tenants, collecting monthly rentals, managing the property as well as any maintenance issues, to name a few.
Employing the services of a reputable rental managing agent to assist with the tenant sourcing and management of the property, can help to ensure that your property isn’t left unoccupied for a long period of time, as this can affect the return of your investment.
- Costs versus returns:
Most importantly, weighing up the property costs versus the rental returns and yields is an additional factor to consider, says Seeff.
There are many costs involved in the purchase of a property, over and above the purchase price, such as the transaction and transfer costs.
There are also a number of additional hidden costs that come with owning a rental property, says Seeff.
- The basic holding or ownership costs, such as home owner’s insurance.
- Basic utilities and levies.
- Any additional complex levies and costs.
- Security costs.
Depending on the property’s location, you may have to also factor in any added expenses which may relate to the property’s area. For example, if your property was situated near to the coast, you may encounter higher repair and maintenance costs due to the coastal erosion.
According to Seeff, “While you may be tempted to try and recover most of this by way of the monthly rental, that is highly unlikely. The rental rate would need to be set at the correct market level to attract tenants and ensure that your property is always filled.”
- Should you still invest in a rental property?
Despite a number of complexities that accompany a rental home, purchasing an investment property is still considered an excellent way to build personal wealth.
According to Seeff, for ordinary homebuyers looking to invest, they can obtain a housing loan to finance their investment property and then use the monthly rental to off-set some of the bond and other holding costs.
“At the same time, the natural lapse of time will see the asset grow in value and before you know, five years have passed and your asset starts accumulating real value” assures Seeff.
- Which are the best areas to invest in?
Neighbourhoods which are considered to be good areas to invest in, especially for first time investors, are high demand middle income neighbourhoods.
According to Seeff, there is generally a high demand for rental property in middle class areas, especially in security complexes, as well as areas that offer good schools and infrastructure, transport facilities and easy access to business and commercial nodes.
However, even the best location can still make the process of investing a challenging experience, which is why Seeff stresses the importance of weighing up all aspects first before taking the plunge.
“Part of this, is considering what the economy is doing and how this may affect your household finances in the short term. Interest rate hikes and rising basic living costs are all current realities for the economy and property market” concludes Seeff.
Discover how to build your wealth with property investment Get free training videos & resources on the secrets of property investment in South Africa. Fill out the form below to gain instant access to our training resources.