How to ensure your rental property generates cash flow

Agents servicing rental properties in Cape Town, from the City Bowl to Plumstead, believe that good cash flow is, and should be, a priority for landlords.

This is according to Caron Leslie, Broker/Owner of RE/MAX Property Associates, who says the first step in checking out potential cash flow for any prospective landlord would be taking a detailed look at similar properties in the area in which the rental property is situated, and verifying that the projected monthly rental amount is in fact achievable.

“If a landlord is looking at buying a new unit in a complex to rent out, they should be on the lookout for units with low levies and maintenance costs,” says Leslie.

She says landlords must also include expenses such as insurances, rates, taxes, water and the like into their operating budget.

Peter Kratz, rental agent at RE/MAX Property Associates says for landlords, the best way to ensure that they can fully reap the benefits of capital appreciation over time is by securing a reliable cash flow, along with avoiding any possible gap between the rental income received and the expenses paid.

Kratz says in order for landlords to see any benefits from their rental portfolio, they need to make more on their investment each month than they are paying out.

“It is sound business practice. If a landlord is making less money than he or she is spending to maintain their rental portfolio, they are not going to be able to hold onto their properties for very long,” he says.

“Maintaining a positive cash flow will ensure that the landlord will not need to sell their rental property prematurely.”

Property should be viewed as a long-term investment, and, as such, selling the property too early due to poor cash flow will negatively impact on the landlord’s potential for seeing capital growth on their investment, he says.

While there are a number of ways to achieve this, Kratz says location will always play a pivotal role in rental income and a property’s value growth.

“It is the decisions that are made in the beginning of the investment that will be the most influential on the end result,” he says.

“It is essential for landlords to identify neighbourhoods where they believe capital growth is likely to be strong over the long term. Investors should bear in mind that these may not necessarily be the same areas that achieved strong growth in the past.”

The best piece of advice Kratz believes he can give to landlords is to make use of a property management professional.

“While managing your own rental property or portfolio might hold financial appeal, the services rendered by a reputable and professional rental agent will really be worth the cost,” he says.

Adrian Goslett, Regional Director and CEO of RE/MAX of Southern Africa, says that if a landlord chooses to manage their rental property themselves, it is possible that maintaining the property and making sure everything runs smoothly could take up a fair amount of the their time and energy.

“There is also the matter of any legal issues and ensuring all legal requirements are adhered to and the right procedures are followed,” says Goslett.

Kratz says one of the most fundamental roles of rental agents is their assistance with tenant selection.

“Landlords want to find a tenant or family that will be financially responsible and always pay the rent on time, respect the property and look after it well, not cause disturbances in the neighbourhood and those who will potentially become a long-term tenant.”

In order to ensure a quality tenant with these kinds of characteristics, he says a thorough screening process is followed by rental agents.

Kratz says before a landlord enters into an agreement with a tenant, they also need to know who they are dealing with.

“A rental agent will assist landlords in obtaining all the necessary Fica documents on all adult tenants, while also ensuring that the tenants comply with the predetermined selection criteria.”

As a general rule of thumb, Kratz says that the minimum selection criteria should require that the total income of all applicants be listed on the application and to be three times the monthly rental.

In addition, he says all income must be verifiable, and tenants must be able to show that they have a clean financial credit record.

“Where possible, tenants should also provide proof of previous rental history and should be able to show that they have paid rent in the past in compliance with the agreements entered into,” he says.

The landlord should verify critical information provided in the rental application, which includes employment details, credit health and information about the occupants.

“This is where the services of a rental agent are invaluable,” says Kratz. – Property 24

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