Buying a property to let can be a sound financial investment – or a disaster. Here’s how to avoid the pitfalls.
Many people purchase buy-to-let properties as an investment for the future – often in lieu of a pension plan. Here’s how the thinking behind it goes: if I buy three or four properties now, I can live off the rent money when I am retired.
In theory that sounds very workable, but there are several potential obstacles along the way.
“There is big difference between buying a house in which you want to live, and buying an investment property,” says Marc Lunau, owner of Houses4Rent, a rental agency in Cape Town, which chooses tenants, and guarantees cash flow by paying the landlord on the 1st of the month no matter when the tenant pays. If the tenant stops paying, his company covers up to three further months too.
He is not only a rental agent, but also a property investor, and owns property on three continents.
“When buying as an investment, you cannot buy with your heart. You have to buy using a pocket calculator.”
In answer to four pertinent questions during an interview, Marc had the following advice for new landlords:
What are the main things that a new property investor should look out for?
A property is only an asset when it generates income, therefore you should strive to buy properties that will give you that from the very beginning. It isn’t easy, but if you look long and hard, you will find properties that are below market value, for example distressed properties.
Smaller entry-level properties close to schools and transport and shops are easier to rent out, as there is just a bigger demand for them. This is a global trend. Capital growth often lies in the smaller properties. Whatever you do, never sell a property.
How does one choose the right tenant?
Obviously the right tenant will be someone who pays the rent and doesn’t trash the place. It is the landlord’s responsibility to ensure the potential tenant’s financial viability. The focus should be on whether the tenant can afford to pay the rent, and whether this person has a good credit record and a steady income.
It is essential to ask for three months of bank statements, salary slips or proof in income, and possibly references. Phone to confirm the applicant’s employment status. All occupants of the property must be named and identified, and the landlord has the right to limit the number of occupants. If too many people are living in your property, the wear and tear could be much higher than expected.
If potential tenants are unreliable, for example missing appointments to view the property, it could be an indication of future problems, according to Lunau. Often people with poor credit records offer to pay cash up front. This could be a red flag, but nevertheless some new landlords sometimes fall for this.
It’s also crucial to have the ID/passport of prospective tenants and if it’s a foreigner you need their residence permit/visa. Failure to do this could lead to the landlord being charged with harbouring illegal immigrants.
What are the advantages and disadvantages of using a letting agent?
Some letting agents are very good, and others are not. One of the advantages of using a letting agent is that it removes the personal contact between the tenant and the landlord. The landlord does not get drawn in emotionally if the tenant is experiencing problems which could have late or no rental payments as a result.
A good letting agent will know the legal requirements in setting up rental agreements. A letting agent or landlord who neglects to vet the tenant’s details, and have the lease checked by a person with legal expertise, is actually endangering the investment, according to Lunau.
Inexperienced landlords who try and handle the letting themselves can quickly run into trouble if tenants don’t pay, or the lease was not correctly drawn up.
Obviously using a good letting agent comes at a cost (usually between 10% and 12.5% of the rental income), but choosing the right person to do this could save the landlord thousands of rand and a heap of trouble.
Good letting agents will also take charge of maintenance issues and keep the landlord updated if any problems should arise. Poor letting agents are only interested in the commission, and not in protecting the asset of their client. This results in the owner running 100% of the risk as far as the investment is concerned.
What happens if the tenant stops paying?
This is a potential nightmare, as it isn’t easy or quick to evict a tenant – even a non-paying one. It can be a lengthy process during which a new landlord can lose lots of money.
The Prevention of Illegal Eviction and Unlawful Occupation of Land Act (better known as the PIE Act) often gives the tenant more protection than it gives the landlord. When a tenant doesn’t pay, immediate action is necessary, says Lunau, as failure to act on the part of the landlord could set a precedent, and count against him or her in the future.
According to the PIE Act there are four steps which need to be followed before a tenant can be evicted:
• Delivering the Eviction Notice
• Applying for an Eviction Court Order
• Appearing in Court
• Forcing Tenants to Vacate
This can be a lengthy process, as tenants have 20 days to reply to a letter of demand. The rest of the legal process can also be drawn out. If the lease was not drawn up properly, it could buy a non-paying tenant extra time. That is why it could be dangerous to buy ready-made lease agreements.
Lunau stresses that it is illegal for landlords to make the property uninhabitable, for example by cutting off the water and the electricity. That would count against a landlord in court, and could result in a separate case, which could drag the matter out even further.
Even though most non-paying tenants end up having to pay their arrears, six months or more without rental income could leave a new landlord financially stressed, and endanger the investment.