Planning for your pension through a property portfolio is just as questionable a plan as the stock market. Both these options will have a similar learning curve for a newby. There are however a few fundamentals with becoming a new landlord. Our 10 Mistakes Inexperienced landlords make will give you a speedy and steady start to your new landlordship.
You may also be interested in 5 Traits of a Profitable Landlord
1. Not conducting a thorough tenant check
It is essential that you conduct a thorough check on your potential tenants. As tedious as it may seem, it could also be the final checking point that could prevent you from choosing a bad quality tenant.
- Make sure to check the following:
Credit Report, you may have to ask a property management company to help you out with this - Verify References, previous landlords as well as previous and current employers.
- Payslip, if you questions its authenticity give a call to the employer. Make sure that this payslip will be forth coming for the foreseeable future.
- 3 Months Bank statements, you are allowed to ask for more if you like.
Tenant Screening, that leads to quality tenants takes it’s time. Stick to your gut and feel comfortable with your decision. It must be noted that choosing the correct tenant is the most difficult part of the job. Sometimes you get lucky, but unfortunately there will be tenants that are bad eggs from the start. A thorough check can help prevent these tenants. It is suggested that if you are very new to the game that you allow a professional property management company handle this matter. The professionals simply have the experience we DIY-ers lack.
You may be interested in our 5 Tips for tenants complaints, a quick overview to ensure that the lines of communication are always open;)
2. Keeping a 100% rental capacity is very difficult
Many new landlords underestimate how difficult it can be to have a 100% occupation rental rate. This often leads to a few dry cashflow months, months that many landlords can’t afford. Don’t let your optimism get in the way of good old planning. Be sure that you can cover a few months without your rental income (6 months is a very good start). I promise you there will sadly be the times where it simply takes a bit longer to find the correct tenant.
It is always worth waiting longer for a quality tenant, instead of choosing a tenant that may lead to a possible eviction.
By anticipating the following expenses you will be able to keep a healthy cashflow
- Mortgage
- Property Tax
- Insurance
- Utilities
- Maintenance Cost
- Vacancy Rates (working on a 10-25% vacancy)
- Property Manager – You might need one if this is all too new to you:)
3. Underestimating the maintenance, timewise and financially
Many new landlords underestimate how much the maintenance will cost, time wise and financially. A nice saving tip will be to delicate 7-10 % of your monthly rental income to maintenance/emergencies. This should ensure enough savings for those emergency maintenance jobs.
Landlords needs to manage their property maintenance correctly to ensure the property’s desirability for future tenants. Keeping your property’s desirability high will ensure that you have a bigger pool of tenants to choose from. Allowing you to choose a tenant of high quality, while keeping your rental rate equivalent to the market value, if not a touch higher;)
You should consider making some home improvements to your property if it would allow a significant rental increase. There are key rooms that will allow a rental income jump, such as a second bathroom, minor Kitchen updates…
It would be a good idea to consider HOW you want to approach your investment property maintenance. Will you be buying to fix up and sell, will you buy to rent and make the best profit in a few years ….
Are you buying for selling or renting purposes, the difference should alter your maintenance plan.
4. Make your A Team list
It will also be a good idea to immediately start working on your A -team list regarding the maintenance and emergencies. This will be your trades men list of plumbers, electricians, handymen, locksmiths, exterminators, painters, gardeners, poolman …
This is one of the key resources that all estate agents and property management companies collect and keep building on. Building a strong and reliable relationship with your tradesmen is essential, as there will be a day that you need their help asap.
Remember to request good quality work for good pay from your tradesmen
5. Understand that property investment is a business, not your side hobby
Many landlords seems to think that if their property portfolio only exist out of a few properties that they can manage it like a hobby. The truth however is that landlords need to drop the hobby mindset and plan for what it is…. a business.
Consider…
An average residential property cost roughly R1 million. Meaning that you should on average make R10 000 a month in rent to keep up with the stock market. This means R10 000 every month, excluding your expenses such as:
- Property Tax
- Insurance
- Utilities
- Maintenance Cost
- Vacancy Rates (work on min of 15-20%)
- Property Management, its either your time or a professionals time.
The math will tell you that you will have to take even a small property portfolio seriously, otherwise you will lose money in the long term. Make sure you don’t over invest by putting a 20% deposit down as the minimum. Make sure you have the time to manage your property correctly, otherwise consider a Property Management company. These companies know their business, ensuring you get the best return on investment you can.
Things to keep in mind:
- Depreciation Schedule – Keep in mind that there will be items on your property that will need replacing at some stage. This allows you to deduct this depreciation % from your tax bill, a small allowance considering the property income tax.
- Annual Rent Increase – Many landlords forget to increase their rent yearly. This can be a costly mistake as you aren’t allowed to simply increase your rental rate to an existing tenant for the previous year’s forgotten (only year on year is allowed). It is important to create the expectation that the rent will increase every year, even if it’s only with 2%.
It this interest you, then please continue to Part 2 of 10 mistake new landlords make. If you feel that this may already be a tad overwhelming then I suggest you give Mafadi Property Management a call. They have more than enough years of experience behind them to ensure you get the best return on investment, that your property can yield.
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