Investment properties are one of those money makers that sounds perfect in theory, and in theory investment properties are perfect. There are always a minimum limit on the rental income of a particular size unit and also these rental rates should stay with inflation. The very key to why investment properties seem like such a good idea. Also the poorer a country the more you will find that rental properties become an even more valuable commodity, this is something worthy of remembering in a country such as South Africa or Africa as a matter a fact.
Poorer countries tends to have less sales and more rentals.
However if investment properties were the answer then everyone would be buying investment properties to rent out. But why is it that those of us who have a few investment properties tell the others to be careful. Well it is real simple, we property folk tell you so because the grass is not always greener on the other side, and as with any investment opportunity there are pros and there are cons.
Today we will focus on the cons, the things one have to keep an eye on in the property investment game after the initial capital investment.
6 Cons of Investment Properties:
The biggest con of investment properties are that it is real hard work, to the point where most have question their property investments at some point or another. The best way to overcome this never ending bucket of chores is simply to give it to a professional. Property Management companies, like Mafadi is made and developed to do all your hard work for you. Honestly the small amount of commision they ask is worth every cent.
Just make sure you get the best Property Management company out there – this will save you time, money and tons of frustration.
2. Unexpected Expenses
There are always hidden cost that you are unaware of. The best thing you as a landlord can do is to build a large enough buffer for the worst case scenario. Lets say you have to repaint, put in a new geyser, fix some counter top and put in a new stove, you need the emergency funds for these undesirable stages of your Investment Property. The best you can do is to make sure you actually have this emergency buffer for each investment property you own. I would suggest that you add 10% (at least) of your monthly rental income to this emergency fund.
Having said this, I should also say that there are different investment property types that are better suited for investment purposes than others. Personally I think a typical residential home is a really bad investment property for rental purposes. Simply because with a home you have the structural problems that can bankrupt you as a landlord as well as the everyday extensive maintenance list. If you choose however to invest in something like small bachelor apartments you will have the small interior space to worry about and the month levies, in theory nothing more. These are relatively small expenses that you can try and plan for, as opposed to a structural problem with your entire roof.
3. Financial Independence
Many would say that investment property is a game for the financial independent. Personally I tend to agree with this, simply because of the hidden cost and the simple fact that your funds are tied up in an actual tangible asset. The problem is that your capital isn’t liquid, selling any property takes months, if not years. Especially if you have to wait for the property market to improve as is still the case in South Africa and in many countries across the world.
Also the key is that you have to look at the property out of an investment point of view. This simply means you need to check your figures, make sure you don’t buy to high and calculate if you will receive your 10% capital growth per year.
Also consider the worst case scenario:
- You may have bought slightly too high
- You have more vacancies than you expected
- Your rental rate is 10% less than expected
The investment property you are interested in should still seem appealing, even if all 3 were to be the case. Otherwise the particular property may not be the correct property.
Consider your property like a big dog, you should have third party insurance for the possibility that your dog might one day bite a person. The same with your property, third party insurance for a tenant falling of the stairs is a must, especially in a world growing more pro lawsuits everyday.
Other than your third party insurance I would recommend having an indemnity section within your lease agreement.
The better you plan for failure, the better you are prepared.
5. Bad Tenants
This is that frustration that always seem to creep up, bed tenants. The fact that you will have great tenants that pay on time and took care of your place as if it was their own. But honestly this is rare and precious. Most of the time you will get ok tenants, but sometimes you get those bad tenants that became your worst nightmare.
The idea that you may have to deal with evictions, that you may never see that 5 months of rent and that they destroyed your property, these are all realities you may faces at some point. It’s sad, but it shouldn’t put you off entirely. By being smart and questioning first and trusting later you may avoid these problems to a great extend, and also remember that there are companies that deal with these matter on a daily basis.
If you ever find yourself in such an unfortunate situation, I do recommend take the expense and get the advice from a professional property management expert.
I have recently discovered how long it can take to get an “ok-looking” tenant for your investment property. It is why I would recommend that you make part of your emergency fund a section for vacancy planning. Some properties rent out within days and others take a few months. The best advice I can give is to find the best tenants you can as fast as possible, even if you have to drop your rental rate by 10-20%. The months the property may stand empty afterwards, might have made that 10-20% “rental loss” worth it.
Quick tips to finding a happy landlord:
1. Know the law.
Go do your research or go speak to a property lawyer, but make sure you know what is what in your country. As a landlord you can’t play the “I didn’t know” card. It is your job to know, thats why you are the landlord not the tenant.
2. Make sure your lease are legal, especially in South Africa.
You may think you can put anything in a lease agreement. But I promise you, you will be surprised but what is actually considered legal. Take the time, pay the money and get a professional to look at your agreement. Remember that this is one of those “once-off” expenses. Once you have a proper Lease Agreement with an indemnity section you can reuse it over and over again.
3. Get your Third Party Insurance, at the very least.
Don’t get caught with your pants down – because in the property game it can cost you your life savings. Prepare for that horrible tenant that you may get.
4. Create that Emergency Fund
It is surprising how few DIY landlords actually have an emergency fund, honestly I don’t understand it at all. Property Investment aren’t going to make you rich overnight, instead it is a slow and patient game over a few years. You need to plan for the possible worst case scenario, if that doesn’t happen then (and only then) will you have those extra savings at the end of the year. Keep every properties funds separate, make monthly deposit and keep your council account up to date. The rent that remains, that can be considered monthly profits with the capital growth.
As always, diversity is key. Build your retirement around several money makers, the stock market, investments and property. All of these are good money makers, but putting everything in one baskets is perhaps a bit risky for the normal folk.
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