Pitfalls and complexities of investing in rental property

Property can be one of the best investments you make and an excellent way to build wealth. However, Samuel Seeff, chairman of the Seeff property group, says that beyond your primary residence, investing in a rental property for example can become a financial nightmare.

You need to know what you are getting yourself into, especially if you are a novice investor, he says.

“Property, and South African property in particular, has proven to be one of the best investments that you can make. Aside from investing in your own home, there is always the option of investing in an additional property or multiple properties as part of a portfolio of properties to rent out and earn rental returns or yields while your investment value grows.”

Rental property in particular, seems to have grabbed attention as attractive investment options for buyers, says Seeff.

”Though you cannot really go wrong with local property unless you hopelessly overpay, buy a structurally unsound property or buy in the wrong area, when it comes to property that is not your primary home, there are many, many pitfalls.”

Seeff cautions buyers that though buying a property and getting tenants in may look as easy, there are in fact many logistical, legislative and financial issues that you need to be aware of, especially if you are a newcomer to the market.

“Prospective buyers and investors need to do their homework thoroughly, investigate the market carefully and think about the costs, not just financial, but also the time and hassles that can come with a rental property.

“The demand for rental accommodation is likely to again increase notably as the weak economy and rising costs drive more consumers to the rental market. However, the poor economic outlook can likewise dampen the performance of rental accommodation. Rental rates tend to remain flat as consumers simply cannot afford to pay more.

“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.”

Investors need to find out just what type of property is in demand and at what rental rates. Often property owners think they can get more for their property than reality dictates. While some properties can achieve quite high rental rates, this may not be the case for all properties or at all times.

Another consideration is whether or not to furnish. It may be tempting to think you can get more for a furnished property, but long-term tenants tend to prefer unfurnished, he says.

For holiday and short-term rentals on the other hand, basic furniture and furnishings and extras such as satellite television and Wi-Fi have become essential. Security too is essential 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.

Maintenance is another aspect that is far more costly in rental property than your primary home. Bear mind, says Seeff, that tenants are just using your property for a period of time. It is not their asset and they are not going to take the extra care with it that they would with their own property or assets, if at all.

You will in all likelihood therefore be responsible for the basic maintenance of the structure and fixtures that come with ordinary wear and tear, and need to be prepared for additional damage repairs and maintenance.

Another problem area is tenant sourcing and management. Given the legislative complexities, it has become advisable to employ a credible rental agent to help manage your property and its occupancy, says Seeff.

“This includes navigating what has become a bit of a minefield of legislative issues, vetting of the tenants, collecting monthly rentals, managing the property including any maintenance issues and more. This, would certainly help ensure that you don’t have unnecessary vacant periods, which can quickly add up to a chunk out of the returns you may have hoped to achieve.

“Most importantly, there are the property costs compared to the rental returns and yields. Over and above the costs of buying the property such as the purchase price and transaction and transfer costs, there are many hidden costs that come with a rental property,” says Seeff.

The first of these include the basic holding or ownership costs such as home owners insurances, utilities and levies, any complex levies and costs and security costs. Further costs could relate to where the property is situated. Near the coast for example, you would have higher repair and maintenance costs due to weather condition.

“Consider also that while you may be tempted to try and recover most of this by way of the monthly rental, it is highly unlikely you would succeed. Rentals would need to be set at the correct market level to attract tenants and ensure that your property is always filled.

“In spite of the pitfalls, owning rental property is an excellent way to build personal wealth. Ordinary homebuyers could for example obtain a housing loan to finance this investment and then use the monthly rental to off-set some of the bond and other holding costs. Over time, the asset will grow in value and after five years or so your asset starts accumulating real value.”

Seeff says strong demand middle income neighbourhoods tend to be good areas to invest in, especially for novice investors.

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