Buying a house with the intent to generate rental income from it can be a great passive investment move, but it is also more complex than many may think. Before taking on the decision to become a landlord, there are several factors buyers need to consider.
“While generating income from a rental property is a great way to bolster personal wealth, it can also lead to some financial troubles if tenants are not properly vetted and expenses are not properly budgeted for,” warns Regional Director and CEO of RE/MAX of Southern Africa, Adrian Goslett.
To help investors decide whether they are ready to become a landlord, RE/MAX of Southern Africa provides a few key considerations that should be made before signing any offers to purchase.
How much free time do you have?
Being a landlord can be a good way to earn additional income, but it can be big on time and sweat equity if you do not involve an agent to help manage the property on your behalf. In addition to selecting the right property, preparing the home for tenants, and finding reliable tenants, there will also be ongoing maintenance hassles and tenant challenges. Those with less time available should factor in the cost of involving a real estate professional to help manage the rental on your behalf.
How much debt are you carrying?
Savvy investors might carry debt as part of their portfolio investment strategy, but the average person should avoid it whenever possible. If your tenant ever happens to default on payments, you do not want to be in a position where you will be unable to make the necessary repayments on your debts. Purchasing a rental property may not be the right move if it will overstretch any other financial commitments such as outstanding student loans, unpaid medical bills, or even children on their way to university.
Have you thought about financing the purchase?
Acquiring the lowest possible interest rate on your home loan is a crucial part of maximising the return on a buy-to-let investment. When applying for finance, keep in mind that most banks do not take the potential rental income on the property into account when assessing your bond application.
Have you factored in all the costs?
Once you learn how much you can charge in rental income for the property, you still need to take into account what your expenses will be and subtract them from the income to find out what your bottom line will be. Remember to include any applicable fees, including:
- Insurance
- Levies and/or Homeowners Association fees
- Utilities
- Advertising costs for acquiring new tenants
- Travel expenses to and from the property
- Cleaning, maintenance and repairs
- Professional contracts (legal and management)
- Home loan repayments
- Rates & Taxes
Have you considered the location?
Ambitious millennials are often looking for a cosmopolitan lifestyle, usually near urban vibes. There’s also a drive for family homes in suburban rental markets across Johannesburg, Pretoria, Durban, and Cape Town too. Semigration trends have also created a demand for rentals in coastal and smaller towns. Investors should also consider “work, play, live” opportunities near transport nodes that reduce travel time and are situated in fully-equipped lifestyle estates. In general, South African renters are seeking a better quality of life, greater safety, and a sense of community.
Ultimately, the best way to find out if you are ready to become a landlord is to consult a local real estate professional as well as a financial advisor. “Owning a rental property can be hard work, but it can also be the foundation to creating wealth over the long term – especially when you have the right support at your side. With a reliable rental agent managing the property for you, you can sit back, relax, and reap the long-term financial rewards of being a landlord,” Goslett concludes.
