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Getting Started With Rental Property Investment

Buying a rental property means that you will own a home for a while, potentially forever... if you plan to leave it for you kids as an income mechanism.  So to get yourself ready to buy your first rental property here are some steps to get your there.

1. Check out your credit score

It is a good idea to always be up to date about what your credit score is whether you are looking to a buy a property or not.  But it is especially important for bond applications that you have a high score and a clean record. It takes so much time and effort and negotiations to find the right rental property that you really don’t want to get to the end of the process just to find out that there is some surprise waiting for you on your credit record (that might be completely wrong) and could cost you losing the property and with it all your hard work and dreams of starting a rental property portfolio.  

If your score is low, don’t despair there are also some basic things you can do to increase your score and within a couple of months you will be good to go.  Yes I said a couple of months…unfortunately this is a long game and increasing your score will take time. So start early.

2. Get yourself pre-qualified for a bond

Now that you know your credit record is clean and your score is high get yourself pre-qualified for a bond.  Always use a bond originator – they are FREE for you to use.  They should hand in your application to all the major banks and will get you the best interest rate.

Don’t make the mistake of thinking your bank will automatically give you the best rate. New banks are more likely to want to win you over and might go lower on the interest rate to get new business from you.  Yes they do negotiate so if you feel the rate is very high ask why is was given to be so high and ask for a reduction.  What you will need:

  • Bank statements
  • Salary slips
  • FICA documents
  • A list of all your monthly expenses
  • Assets and liabilities 

The outcome on the amount you will get will be determined based on your affordability.  That means they look at your income minus your expenses and see if you can pay back, not only the bond, but also some other costs associated with owning a home – like rates and taxes.

3. Buy at the Right Price

This part is what will determine whether you will be making extra money every month or whether you will be paying your tenants to live in your house, so you MUST get it right. This is also the topic of many real estate books so I can only to give you the basics in this short blog. You have to get the property below market value.  The discount you will get will be mainly determined by your ability to spot a problem and to solve it for the seller.  The more difficult the problem is to solve the more discount you will get.  So if this is your first rental property is suggest you stick to easy problems to solve and get around 20% - 30% discount on asking price.  Here is also a video where you can easily estimate an offer price on Property24.  How to determine what price you can offer on a property

4. Determine Cash Flow and Appreciation

Monthly rent can be extremely lucrative if it brings in enough cash flow. Cash flow is basically your monthly income minus ALL your monthly expenses.  Here is a video on how I calculate rental income for my properties.  How I calculate passive income from my rental investment property

Appreciation comes in two ways, forced appreciation and natural appreciation. Forced appreciation is when you buy a property, renovation or improve it somehow and then the end result is a property valued at a higher price than your original cost.  For example. Buy for R1m, renovation for R200k and the property is valued at R1.5m after the renovation. Net appreciation is R300k.

Natural appreciation is the property appreciating over time as per market trends and conditions.  Never buy by just relying on this, always buy with some kind of forced appreciation in the mix as this is more guaranteed

5. Calculate Expenses

Not sure what numbers to include in your expenses? Some things will always remain the same and some will depend on the type of property you buy.  If you buy a property to rent out to students you will have internet costs whereas you might not have that for a single family home.

6. Decide Who Will Manage Your Property

Will you manage the property yourself or hire a rental agent to do it for you? If you’re considering DIY, make sure you have the time and a local knowledge of the market. The right rental rate is key to the success of your property.  You can get an idea of what rental to charge using the investors report on TPN.  TPN is a credit beaureau specifically dealing with rental collection reporting.

Also make sure that you have the time to manage tenants as it could get fairly intensive depending on the type of rental you do.  A single family might require less time but will have lower cashflow.  A student accommodation rental will have much higher profit but be very time consuming

7. Establish Management Processes

Handling tenants, evictions, leases, deposits, and escrow accounts requires specialized knowledge to ensure you stay within the law and manage your property professionally.

8. Identify Necessary Repairs

What initial repairs will you need to take care of to get the property ready for rental? Consider the current condition and calculate potential renovation costs.  Also consider things like security and furniture for student accommodation.

9. Ensure Recent Repairs were done correctly

If the previous owner renovated the house, make sure they did the work at the right standard. If not, you’re responsible for getting it up to council requirements and will have to deal with whatever breaks due to shoddy workmanship. If any building work was done make sure it had plans as you might need to demolish should council not approve it in the future.  Ask for certificates such as a roof inspection certificate – if you suspect a roof leak, electrical and plumbing certificates. 

I recently lost R100,000 on redoing crappy plumbing work when it literally started raining from the ceiling and all the pipes in the roof burst, leaving me with no choice but to replace all of it at my own cost.  This included taking out tiles in all of the bathrooms in the house and re-tiling as well as R67,000 in lost water bills. OUCH…..

10. Plan for Ongoing Repairs

When a new person moves into a house there will always be a “settling in” period where there are some work to be done. Especially if you have renovated as part of the purchase.  Prepare for higher expenses in the first 3 months of rental. Plan for ongoing repairs such as blocked drains, fixing roof leaks etc.

Make sure that you have your insurance set up before anyone moves in. And a little extra tip ask for a plan where you don’t have any excess on a geyser replacement. 

11. Market to the Right Tenants

The success of a rental property depends on finding good tenants who take care of your home.  Even if you plan to manage yourself you can still get a rental agent to place tenants for you and just pay a placement fee or you can advertise on various rental platforms.  One of my favorites is HouseMe.

12. Vet Potential Tenants

Do you have a process for vetting potential tenants? Plan an interview and referral process that lets you establish rental history, and choose a tenant who will take care of your property and pay rent on time. 

Get approval from the tenants to check their credit record and use the TPN tenant check functionality to see if they are good payers and if they can afford to stay in your place.

13. Establish a Process to Collect Rent and Enforce Late Fees

How will you collect rent? How will you handle late fees? Be proactive in your rent collection procedures so tenants know how to pay and what to expect if they don’t. 

Do not let late rental slip. It is extremely difficult for tenants to catch up on outstanding rent and could lead to a spiral of short or no payments. Understand the reason for the issue and act accordingly.

14. Plan to Manage Tenants

How will you handle hostile tenants? How do you ensure tenants won’t destroy your property? When there’s a breach of contract, you need an action plan for handling it.  If you are dealing with multiple tenants on the same property, they will gang up on you and will organize a rental “strike/boycott” if they have some grievances.  So make sure you are ready to handle group negotiations. 

15. Legal Regulations

Make sure you have a proper understanding of your obligations and the tenant’s rights, you’ll easily find yourself in a legal mess. Before you buy, make sure you legally protect yourself.  You can get rental insurance, building insurance as well as content insurance and personal liability insurance.  All of this comes with it’s own requirements so make sure that you qualify to get it if you are planning to use it.

16. Understand How and When to File an Eviction

What justifies eviction? What warning should a tenant have before you file?  No one wants to file evictions, but you need to know how in case it’s necessary.  We use Xpello to get eviction “insurance” so that we don’t have to stress about extra costs for court cases to evict a tenant.

17. Understand How to Apply Rental Funds on Past Due Balances

Do you know how to prosecute a tenant that owes you money? Do you know what fees you can charge?  Don’t let this slip, keep them up to date with rentals and make sure you use TPN to report late payments or non-payments. There is nothing more motivating to a tenant to pay when they get a message from the credit bureau telling them that their credit profile is being affected due to the payment history with you!

Check list of documents you will need in setting up your rental.

1. Rental Application Form

Get approval to do a credit check on this form as well as all other details and references of previous rentals.

2. Residential Lease Agreement

You’ll need to know the existing lease term, monthly rent, deposit amount, late fees, required time for a notice to vacate, and many other important details – all located in the residential lease.  Use a professional lease agreement not a free one you downloaded off the internet…. A lot of rental agents use the TPN lease pack for all their leases.

3. Ingoing Inspection Report

Without this, you won’t know the condition of the rental property prior to taking possession. And without this information, there’s no way to hold a tenant responsible at the end of the lease for any damage done to the property.  Make sure  you do a video walkthrough and keep detailed photographic evidence of every single room.  The tenant MUST sign off on this document.

4. Property Keys​

This one seems obvious, but you’ll want to be sure you get extra copies of the property’s keys so you have access to the home. Don’t rely on the tenant to give you access.

5. The First Month to Collect Rent

If the property came with a tenant, firstly you need to get them to reapply.  The seller might want to sell due to non-payment.  Preferably ask for a vacant property and place your own tenants.  If it had a tenant make sure the tenant is aware of the new ownership and that they need to pay the rent to you now as this could easily still be paid to the previous owner leaving you with a claim against them.  Make sure you give the tenant an invoice with clearly stated bank account details and due dates.

6. Outgoing inspection report

This is basically the same as the incoming inspection report but is done when a tenant move out. They should also sign for this, however they do not have to as long as you have the evidence proving whatever damages might have been done.  This will determine what you are available to deduct from the deposit that they paid.

Now that you know the basics of rental property you can get out there and make it happen. Remember you will always make mistakes but you will learn from it and you will get better at it.  If you bought below market value you can always decide to sell and still make a profit if rental properties is not your thing.

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