Buy-to-let investing has been gaining traction, with more investors noticing the advantages to owning a property to rent out in a competitive market. But without proper planning, the dream can quickly turn into a nightmare.
- Long or short
One of the first questions you need to answer, is whether you’re looking to rent out your property on a short-term or long-term basis. Both have clear advantages and disadvantages, with your ultimate decision dependent on the specific property and circumstances.
Long term rentals have the advantage of stability. Your tenant is generally signing a longer lease, meaning you’re guaranteed a monthly income for the duration of the contract. This also allows you to factor in monthly costs like water and electricity. Another clear advantage of a long term rental is that, typically, tenants do not need it to be furnished. This saves you some initial expenses, but it’s important to keep in mind that you’ll have to maintain the property. This usually involves painting and cleaning once a current tenant moves out.
Short term rentals have become all the rage in cities like Cape Town, where platforms like Airbnb have taken the market by storm. An increasing number of landlords are choosing to let their properties to short term tenants (usually on a day-to-day basis), rather than getting stuck with one long term tenant. While this has the benefit of added flexibility, it’s important to keep in mind that short term rentals require more effort on a day-to-day basis. Depending on where your property is located, short term rentals can be more profitable over high seasons, but keep in mind that you’ll need to find tenants for quiet periods during the year.
- Who’s managing the property
When renting out your property, it’s important to have a clear plan regarding property management. You can choose to enlist the services of an agency for this, or you can choose to do it yourself. While it may save you money in the short run to manage your own rental property, it’s important to be realistic about the day-to-day requirements. For this reason, many first time landlords opt to outsource property management services. Property management includes everything from collecting rent, to inspections and repairs. If you choose to do this by yourself, it’s important to stay organised and have open channels of communication with your tenant.
- Legal matters
Lease agreements need to be clear and detailed. You don’t want to end up in a situation where you and your tenants argue over things like deposits or repairs. Essential items to include in your rental agreement include what is or isn’t acceptable from the tenant, breakage costs, and method and date of payment. It’s a good idea to stay up to date on the law when it comes to evictions – gather all the necessary information from legal experts before you rent out your property.
- Make money
Ensure you have enough income from your property to cover your costs. It’s important not to over-capitalise on your rental property, thus pricing yourself out of the market. Stay up to date on rental prices in the area for comparable properties to ensure you’re able to find a suitable tenant. Marketing your property is also an essential step. The days of placing a small ad in the paper are long gone. Whether you choose to advertise with an agency or by yourself, make sure you have high quality photos and include all the necessary information in your advertisement. Social media has become a popular way to market properties, so look out for any groups focusing on rentals in your area.
How to run a successful rental
Check comparable rentals in the area and price yours at or just under the market.
Only price higher if your property has features that would make it more attractive to prospective tenants
Time of year has a big impact on price.
Depending on when you list your proeprty, your tenant pool could be significantly smaller. Take this into account in your planning and listing of your property
Know the market (or work with someone who does).
Don’t miss the peak of your city’s rental market by overpricing your rental property – you’ll end up dropping the rent in the long run and oftentimes you’ll end up with below market rent.
Conduct thorough background checks.
The types of items you can find in a background check are evictions, criminal records, previous property damage, tax liens or a trail of unpaid bills.
You need to understand that credit score, above all else, is your most important criteria for vetting tenants.
Even if they’re underemployed or a new hire, someone with great history will find a way to pay the rent on time.
Try to divorce emotions entirely when choosing tenants.
While you may feel better offering your rental to someone down on their luck, at the end of the day you need to remember that you’re running a business.
Focus on how a prospective communicates with you throughout the application process.
This will tell you a ton about what kind of communication they will have with you as a tenant.
Remember that in most places, the tenant has more rights than the landlord, so don’t let someone move into your home before they’ve paid their security deposit and/or first/last month’s rent. Once a tenant moves in, the law views them as having the upper hand.
Take move-in pictures and use a detailed move-in checklist.
This comes in extremely handy if there are items that need to be paid for from the deposit funds.
Inspect the apartment when a tenant moves out before another moves in.
Have tenants fill out an “Apartment Condition Form” stating any issues with the apartment or agreeing that the apartment was delivered with no repairs needed. If a tenant disputes any deductions from their security deposit you’ll want as much documentation as possible.
How quickly are you able to connect with a tenant? Do you have all your leasing and property documents ready ahead of time? How well do you serve your tenants’ needs during their stay? How well do you close your relationship with the tenant through the departure process? If you do all these things right, you will be well on your way to a strong reputation and repeat business.
Remember that real estate success is not luck
Real estate, like any investment market, consists of patterns that repeat themselves or cycles. When evaluating any real estate investment you will need to think about and calculate your property cash flow, you will need to know how you are going to leverage your investment capital, understand what your equity is, figure out what your potential appreciation is and, most importantly, do some risk assessment.