Tips for first-time investors
Category Newsletter: Article
Property investing is typically low-risk, high reward - which is why most South Africans use it as a tool to preserve and grow wealth.
While real estate investing spans a gamut of investments - REITs, buy-to-let, and house flipping - most first-time investors will find the best value in buying to let. This type of real estate investment is most forgiving as it enables you to acquire and profit from an asset long-term.
But acquiring property to let is more complex than acquiring a home in a security complex or a flat in a sought-after suburb. Success depends on preparation and understanding, which you can do by following the tips outlined below.
1. Get the Property Inspected
Although an inspection is an extra expense, it's the best investment you can make before buying a home or apartment.
The inspection saves the stress and expense of an underlying issue rearing its head after you've gone through with the transaction.
Not only will fixing unexpected problems be cost-intensive, but you'll be losing money every month the property remains vacant.
2. Do a Cost Analysis
You are property investing for profit, making a cost analysis the cornerstone of a successful investment.
Remember, investing in a property is nothing like buying a family home, the key difference being that you want to profit from the property. The only way to determine whether you will profit from a property is to conduct a cost analysis.
Your cost analysis should include the following:
Bond repayments
Know how much you're on the hook to repay every month (including how that figure will change with rising interest rates).
Rates and taxes
Consider the rates and taxes, and when last the property was evaluated/when it's due to be reevaluated - as a reevaluation could significantly increase this figure.
Levies
Consider how much your levies will be, and look into how much they increase annually, along with other costs associated with owning a home or flat in a security complex, including fines for breaking body corporate rules.
Annual repairs and upkeep
If you want your home to be desirable to future tenants, factor in the cost of maintenance and repairs annually.
Real estate agent commissions/ property manager fees
As a first-time investor, being a landlord is inadvisable as it is a time and resource-intensive job that can become overwhelming.
For your first rental property, a real estate agent will help you navigate finding the right tenant -including advertising the property, assessing tenant applications, conducting viewings, establishing contracts - managing the tenant relationship, and pricing the property appropriately.
Ensure you annualize the figure (multiply each monthly payment by 12). This figure will help you determine how much you'll have to make every year to secure a profit or at least break even.
Once you know how much you're spending on the property every year, you can calculate how much you need to charge in rent and determine if this figure is:
a) reasonable
b) sustainable
Remember that most long-term rentals have an 8% vacancy rate, account for that when determining your rental.
3. Conduct Market Research
Even some seasoned investors forget the importance of market research in determining whether a property is viable and for how long the property will remain viable.
When conducting market research, you want to assess the following:
Your Ideal Tenant Demographic
Knowing who will want the property you're buying and how large the demographic is will help you decipher if the property you're pursuing will be profitable.
For example, a studio or micro apartment isn't going to attract a young family or even a couple, as most couples won't be able to survive in such close quarters. But could attract a busy professional or nomadic international freelancer.
Knowing the size of the demographic you're targeting lets you decipher if your property will be profitable long-term.
Your Competition
Other landlords in the area are your competition. You need to know the average asking rent for the type of property you're interested in acquiring and determine whether you can compete based on your cost analysis.
Your competition research should include research into development plans, as this could affect the desirability and demand for your property.
4. Get Acquainted with Tenant Rights
If you're ever in the unlikely position that a tenant breaks the lease agreement, whether because of non-payment, subletting, violating the governing body rules, or any other clause in the lease, knowing how to deal with such instances legally will save you considerably in the long run.
5. Get Insurance
It's better to be over insured than underinsured when you're leaving your investment in the hands of a stranger.
Rental insurance, also known as landlord insurance, is vital to secure your investment.
This type of insurance covers malicious damage to the property, loss of earnings due to damage, and a tenant refusing to pay rent.
Moving risk to the insurer means you don't have to use your cash if any problems arise with a tenant.
6. Work Alongside a Good Tenant
Most seasoned investors know what a challenge it can be to find the perfect tenant, and when they do, they're sure to hold onto them.
When you find a good tenant, one that's unproblematic and treats the property like their own work with that tenant rather than focusing on getting in new tenants to rapidly increasing rents, good tenants - who pay on time and aren't problematic (noisy, dirty, or disinterested in body corporate laws) - are rare. If you find a tenant like that, hold onto them and work with them regarding increases.
When you're in the market to purchase your first investment property, consider approaching a real estate to work with rather than viewing various properties by different agents. Having an agent who understands your needs and your objectives will make what can become a frustrating task stress-free.
Author: Coastal Property Group
