A week ago, Business Report had an article outlining that tenants are not paying rent. I wasn’t too surprised. Yes the economy is bad and there are huge job losses. The careers section of any newspaper is very thin so there are fewer jobs than in the past. But also, we are becoming a very poor paying nation. We have over 9,3 million people with an impaired credit record. When someone doesn’t pay their clothing store account, they risk being blacklisted and therefore not able to take on any new credit. However, if someone doesn’t pay you rent, in most instances, you cannot blacklist them. So many prefer to pay clothing store accounts, furniture accounts, credit cards, personal loans and paying of rent is the last thing on their mind because the consequences are not dire.
Sindi* was very lucky, she bought a flat in an auction. She got it for a song. She was lucky in that the flat was in a good block. She needed to do a few repairs and give it a good coat of paint. From the very beginning, her rent was higher than her bond repayment. There is good demand for flats in the area. So Sindi has never struggled with rent or a vacancy. Normally as soon as one tenant moves out, she has another tenant already waiting to rent from her. The buy-to-let investment has worked very well for her. As a result of that, Sindi went on to buy a 2nd flat and a 3rd and 4th flat, etc…Hers is a very good and a happy story. Today, Sindi owns a number of flats and some of them are paid up. She enjoys a standard of living in line with her high income as a multiple property owner.
When we hear stories like Sindi’s, we rightly believe that buying and renting out property is certainly a good way to go. However, before we take the plunge, let us look at what happened with Sbo**. Like Sindi, Sbo also bought several flats and rented them out. However, things haven’t worked very well for Sbo. She has struggled with many issues including but not limited to; tenants packing and leaving in the middle of the night, huge repair costs, tenants not paying rent, and even an agent that collected rent and never paid it to her account. Same type of investment, different locations, different players and different outcomes. It is in light of this that I thought I should share with you what could possibly go wrong so that you go in with your eyes wide open and you make informed decisions.
If you have read any of my books, you are fully aware I am passionate about property but I feel there is a need to differentiate between your home and rented property and also to ensure that you take all facts into consideration before you invest.
Some of the considerations of renting out your property
- High initial costs e.g. transfer costs, bond registrations costs, deposits, etc…
- Estate agents commission.
- Insurance in case your tenant doesn’t pay the rent.
- Possibly legal fees to evict your tenants. In my view, the law is biased towards tenants. Non-payment of rent is not considered a material breach of contract and the process you have to follow could result in you having a tenant that is not paying rent for at least 3 months while you are paying lawyers to try and evict such a tenant.
- Levies – to pay for security, keeping the common grounds clean e.g. gardens, passages, etc…
- Municipal rates.
- Penalties in case your tenant fiddles with the electricity meter – these range around R13 000 per instance. With all kinds of fraud so rife in our society, you have to be aware of this.
- Repairs and maintenance when you get a new tenant.
- Financial loss in case your tenant doesn’t pay rent.
- Security risk especially if your rental property is a stand-alone home. In some areas, it is not uncommon to have vandals moving in and removing anything metallic e.g. geysers, taps, window handles, door locks, etc… Some even move in and occupy the house.
- Huge exit costs e.g. bond cancellation fees, electrical compliance certificate, agents’ commission, etc…
- Huge impact on liquidity and there is also no guarantee that you would recoup your costs when you sell. Depending on your location, it can take several months before you get a buyer.
- The yield on your rent is lower than the rate of return on collective investments [unit trusts], exchange traded funds [ETFs] and shares. Please see the last chapter of the book From Debt to Riches to find out more about ETFs.
I would like to hear your views on the article. If you want help to invest in collective investments, drop me an email on email@example.com
*Sindi is not her real name
**Sbo is not her real name
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