Should I invest in rental property?

There are many benefits to owning rental property. But like all investments, there are also downsides. You likely know a few people who have had great success with renting out properties to tenants. But there are also likely a few people in your circle who have had negative experiences. You’re just not as likely to hear those stories.

The positives are many. That’s why so many people swear by owning rental property. You’ll often hear the argument that the tenant will pay off your bond for you. Within a few years, the bond will be paid off and you’ll have a large asset. Property prices in South Africa have increased by nearly 10 times in the past 20 years; that’s a solid return on investment.

A well-known advocate for owning rental property is Robert Kiyosaki, author of best-selling book Rich Dad, Poor Dad. He famously said: “Real estate investing, even on a very small scale, remains a tried and true means of building an individual’s cash flow and wealth.”

But there are some legitimate concerns with owning rental property. You should keep these points in mind:

 

1% rule

Before you purchase a property, you should be sure that the rental you receive from the tenant will be at least 1% of the purchase price. Not sure how to work that out? Take a look at the purchase price and chop two zeros off the end. That’s the rental price you need to charge.

 

Extra costs

You need to keep the possibility of extra costs in mind. These are often costs like levies and rates. It’s important that you consider these when you calculate how much you can afford to pay and how much rental you should charge. Think about using a mortgage loan calculator to properly work out what offer you can put down on a property.

 

Tenants

Having the right tenants is the key to success in rental property. You need to know that your tenants are going to take pride in their surroundings. The last thing you want is your new property being ruined. You possibly don’t realise just how much damage they can do. But far too many landlords have horror stories to tell about what tenants have done to the house.

 

Property manager

An important factor you need to consider before venturing down the path of buying to rent is whether or not you’ll make use of a property manager. There are plenty of reasons this is a good idea but a number for why it’s not. The upside to a property manager is that they can take care of all the administrative details. The downside is that obviously they’ll take a cut of your profit. You’ll need to be sure of how much your time is worth and whether you’re willing to take care of those administrative details.

 

If you can find a way to make the best of these negatives, you could be on your way to buying your first rental property.