Passive is first prize: Property must bring you freedom not slavery

Article 6 of 8 in the series:
YDL Property Investment’s Eight Golden Rules of Property Investment


Passive is first prize: Property must bring you freedom not slavery

You want passive income. Your freedom comes from receiving your rent as hassle-free as possible – like monthly pension payments.  If the rents are high enough, they free you from having to work for a living.  On the way there, while you are building your portfolio to that rent level, you want your properties to take up as little of your time as possible.  And it is possible.  You can hand all or part of the management of your investment property to an agent.  The agent can find you a tenant and you can manage the tenant thereafter.

Alternatively, the agent can manage the tenant as well, making sure the rent is paid, necessary repairs are made, and dealing with any tenant problems.

You will pay for the services of an agent.  There are no uniform commission structures in South Africa. Commissions vary from agent to agent, based on the type and extent of services. Usually a commission of around 7% to 7.5% plus VAT is payable for signing up a tenant, and between 7% and 10% plus VAT for managing the tenant. Many agencies have an inclusive fee for finding and managing your tenant.  If your rent is R14 000 per month the full service will cost you for example 10% plus VAT, R1 596 a month, giving you a net income of R12 404 before levies, rates and taxes, and any other expenses.  The more you pay your agent, the more you reduce your return, and if you do appoint a managing agent, don’t expect them to take all problems off your hands.  It is still your property and ultimately you are responsible for seeing that it performs at its best.  You need to check on the agent regularly and understand the market and your tenant at all times.

The Tenant

The tenant is at the centre stage of the investment.  An investment is sound if you can rely on a steady monthly flow of rent from a tenant who is a settled occupant.  Finding and keeping such a tenant should be an investor’s main occupation.  Landlords should carefully check each potential tenant to ensure he or she is likely and able to become a reliable long-term occupant.  You must check each applicant’s credit rating, payslips and bank statements, and get a reference from their previous landlord.  If you are working through a letting agent, ensure that these practices are performed diligently.

The Property

If you own a house, you must ensure that the garden and exterior are well maintained and that the insurance, rates and taxes, water, electricity, garbage removal and sewerage charges are paid.  Most leases make it the tenant’s duty to maintain the interior of the property.

It is important to balance your need to keep costs low enough to make good returns with the need to prevent the property deteriorating.  Positive income from a property can disappear easily if you don’t control repair and maintenance costs.  It will be difficult to attract tenants and maintain projected rental increases if you neglect the property or constantly choose the cheapest way to maintain it.

The Bond

Management of the mortgage bond is an integral part of property management, particularly ensuring that the rent is high enough to cover costs and the mortgage instalment and that these are paid on or before the due date.

Most property owners try to keep the home loan far enough below the value of the investment property.  This practice allows you to draw on the ‘equity’ in the property from time to time. This can be used to bridge the gap between a late rental payment and the bond or levy instalment.

The Competition

If you have owned a property for many years, you should continually monitor its quality against competing accommodation in the area.  Fashions change.  Good maintenance is not enough to keep a property in fashion.  Sometimes it is necessary to upgrade a property to keep it competitive.

Experience and good budgeting will help you find the best balance between current return from cost control and future return from good property maintenance.  It also helps to compare your property’s performance with those of other property investors you know.  Each property is different, but you can establish trends with such comparisons.

Getting the basics right as they relate to tenants, property, bond management and competition are essential if you are to enjoy the freedom that well managed investment property can bring to you long term.

If you are interested exploring property investment opportunities, contact YDL Property Investment for a consultation.