Calculate the estimated maintenance and operational costs, to have an understanding on how much nett income the property would generate and what the capital growth would be.
Look at similar properties in the area, research how the rents have changed in the past five years and how they are projected to change in the next ten years.
Forecast the prospects for each property some time into the future to confirm whether it will be performing as well into the future as it does initially.
COSTS TO TAKE INTO ACCOUNT WHEN RUNNING THE NUMBERS
Finishes and renovating costs
Be prudent with how and where you spend your money. A higher-class finish does not necessarily translate into a higher rental collected. Distinguish between what you want and what you need and know the difference. Forecast for different scenarios. Keep meticulous records of expenses to minimize tax liabilities.
Look for ways to add value to both your rental proposition and the property itself. Renovating bathrooms and kitchens from time to time and keeping them in a great state of repair, for instance, ensures that you get a better return when renting the property out and makes you more money when you’re ready to sell.
Keep up to date on maintenance and repairs of the unit and ensure these are done when requested by the tenant.
If your property is not well kept there is little chance that good paying tenants will want to stay on. Remember your tenant is your customer and if you want him to pay on time, make sure that he is happy.
Insurance exists for a reason, use it!
There is no need to take unnecessary risk. Awesome rental insurance products are available in South Africa to help mitigate the risk of a nonpaying tenant.
They typically cover your missing rental from a delinquent tenant and the cost of evicting the tenant. You should only consider self-insuring when you have a substantial portfolio where you can use the incomes from the rental pool to offset the risk.
Be warned not to attempt self-insuring too soon when your portfolio cannot yet carry the weight of at least 2 simultaneous unpaid rentals. The same goes for building (structural) liability, fire, storms, burglary, vandalism and other cover.
Safety & security measures
If the property needs security additions, take the necessary steps to protect it and your tenant. Proper lighting, trimming tree branches that hang over the wall or fence and decent security gates are often all that is needed.
Monthly service fees
The onus is upon you to ensure that the municipal utilities bill is paid. Your tenant is responsible for items such as refuse removal, water & sanitation and electricity, but you are responsible for the rates and taxes. If the property is governed by sectional title regulations, you need to account for levies.
Now that you know where to start...
you understand some of the financial aspects of investing...
we have touched on the investment evaluation metrics...
and you have taken into account all costs and run the numbers...
The next step in your Buy-to-Let Investor Guide is "Managing tenant relationships professionally":
- Where to start?
- The financial aspects of investing in property
- The metrics used for evaluating property investments
- Costs to take into account when running the numbers
- Managing tenant relationships professionally
- Education, team and exit strategy