Although managing several tenants rather than just one can be irksome and time-consuming, in today’s property market it is almost always wiser to invest in two, three or four lower priced homes rather than one big substantial unit.
Bill Rawson, Chairman of the Rawson Property Group, has ‘a significant number’ of tenanted properties in his own private portfolio.
“I am not going to advocate totally shunning expensive residential properties,” says Rawson, “because in my experience every now and then one is able to sell such homes at a very substantial profit simply because, for some reason, they have aspects which appeal to certain buyers – who are then prepared to pay a premium for them. However, right now in South Africa, it is the smaller units that (a) appreciate in value the fastest and (b) earn the best rents in relation to the capital outlay.
“Two R1-million units will probably give a better return than one at R2-million. Similarly, three at R700 000 will probably bring in a better return than one at R2.1-million.”
With one unit, Rawson adds, the risk is focused and concentrated on a single tenant – but spreading one’s risk is one of the oldest and wisest investment strategies and has always been favoured by landlords.
In the current conditions in South Africa, says Rawson, the landlord is sometimes approached by three or four people (especially young people) to split the rent among them and bill them each individually.
That, he says, can be a dangerous route to follow because all too often one or perhaps two of the signatories to the lease default and their co-tenants are either incapable of carrying them or do not feel obliged to do so.
“It is essential to have one person accepting the responsibility and being accountable to the landlord,” says Rawson.
Frequently, adds Rawson, he is asked why he remains such a devoted proponent of residential property when the returns (on average around 5% after cost deductions) are half those of commercial property (which today can easily earn a 10% or 12% return).
“The danger with commercial properties,” says Rawson, “is that if and when a tenant leaves or defaults, it can take months – even years – to replace him. By contrast, the demand in residential property is so great that new tenants can almost always be found within one or two months.”
Furthermore, says Rawson, while a tenant living in a home will often do all he can to stay there, the industrialist or trader in financial trouble is inclined to put the landlord at the bottom of his payment list and is often only too glad to get out of the premises and ignore the lease conditions.
Rawson warns, too, that unless the property investor has a legal background or years of experience, he should always bring in a good lawyer and a good rental agent when drawing up the lease.
“Here again,” he says, “it is only too easy to leave loopholes which an unscrupulous tenant can and probably will exploit. Leases have to be so drawn up so that they cover every possible contingency.”