This series is designed to help you progress through the journey of property investment so that you can enjoy the last third of your life without financial worries.
This is not the ‘ultimate’ guide because the property market goes through many cycles that are impacted by a number of factors, but it does give you working knowledge about how to invest in one or multiple properties to ultimately build a portfolio with confidence.
In Part One we stressed the importance of knowing and understanding your financial position, and in Part Two we mapped out how to use equity from your primary home loan to buy your first investment property. In Part Three, we covered the considerations involved in the search for investment properties. Part Four covered the buying of your first property and the mindset shift required to become a property investor.
Finding the right tenant for your first investment property is a major priority in the journey towards building a successful property portfolio. The best tenants are those who pay on time and regularly, who keep the property in good condition, and ideally stay for the longest possible term.
Draw up a standard contract/lease agreement
Having a blueprint lease agreement that will work for your first and following investment properties is a good idea, so it is worth doing some deep research on tenancy agreements and even engaging a property lawyer to draw one up for you that will serve for all future lease agreements and will avoid many pitfalls that landlords make.
A lease is an agreement between a lessor (landlord) and lessee (tenant), in terms of which the lessor agrees to provide the lessee with the temporary use and enjoyment of a property. The lessee binds himself to pay a sum of money as compensation (rent) to the lessor.
The minimum a lease agreement should cover includes:
- Names, ID numbers, and contact details of lessee and lessor.
- Description of the property and where it is located.
- Rent and when it is due.
- Any additional charges for add-on utility usage or amenities.
- The security deposit and terms of returning the deposit at the end of the lease term.
- The lease term and termination of the lease.
- Maintenance and repairs indicating who is responsible for repairs vs. structural issues.
- A pets policy.
- Restrictions on how the rental property is used or enjoyed.
- Any additional essentials such as parking, rules, fixed items, guarantors of the rent should the tenant default or be unable to pay rent, late payment penalties, subletting or co-living conditions, noise restrictions, etc.
Checking tenants
Before selecting a tenant, you should create a tenant profile, which includes the age the property is best suited to and who has a good credit score with no dodgy financial past.
Before committing to an applicant, it is imperative you undertake a thorough background check. This process includes:
- A credit score evaluation through a credit bureau. You should look for a score that indicates a good to excellent history.
- Background checks include any criminal records, judgments or evictions, and the validity of their identity document.
- Confirm their employment status and monthly income by asking for proof of such.
- Pre-screening check: references from previous landlords; whether they are happy with the terms of the lease agreement; if they can afford a one- or two-month deposit; if they understand the rules.
- Interview tenants: This can be done online, although ideally you’d like to meet in person. Focus on lifestyle questions; the number of people they will have staying on the property; how they intend to maintain the property condition (e.g., gardening, etc.); and their future plans and whether they foresee any change to their ability to pay rent or stay for the term of the lease agreement.
The law
Both landlords and tenants are protected under the Rental Housing Act. Familiarise yourself with the terms of the Act and your and your tenants’ maintenance responsibilities. You are required to undertake inspections of the property during the lease term, which will give you an idea of how your tenants care for your asset.
Agency
Consider appointing a credible agency to manage the tenancy that is able to manage the entire selection process, from advertising the property for rent, through screening and credit checking, and securing the monthly rental. This will minimise any risks. Most agencies charge a percentage of the rental, which is usually around 8-12%, depending on the number of services that they are engaged to perform.
How to build a portfolio
With two or more investment properties, you can continue to grow wealth. The right time to buy a second property for rent (excluding your primary residence) will be obvious when:
- You have a clear understanding of the legal obligations of a landlord and legalities.
- Your savings and income from your first investment property have grown, which can be considered a success.
- The interest rate is low, and indications are that it will either stabilise at that rate or drop further.
- You have a good tenant in the first property, and indications are they will stay for a long time, or the property is well-located in an area that has a high demand for tenants.
- The first investment property is paying for itself through rental and possibly even contributing to your mortgage on your primary residence.
Do not buy a second investment property:
- If you feel you are unable to manage the first adeptly.
- If you cannot devote the time to managing two separate tenants and lease agreements.
- If you cannot meet your maintenance obligations on the first property.
Two investment properties translate into double the work when managing the portfolio yourself, but conversely, two means twice the chance to build wealth. At this point it is advisable to consult with a financial advisor and/or a tax consultant and consider engaging the services of a rental agent if none of these are already in play.
Private Property wishes you a lucrative journey on your wealth journey through property acquisition.
Private Property’s blueprint on becoming a property investor: Part One
Private Property’s blueprint on becoming a property investor: Part Two
Private Property’s crash course on becoming a property investor: Part Three
Private Property’s crash course on becoming a property investor: Part Four
