Property investment done right can be a rewarding and profitable venture. But if done wrong, it can be a nightmare – both financially and in terms of managing the asset.
To avoid making mistakes, property investment experts offer the following advice:
Buy-to-let on the long-term market
Don’t be tempted to do it alone, says Paul Stevens, chief executive of Just Property.
“Property management is hard, time-consuming work that includes tenant vetting, rental collections, maintenance matters and, in some cases, eviction proceedings.”
The property rental industry is heavily regulated by law and there are potential pitfalls that can land ignorant landlords in trouble, he says.
“The rental market is currently under pressure in many parts of the country, with rental escalations tracking below inflation. Vacancies and arrears are slowly recovering from the Covid blow but have a long way to go before they reflect a stable market.
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“Take time to speak to local area experts about what rent you can charge, what tenant behaviours you can expect in the area and what yield you can expect over time.”
To put it simply, property investor Ben Malapile says you should:
• Run your numbers.
• Have proper structures in place for the portfolio and your estate.
• Never buy investment property in your own name.
• Remember that you are playing the long game.
You should also always use a trusted estate agent who knows the area, says Grant Smee, managing director of Only Realty.
“Do your homework prior to purchase to make sure there is demand and that the rent you will receive will cover your bills.
“Ensure every bit of communication between you and the tenant is in writing.” He says you should also do proper checks on your tenants, such as getting references and credit scores and checking income.
“A long-term tenant is a long-term commitment, so don’t rush into anything.”
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Buy-to-let on the short-term market
If you are looking to invest in a short-term buy-to-let, Smee says you must: • Consider the location.
• Price your property according to what is suitable for the area.
• Market your property well.
“Remember, there probably won’t be demand all year round, so budget accordingly.” If you are buying into a sectional scheme property, such as a flat, says Stevens, you must ensure that the house rules allow for short-term rentals. If the house is freehold, chat to the neighbours.
“There is often concern from permanent residents that short-term rentals are disruptive and you may find yourself facing a conflict between residents and visitors.”
You should also research the trends in your area and see whether you can expect guests throughout the year – as you might if the property is close to places of work/ convention centres/ sports grounds etc – or if it is likely to be seasonal.
“This will impact your cash flow planning. For example, property owners in coastal towns like St Francis Bay make as much as six times their average monthly income in the December/ January period but face doldrums outside of school holidays.”
Malapile agrees: “You must budget for vacancies and slow months. Being in the short-term rental industry myself, I had a number of open calendar nights with no bookings at all.
“This pandemic has taught that we have to have saved at least six months’ worth of monthly expenses at any given time.”
Buying a second property as a holiday home
Malapile suggests that, if you do buy a holiday home, you hire a management company to take care of it and let it in the short-term when you are not on holiday and not using it.
Buying a holiday home is an emotional decision, Smee says. This means you need to be rational to ensure you are purchasing a property in a desirable area for future resale purposes.
“Do your homework on the area and ensure that you factor in the maintenance costs of the home,” he says.
Echoing this, Stevens says running a second home means you duplicate costs in areas like rates and taxes; cleaning; maintenance; security; connectivity and more.
“Ask yourself if it makes sense to own – or simply rent regularly. Consider your stage of life and what you will want, and need, five, 10 or 15 years from now.”
Buying to flip
There are also careful considerations to make here, Stevens adds. “Building or renovating always takes longer and costs more than you anticipate, so make sure you plan for that.
“Be very clear about your target market and what will appeal to them – solve their wants and needs, rather than do what works for you.”
Look carefully at the market and what you can expect to get for the property should you resell it, Stevens says, as you risk overcapitalising if you are not careful. You must not buy a property to flip if it has less than 20% to 30% of built-in equity, Malapile warns.
This is because you want enough equity to get back your renovation costs and make a profit. “If you pay too much, you may end up losing money on the investment.”
He also urges those who want to flip properties to avoid overcapitalising.
“Don’t spend too much trying to make it look nice and end up losing money when you sell.” Ultimately, Smee says, you must do your maths properly and get quotes from reputable companies, with references, if you are outsourcing the work.
Other advice he shares is to:
• Make sure that you know the area and what the property could sell for.
• Get advice from trusted contacts who have handled similar projects before.
• Ask an estate agent to value the property as you go along.