1. Plan for future returns
Purchasing a rental property is not a get-rich-quick scheme. Property investment of any kind should be viewed as a medium to long-term investment. A property will appreciate over the long term and will generate a rental income, however, there might be costs that are not entirely covered by the rent. There is a good chance that the rental property will pay for itself over time or when the market booms or when the bond is paid off. However, in the initial stages there will probably be a cost involved.
2. Crunch the numbers
The monthly bond repayment is only one of a few monthly expenses that need to be considered. Affording a rental property is not just being able to pay the bond. When it comes time to crunch the numbers, landlords need to factor in expenses such as property insurance, rates and taxes, utilities, possible legal costs or collection costs, rental agent’s commission (a rental agent can assist with vetting potential tenants, collecting rent and general management of the property) and general property maintenance.
3. Set up emergency funds
Ideally, landlords will also need to have a contingency fund in place to assist with any unforeseen circumstances such as issues that are not covered by the home insurance or for legal costs if the tenant defaults on the rental agreement.
4. Selecting the right tenant is crucial
Each prospective tenant should be put through a vetting process before they can let the property. This process is where the services of a rental agent will really pay off, as they will provide the landlord with the professional vetting of potential tenants. Factors that will need to be considered include: the tenant’s previous rental history, reasons why they are moving, their place of employment and their monthly income. Landlords should verify the information given by contacting the references provided by the tenant.
Another factor you should take into consideration is rental escalation. How to set an amount:
For many landlords, escalations should reflect a fair return on their investment and should be market-related. An industry standard seems to be 8 % per annum, but the landlord may decide to forego the increase or to increase this more than 8 % (depending on what your contract states) to ensure the rental is market-related. The increase in rentals is influenced by supply and demand more than any other factor – but this does not mean that tenants have no choice but to expect whatever percentage the landlord decides. Your tenant may choose to negotiate less of an increase if they want to and it is up to you to decide whether to agree to the request or select a new tenant who is willing to pay the higher amount. Sometimes it is better to keep a good, reliable tenant happy than to risk getting a new tenant who ends up defaulting on payments.
