What to consider on your Property Investment - Part 2
by Emile Grobbelaar
In a previous Times article (found here), we discussed three important things to take into consideration when making a property investment purchase. The following terms were explained in that article:
- RVR – Rent Value Ratio
- NETT ROI PA – Nett Return on Investment per Annum
- Return on Cash
Although the above are the most important factors to consider when buying a property, there are other matters that also play an important role in owning and managing a property which will influence the income/return on the property. They are:
- Maintenance Cost
- Vacancy Provision
- Rental Managing Agent
Let's discuss each in detail.
- MAINTENANCE COST
This cost will always be part of the property investment business. It is difficult determine know what it will be and what the effect will be on your investment return. A good way of making provision for it, is to allocate a percentage of the monthly rent amount to a maintenance fund. You can decide how big or small that percentage should be but have a target total so that you can stop with the allocation when that amount is reached. Make sure that money is kept in a separate account. This money should be used for general maintenance for which the owner is responsible or when the tenant's deposit is not enough. It can also be used towards bond, and levy and rates account payments when the property is vacant. If you have this available, paying for maintenance, bond, levies or rates will not affect your pocket directly when it is required. Always ensure to replenish the account when the funds are used.
- VACANCY PROVISION
Also, a very difficult factor to take into consideration but it is important, especially in the current rental market in Gauteng. It is advantageous to make this part of your budget for an investment property and will help to make provision for when there is no rental income, specifically to cover the bond, rates and levies accounts. As mentioned above, the maintenance fund can be used to cover the accounts in a vacancy period, so it is very important to ensure sufficient provision. A good suggestion is to make provision for a 2-month vacancy period.
- RENTAL MANAGING AGENT
Many people feel that this is a cost that they can do without as they feel they can do it themselves. Even if that is the case, time and legal wise, your situation can change in the way that you do not have the time to do it properly anymore. If you did consider this cost when you budgeted for your property in the beginning, you'll know if you can afford to use the service of an agent or not.
If you are planning to grow a substantial portfolio, it is advisable to plan for the professional management of it to ensure that your budget balances and your service to your tenants are being delivered properly so that all your properties will remain tenanted. Apart from the invoicing and collection of money that an agent does, also consider all the other functions an agent will perform for you such as all your account payments from the rent, tenant complaints, the untimely maintenance issues that always happens over weekends, conducting proper checks on new tenant applications, etc. This might be worth taking the agent management cost into consideration when budgeting for your property.
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