Yeah, you will need to pay costs
As you might’ve guessed from quite a few posts on Twitter and other places, I invest in the real estate specialising in sectional title schemes for middle lower-income households.
I did a previous post here on hidden costs of buying and selling property, yet in this one I would like to look at your hidden and unplanned running costs.
Investment rental property has a lot of costs people don’t think about
If you are renting at the moment, think about these situations: Your geyser burst
Your stove stops working
You conveniently ruined the paint job by a roof leaking.
Your pressure cooker exploded. Oops, the roof is no
more…
These things happen! Maybe not today, but it happens. There are some costs that we don’t think about – we plan for levies, but neglect to think
a bit further than that. This is often due to not knowing the details, not due to ignorance. You know what your income will be roughly for your investment property, but here are some expenses that you might not know about.
Monthly costs
Home/life insurance
Often the bank requires you to take out life insurance when you take out your
home loan. On the other hand, you might need home insurance as well – whereas with sectional title units the body
corporate is required to have home insurance – but not for your furniture.
Tip: If there’s damage on the inside of your property due to something from the
outside, the body corporate should pay for that, not you – e.g. the flat above yours had a burst geyser and now
your paint job is ruined.
Levies
Yeah, you sort of need to pay a monthly fee for sectional title or boomed off areas.
There’s also a CSOS fee that you need to pay to make the government rich – the body corporate will pay this and put
it on your statement. Some complexes include water on their levy statements, some you will need to pay it yourself.
Tip: Pay your levies – if you don’t pay, legally the body corporates are allowed to add
interest on any outstanding fees, which often can be up to 30%.
Special levies and reserve fund levies
Sometimes things go very wrong – like seriously wrong. And who should pay for it?
Yes!
The government!
Which means us.
Most of the time they will allow you to pay it off over a few months. With smaller complexes, this could cause some serious issues in cash flow and might affect the maintenance and upkeep of the block if these levies are not paid.
It’s really in the interest of your investment that you should make sure you have money available if there’s a crisis.
Rates and Taxes
Death, taxes and Cher. These are the three things you can never get away from. These can range from R100 to thousands depending on where you stay – and this is your responsibility, not your tenant’s!
Gardening services
In non-sectional title estates and homes, you are responsible for the upkeep of the garden – you could try and move this responsibility off on the tenant (some people write this into the contract, which is not a bad idea) meaning at least you won’t come back to a desert or a rocky horror.
Annual costs
As with personal finances, there are some fees you know will probably be rearing its head.
Make sure you cater to these annually.
Special levies
With new legislation that came in just over 2 years ago, sectional title body corporates are required to have a maintenance fund for emergencies. The amount saved is legally regulated, and thus the last two years many levies doubled to get this in place.
Often this is an amount that needs to be paid as a type of ‘second levy’ to the body corporate. These can sometimes be for making the complex better, e.g. adding cameras.
Tip: ask your board of trustees for their 10-year maintenance plan so you can know what they’re planning.
Vacancy due to non-payment or the tenant moved out
People move out and sometimes you won’t be able to find a new tenant in time. Depending on the demand for your property, the place may be empty for one month in a year.
Tip: budget for one month every year for your property to be vacant.
Unplanned costs
People rape property. This is one of the most important things you need to know about rental property. Does this make it a bad investment? Nope. It just means you need to manage your expectations and your property emergency fund.
Sometimes the deposit doesn’t cover the damage that the tenant did – how they were able to break the shower out of the wall and turn your bathtub into a material dyeing facility – heaven alone knows! But they do these things.
And then you need to fix up the place, which takes a month out of your rent as nobody can live there while you are rebuilding the house from rubble found in the big black bin outside your own house.
Tip: Budget about one month’s rent per year for some maintenance work that might
happen.
Unplanned maintenance
Sometimes life just happens – and properties get older. You would need to make sure you have money available in case you have an issue like:
- Geyser bursting
- Faulty electricity issues or stove issues
- Taps breaking
- Windows breaking
- Roof leaking
I suggest having about 3 months’ rent for this. Available on hand.
Notes on rental agency fees
You don’t have to use one, but I suggest this is a good idea for people new to the property world to use an agent. These agencies can charge anything from 4-14% of the rental income for their services. You can also use them to find a tenant for you – they will screen them for you, and then you often
have the option for a managed or unmanaged lease – this means you can manage the tenant (which incurs a once-off fee equal to your rent) or ask them to manage the tenant (incurring the above 4-12% fee). Note that many of them use their own ‘premium’ plumbers and electricians to go fix your property when something breaks.
Warning: We got a quote from their handyman for FIVE TIMES it cost us to paint out the place. So be careful when using rental agencies – they need to make their money as well.
Conclusion
You’re running a property business
Yes. You read that correctly.
So keep all your slippies/receipts. It’s your responsibility to file all of these for tax returns.
In a business (as in your finances) you have monthly costs, unplanned expenses and emergency costs that you need to keep under control – this is to avoid bankruptcy. You might ask if it’s worth it? I would argue that yes, this is – being in control of your finances and knowing where your money is going and how it is growing is exceptionally important in moving forward.
So, go!
Happy investing!
Final Expense sheet:
| Property Value | R |
| Monthly Fees | |
| Levies | R |
| Rates & Taxes | R |
| Gardening | R |
| Rental agency fees | R |
| Yearly fees | |
| Special Levies | R |
| Vacant property (1-month rent) | R |
| Unplanned | |
| Breakages and emergencies (1-2 month’s rent) | R |
Conclusion
Budgeting for the expenses of your rental property is important – it could financially ruin you. I prefer having 3 months’ expenses on hand for in case something happens out of my control. It might be the stove that breaks, a special levy or something more sinister.
Though rental property as an investment can be profitable, we need to make sure our cash flow is healthy throughout the bond term.
Happy investing!