Killing my investment softly with this tenant
One of the most well-known strategies people use in South Africa is called buy to rent. You can buy a property and then rent it out. The idea is simple – you buy a property and you rent it out. When you do your analysis of an investment, you should consider the strengths, weaknesses, opportunities and risks.
Tenants seem to fit right into the risks factor.
Many people stop investing in property due to rational lies (pronounce this rationalise) – what if the tenant doesn’t pay? What if they break my house? (Note to the reader – insert more absurd questions here)
This does sound a bit like some retarded love song. Many people further claim that ETFs and stocks do not have these issues – which is true. If those issues arise, they just don’t get any returns (dividends or share price increase). Righto, but back to the property tenant issue – I have finished my rant and rave about people dissing property.
In this post, I want to focus on how I find the right tenants.
When you rent property, you have two options. The first is using a rental agent, and the second is doing it yourself.
The Beginner/easy option: using a rental agent
The biggest mistake I see in inexperienced property investors is that they try and save on costs by managing the property themselves. This causes quite a bit of a headache, as they do not have the experience to know a good tenant from a bad one.
If you are looking for a good agent, here are some pointers:
How will I know if the rental agent will do?
- Spend some time with them in a meeting to check them out – remember business is like getting into bed with someone. You need to know a bit about them before you do!
- Ask them how they screen tenants – this is brilliant for if you want to manage it yourself in the future, as then you know what to look for
- Let them explain how they handle a tenant not paying – again, this will broaden your knowledge
- Ask them if they are certified anywhere or have any qualifications in managing tenants and properties
- Enquire about fees – many rental agencies will charge the following fees:
- Finding a tenant – this can be anything from R 1 000 to a month’s rent.
- A monthly management fee – this is anything from 5 – 10% excluding VAT – because they want your money for doing very little.
- Inspection fee – this again differs, but in my experience is roughly R 300 – 1 000. The agent will walk through the property with the tenant (as per the legal requirement) to confirm that all is in order – and create a snag list about property issues. They will also do an exit inspection and some even do a annual inspection.
- How will your agent handle breakages – e.g. when the geyser burst or the tenant complains about a leaking tap?
Notes on managed rental properties
I want to make it clear here – I have some properties that are managed by rental agents. Some of them are good and will give you good insights into the business. Your goal here should be clear – learn all you can from them and have control over your investments.
Rental agents also know what the market-related rent is. You don’t want to undersell yourself!
The hands-on option: Do it yourself
A lot of people would complain that the tenants don’t pay when you manage it yourself. This might be true, but it’s also about your experience. It is also about knowing which tenant to allow to let your property. You don’t want to just let anybody in your house, would you?
If you do want to rent the properties out yourself, you have two options: the first is doing an unmanaged lease through a rental agent, and the second is doing it all yourself.
For an unmanaged lease, you ask your rental agent to find you a tenant. You instruct them which checks to perform and how to screen them. You would need to pay them a fee – this is normally one month’s rent once off. They would then give over management to you – the tenant will contact you in case of an issue and pay you the rent directly to you.
If you want to do everything yourself, you are required to advertise the property, show the property to the potential tenant and manage all the inspections yourself.
Let’s say you advertise on Facebook, and have someone willing to take the property. Here is my list of non-negotiables:
Credit check those people!
Do a credit check on them. If you do a credit check on them you can see what the score is and if they’ve got any outstanding loans if they have money they owe people and they haven’t paid. I would not let them in my property because I don’t think they will pay what they owe me.
You can use free services like ClearScore or Lucid, or paid services like TransUnion or Experian.
Consider also doing a check with tenant networks. An example is TPN – they have great records of tenants and feedback from previous landlords and rental agents.
What if the person does not have a South African id? Well, this is on you then. The bank statement and references should be enough – you will need to use your judgement.
Proof of affordability
No one in the personal finance community would be true to himself without asking for bank statements and/or payslips. Why do I do this? Well, It’s partly due to interest, and partly due to making sure the tenant has been paying his previous landlord on time for the last 3 months.
I currently have a tenant in one of my flats that’s earning more than me.
He also saves more than me.
And he pays on time.
References of previous landlords
Have I ever called a reference?
Is it a requirement?
I find this to be like a sifting parameter. If they are not willing to give me the previous landlord’s details, it would mean that there’s something very wrong. Very, very wrong.
A face to face meeting
Though this one is strange, I like to show the tenant the property. I have learnt over the years what to look for when looking for a tenant. I look for the following signs:
- Presentability: Do you look like a slob who will destroy my property?
- Are you a complainer? I don’t want someone complaining about the amount of light that enters the room from the windows, and stop paying because of this.
- Previous renting: I tend to ask one or two questions about why you are moving and your relationship with the previous landlord. This gives me a great idea on what to expect.
Examples of what to avoid
I tend to start the message like this:
“Hi there, it’s still available. You’re more than welcome to come to have a look at the flat. We would require a 1-month deposit, a credit check (which we will pay for) and references of previous landlords.
Feel free to contact my wife … …. For a viewing.
Here are actual quotes of what I heard from potential tenants:
- “My credit record is shot. That I can tell you upfront. And the only ref i have is my cousin i have been renting from”
- “Would be nice if we agree I can move in today.”
- “I am under debt review though. But i can afford rent have been renting a.place but it became tooo expensive. We enden up paying R … Will that be a problem?”
Dear friend – you will not be renting my properties!
A Property, like any other investment, needs to be managed.
The level of control over your investment needs to be decided by you.
Choosing a tenant is vital for success in the property industry.
Choose wisely by either using a rental agent or self-managing.
If you’re self-managing a property, make sure you do a credit check, get bank statements and ask for references.
Now, go and do what you need to do.
Frugal Local runs his own company (Effectify). He does software development and helps small businesses and startups with digital solutions. He enjoys writing articles and simplifying complex things – such as the article you’re reading!