[Question] Residential property investment

[Parkhere]

There have been a few threads which touched on this topic, and I would like to expand on it, with some questions to the experts, especially Houses4Rent, whose posts I follow with great interest.

I have been a small scale landlord for many years, mostly CBD apartments in Durban.

3 years ago I took a bigger step – purchased a 3 bed townhouse in a good area.

The timing was right for capital growth, it appreciated nicely, and I had an excellent tenant.

The tenant has now given notice, and the townhouse is being advertised for rent again, at a market related rental. I do all my own tenant management, using Private Property for the advertising, and TPN for application, lease, inspection etc. Both companies are excellent and have served me well in the past.

It will be interesting to see what rental applications I receive. I would like to see high quality renters, with a good track record of payment, affordability not an issue, sound financial management demonstrated by bank statements. However, I would not be surprised to see potential renters who have affordability issues and poor financial management.

I always do a credit check through TPN, and ask for a rental payment history, to show they are reliable rent payers. Most applicants are happy to provide a copy of a payslip, but may be reluctant to provide bank statements.

What is the general consensus re what can be asked of applicants regarding financial status? If they were applying for a home loan, the banks will ask for everything, is applying for a rental any different? As the landlord one is handing over a very valuable asset, to a tenant that one does not know very well, and if one chooses the wrong tenant it can be a financial nightmare.

By the way, I did insure the rental income previously via Tenrisk, and will do this again.

Houses4Rent, any comments and advice?

I admire your Cape Town residential rental operation and wish you could operate in Durban as well

[Houses4Rent]

Hi Parkhere

Thanks for your kind words.

Its very simple. An applicant who does not supply what we need (3m statements, 3m payslips, ID) is not going anywhere. We only process applications once they are complete. It gets a bit trickier with self employed people without payslips, but then their accountant has to give us proof of personal ncoem of that applciant.

Of course there are always the wanna be high net worth people who think they are better than others and how dare we ask them for their documents. They are then free to go elsewhere and not rent from us. Either they have something to hide, fear that we report them to SARS or so (not our objective at all) or cannot proof what they claim to earn or both.

As a rule of thumb is an applicant has three times net income (=gross less income tax) of the rent they qualify for only 1 month rent depoost if TPN credit check is positive and statements do not show problems.

I have no idea how Tenrisk and other insurers fare, but they are an insurance only and not a guarantee which is what we do. We pay on the 1st business day no matter when the tenant pays. I believe with Tenrisk you have to wait a few days and then fill out frosm to claim the rent which may be repudiated and/or have an excess. Effectively you never know when you get your rent even if insured. At least that is my understanding. Have you ever claimed? If so how did it work out for you.

So here is the kicker. The guaranetee we offer/use can be taken out nationwide as an add on product using another agent or doing DIY management. But it needs to be done at application stage as the approval and amount of deposit decision is done by the Guarantor. Email me if you are interested.

I hope this helps.

[Parkhere]

Hi Houses4Rent,

Thanks for your informative reply.

I have never claimed from Tenrisk, and hope I never have to.
You are correct, they do not offer a guarantee, you submit a claim after they tenant defaults (7 days late with rent)
They charge 3.5% with a cap of R10000, ie on rental of R12000 , the monthly fee is R350
I sleep better at night knowing they will sort out all legal issues, eviction can be very expensive.

I have advertised my unit, and an estate agent contacted me to ask if she could source tenants, I agreed she could (with mixed feelings)

Clearly stated my terms, but have not received her terms yet.

My terms:

Completed TPN application form (incomplete applications will not be accepted)
Permission from applicants for me to run a TPN credit check
3 months bank statements (both applicants)
3 months payslips (both applicants)
Copy of ID (both applicants)
I must meet the tenants and approve their application, I will have the final say as to whether an applicant will be accepted or not.
Rental insurance for non South African citizens is not available via Tenrisk, and applicants may be turned down for this reason, unless I decided to take the risk of non insurance.

Regards,

Parkhere

[Houses4Rent]

For 4% plus VAT you can get the full monty and its guarantee. The guarnantee removes the bulk of the risks and payment is made on the 1st businesss day. They do accept foreigners but the deposit will be higher than normal.


I suggest you better get a proper mandate sigend with agent.

If you meet the tenants and vet them anyway why use an agent to put some easy ads on the net? Its up to you, but we do not do pure placements as I do not think it ads much value to the owner for the high fee it costs.

[Basment Dweller]

Your terms for screening tenants sound good, here a few more tips:

- Get a reference and contact number of the previous TWO landlords and call the one previous from the current and see what he says about your prospective tenant. The most recent landlord will almost always give a good reference to get the guy out so watch out.

- Make sure bank statements are certified and bank stamped

- If tenant is a foreigner, get VISA and work permit

- Red flag if tenant offers first 3-6 months upfront, because that's usually because that's all the money they have and can't pay in month 7. If they give you this story push them to pay the whole year upfront (This happened to me before) which takes away all your collection risks

- If they have bad credit history you can still give them a chance just ask for a bigger deposit.

- do a snag list and take photos of property before key hand over.

- I always place my own adds but real estate agents always seem to beat me to it, so I don't mind paying them the commissions they ask (usually around 1st months rent) if I can avoid vacancies. Also if you contract an agent, get them to run for you, let them do all the showings, prepare the lease to your spec, do the snag list, collect all applications and credentials etc.

Any qualified prospective tenant should have no problem providing this information and if they do then you've got to wonder why.

I do all my own management (6 properties) and work full time job. With TPN rentbook, proper screening and a good handyman you can easily manage this yourself and pay yourself the commission (sorry H4R). Sometimes 6 months go by an no phonecalls from tenants, everyone pays early, its great!

I don't take out rent insurance but keep 3 months reserve cash for each property in case of emergencies.

I've had two bad experiences over the past 8 years, the one involved an eviction and the other litigation, otherwise everything else is 100% easy.

Also I'm curious to know what the numbers are behind your 3 bedroom townhouse investment, care to share them with us? i.e. what was your downpayment, purchase price, and rental return estimate, levy/rates cost, covered area in m2, any extas like staff room, garage etc?

[Parkhere]

Hi Basement Dweller,

Very good advice, thanks!

With the 3 bedroom townhouse, to avoid too much running up and down for showings, I am having a weekend show, all interested tenants can come and look.

Previously I had several bachelor flats in Durban CBD, and had to use an estate agent to do screening etc, as it is too far from where I work/live to be hands on.
I am in the process of selling the CBD bachelor flats, unfortunately what were prime areas 20 years ago, are now really scruffy, and tenants are battling financially.

Financials for townhouse
Purchase price in 2013 R1,280,000
194m2, 3 bed, 2 bath, 2 lounge, double garage
Deposit R280,000
Current rental (incl R800 water and elec) R12000
Levy R1478
Rates R1300
Return on investment (rental-levy-rates-interest/deposit and costs) around 10%, but cash flow not so great as the capital repayments were quite onerous on a 10 year bond. Fortunately I managed to get the bond extended to 20 years by Standard Bank, that helped a lot. FNB were not so helpful, refused to change term to 20 years for age related reasons, that do not make sense to me. I will not own the property in 20 years, so why does age matter?

Regards,

Parkhere

[Basment Dweller]

Thanks for the info, can you find properties that cashflow on a 20% deposit in your area? It looks like you had a shortfall on your bond for a while.

[Parkhere]

Some interesting numbers regarding residential investment from a property investor in the USA

https://esimoney.com/financial-details-of-my-real-estate-investments/?awt_l=KPaIs&awt_m=hGhHyRBETa6qM8k

[claassenattorney]

Well, I really like the idea you follow to promote your property. Also, I would like to add that the process of credit check through TPN is also good. Everything is fine, just make sure to seek professional help to sort things out. Of course, renting home or property is a big responsibility because you cannot analyze the intension of the tenant. It would be best to opt for a professional property lawyer to handle things in a hassle-manner. And rest will be taken care of.