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Dean Gerber provides 10 tips to help ease the pain of managing your properties.
After 10 years of managing buy-to-let properties, I’d like to think that I’ve seen it all - tenant problems, maintenance issues, even threats on my life. But I’m continually surprised by the plethora of things that can and will go wrong with an investment property at 9pm on a Saturday night.
Investment gurus often advise diversifying your portfolio by purchasing residential property and renting it out to tenants. However, in my opinion, this type of investment is far from the passive income that its touted to be. In short, it looks easier than it is.
So here are 10 tips to help ease the pain of managing your properties.
1) Find a decent tenant
This is my most important tip bar none. I could write for hours on the bad experiences that I’ve had with tenants. Having a tenant that doesn’t pay on time can be an extremely stressful experience and it can cost you a lot of money and time to evict them from the property.
An ITC check (credit history check) normally does not tell you enough about the person who is going to be renting your property. So I always make sure that I meet the tenant myself to get a feeling for who they are. I ask them direct questions about their jobs and their lives and I check their Facebook/LinkedIn profiles if possible. If a tenant is self-employed or is not a South African citizen, there is additional risk and you need to ensure that you are comfortable that the tenant is able to pay you on time each month.
From my experience, I would sum up my views on placing good quality tenants with the following two points:
- It is worth paying more for a property in a good area and an upmarket complex, which will attract a decent tenant. The additional capital investment will be well worth it.
- I would prefer to rather have an empty apartment for a month than to take on a potentially problematic tenant.
2) Find your own tenants
Using a rental agent to place a tenant in your property will cost you a large chunk of your investment return (They typically charge the equivalent of one full month of rent). If you do not have the time or patience to be hands-on in finding a tenant yourself (at least for the first few years), then you’re probably better off investing your money in unit trusts or index funds. This is because using a rental agent WILL eat up most of the return that you are making on the property for the first year of occupation. It is not particularly difficult to find a tenant yourself these days – everything is done online using the same websites that the rental agents use to find you a tenant.
NB: Most agents will also put a clause in the lease to say that if the tenant renews the lease for a second year, you will have to pay them commission again! If I do happen to use an agent, I make sure to delete this clause.
3) Require tenants to set up a monthly debit order
I always have a clause in the lease to say that a tenant cannot move into the apartment until they have paid the deposit and set up a scheduled payment or debit order for monthly rental and average electricity consumption (discussed below). I do realise that its really easy for the tenant to simply cancel the debit order with the bank if they do not intend to pay. So this requirement is directed more at tenants that intend to pay their rent on time, but tend to forget on occasion, pay the wrong amount or pay on varying dates. If you have many apartments, it can be difficult to keep track of who has/hasn’t paid and to send each tenant a reminder. If a tenant goes away on holiday and pays the rent a week or two late, it could cause major cash flow issues for you.
4) Charge an average value for monthly electricity
When you have multiple buy-to-let properties, it can become fairly onerous to let your tenant know their exact electricity charge each month. In addition, if the tenant has set up a monthly debit order, it is not easy for them to adjust the payment amount on a monthly basis. So if the rental amount is, for example, R10 000 per month and the electricity cost typically ranges between R500 and R1 500, I will ask the tenant to set up a debit order for R11 000 per month. Then, every quarter, I will reconcile the electricity amount charged against the amount paid and let the tenant know how much to top-up or refund the excess that was paid.
5) Specify which maintenance issues are the tenant’s responsibility
Landlords are not responsible for everything that goes wrong with a property. They are responsible for general maintenance and upkeep caused by reasonable wear and tear. It is important to specify in the lease that the tenant is responsible for things like drains blocked with hair, replacing lightbulbs etc.
I also always include a clause to say that there will be a professional cleaning fee once the tenant moves out to restore the apartment to the condition that it was in when they moved in. No matter how well the tenant cleans the place, it will normally not be as clean as your next tenant expects it to be.
6) Initiate lease renewal discussions two months prior to lease expiration
It is vitally important to give yourself enough time to find a new tenant when a lease is expiring. Having an empty apartment for a month can cost you most of your investment return for the year. I always have a clause in the lease to say that the tenant is required to give notice two months prior to the end of the lease if they do not plan to renew. In other words, they cannot just wait for the lease to end and then move out. I will also make sure that I contact the tenant two months prior to the end of the lease to start discussing renewal. If they do not plan to renew, I ask for days and times when it would be convenient to bring potential tenants to view the property.
7) Set up your expense debit orders for the 7th of the month
In a perfect world, all your rental income should be paid into your account by the 31st of the month in time for all expenses to be paid on the 1st of the month. But this almost never happens. Make sure to set up all debit order payment dates for the 7th of the month to give yourself time between the receipt of income and expense payments so that you don’t have to fund any shortfalls caused by late-paying tenants.
8) Have a trusted handyman that your tenant can call directly
When I first got into buy-to-let properties, I would personally go to the apartment every time a toilet would not flush or a shower head was clogged up. If you can find a reliable and trustworthy handyman who will not overcharge, it will make things much easier for you. Whenever there is a problem, you can ask your tenant to call the handyman directly and arrange a time for the handyman to come over. The handyman can then let you know if the issue is something for which the tenant is responsible, or e-mail you an invoice for settlement if you are responsible. I also send all work to the same providers and they give me a good discount for repeat work.
9) Use a separate bank account
Don’t mix your property income and expenses with your personal finances. It might be easy enough to manage when you have one property, but can create a lot of confusion at the end of the year when you are doing your tax return. So have a separate bank account. Choose the cheapest possible bank account – it is not necessary to have a business account.
10) Keep a lease register or property register
All salient information on your lease and property should be kept in a register. This could be in the form of an excel spreadsheet. Include all information on the property that may come in handy later: e.g. Start and end date of each lease; deposit held on behalf of tenant; purchase price of property and improvements made to property (both important for Capital Gains Tax purposes). This will make it easier to track down the information when you need in future.
*Dean Gerber is a CA(SA) who works for the VAT IT Group. He owns and manages 16 residential properties. He can be contacted at gerberarticles@gmail.com. Previous articles available at gerberdean.wordpress.com
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