If you are not keen to invest in listed property and prefer a more tangible investment, you might want to consider buying a property for the purpose of renting it out. If you go this route, there are several things you, as a landlord, need to know. In this instalment of our series on how to manage your money, we tell you more about how to buy to let.
Investing in property to let it out is what is known as a geared investment: your tenant pays rent that in turn pays off the mortgage bond you owe the bank. This type of investment has its pitfalls: you must be able to meet your bond payments even if you cannot find a tenant for the property, or if your tenant defaults on the rent or is consistently late with the payments.
If you do not have a contingency plan for those scenarios, the arrears on your bond repayments will reflect negatively on your credit profile and you could face having your property repossessed by the bank. So, you want a tenant who pays rent regularly and on time.
Ideally, the rent should be sufficient to cover your monthly mortgage bond repayments, the levies if it is a sectional title property and the cost of maintenance.
You should set aside money regularly to build up an emergency fund. This money can be used for maintenance costs - for example, if the geyser bursts or there is an electrical short circuit that needs to be repaired. It can also be used to fund your bond repayments if you find yourself between tenants.
As with any property purchase, one of the important things you should consider when you buy to let is "location, location, location". The better the location of your property, the higher the rental return you can expect to receive on it, depending on the condition of the property.
When deciding on where to buy, you need to take into account the type of tenants a property in a certain area is likely to attract.
For example, if you buy a flat near a university or college, you are likely to get students as tenants. Students may not be reliable payers of rent, and you run the risk that they might damage your property if they throw parties frequently.
If you buy a medium-sized house close to schools, bus routes and shops, you are likely to attract families as tenants. Although families may be more stable as tenants, a family-sized home is likely to have higher maintenance costs than a flat.
Look closely at the neighbourhood before you invest in a property. A decent park or playground nearby can be an advantage - unless it has fallen into disuse and is frequented by vagrants.
Drive around the area early in the morning, in the middle of the day and again late at night. This will help you to establish the condition of the neighbourhood, as well as any possible traffic-flow problems.
Financing buy-to-let
In most cases, if you want to buy a property with the intention of renting it out, you would obtain bank finance in the same way as you would obtain a loan for a property in which you want to live.
The affordability assessment that the banks conduct to determine if you should be given a loan is the same in both cases.
Some banks, such as Absa, offer buy-to-let financing packages that give you discounts on conveyancing costs (if you use certain attorneys), and on property management and letting agent fees.
MAKE SURE YOU MEET YOUR LEGAL OBLIGATIONS
A lease is a contract between you and your tenant that governs the tenant's use of the property.
Once the lease has been signed, it cannot be changed, unless you and the tenant agree jointly to the changes in writing.
Residential rental or lease agreements are governed by the Rental Housing Act of 2000, which outlines the obligations of both tenants and landlords. According to the Act, the following information must be included in a lease:
- The names of the tenant and the landlord.
- The address and a description of the property that is rented out.
- The amount of rent to be paid and whether it is to be paid weekly, monthly or annually. Most lease agreements state that the rent for a month must be paid at the beginning of that month. In some cases, rent is paid in arrears. For example, the rent for March is paid at the end of March.
- Any reasonable annual increase in the rent.
- The amount of the deposit, if any, and the amount of interest that will be paid on the deposit.
- Any additional charges, such as for water or electricity, that the tenant must pay.
- The period of the lease.
- The notice period for ending the lease if a date of expiry is not specified.
You can ask potential tenants for references. It is a good idea to speak to their previous landlords, and you should verify that a tenant is employed.
You should also obtain a copy of a potential tenant's identity document so that you can carry out a credit check.
If you are using a managing agent, the agent should conduct these checks on your behalf.
In terms of the Rental Housing Act, there are certain things you, as a landlord, must do. They include:
- Property inspections.
You and the prospective tenant must jointly inspect the property before the tenant takes occupation. During the inspection, you must list any existing damage or defects to the property so that once the lease expires there will not be disputes over what damage was caused during the lease period.
Both the tenant and the landlord should sign and keep copies of the inspection list.
You and the tenant should conduct a joint inspection within three days before the tenant moves out.
In some cases, landlords or managing agents, with the tenant's consent, will conduct a joint inspection halfway through the lease period.
If you fail to carry out these inspections, you cannot hold the tenant liable for any damage to the property that you find after he or she has moved out.
If you find damage to the property on the final inspection before the tenant moves out, you can use the deposit and accrued interest to cover the cost of the repairs.
- Receipts for payments.
You must give the tenant receipts for all rental and other payments, including the deposit, you receive from him or her. The receipt must include the date of payment, the tenant's name, the amount paid and the address of the rented/leased property.
- Deposit requirements.
If the tenant has to pay a deposit, it must be paid before the tenant takes occupation of the property.
You must invest the deposit in an interest-bearing account. You must be able to give the tenant written proof of the accrued interest, if she or she should ask for this.
If the rent is not in arrears and the tenant has not damaged the property, the deposit is usually refunded within seven days of the expiry of the lease.
If the tenant owes you money or repairs have to be made, you must deduct the cost of the repairs or the rent owed and refund the balance of the deposit within two weeks of the tenant moving out.
If the tenant refuses to allow you to carry out an inspection within the last three days of the lease, you have 21 days, from the date on which the tenant moves out, to inspect the property, carry out any repairs, and to deduct the costs of the repairs, any arrear rental and the cost of replacing lost keys, if applicable, and to refund any balance of the deposit.
If you use part or all of the deposit for repairs or to replace lost keys, you must have receipts for these expenses. The tenant has the right to ask for all the receipts pertaining to expenses deducted from the deposit.
If the cost of the repairs exceeds the deposit, you can take legal action against the tenant to claim the balance owed to you, plus legal costs.
- Renewal of the lease.
Once the lease expires, the tenant must move out of the property. However, if the tenant continues to live on your property, either with your consent or where you continue to receive rent, a new lease comes into existence automatically. In such a situation, you and the tenant enter into a month-to-month lease on the same terms and conditions as the previous lease.
- Breach of contract.
If the tenant moves out before the lease has expired, you can take legal action against the tenant for breaching the terms of the lease.
A tenant may move out early or end the lease early if you agree to it, although most landlords then stipulate that the onus lies with the outgoing tenant to find another tenant to take over the lease.
A tenant who fails to pay the rent, repeatedly pays the rent late or withholds the rent is in breach of the lease, and you have the right to enforce the terms of the lease and to sue the tenant for the arrear rent and/or to cancel the lease.
If your tenant is in arrears with rent payments, the law of "the landlord's lien or tacit hypothec" gives you the right to the tenant's goods that are on your property, including any money.
However, there is a legal procedure to be followed if you choose this route of action. David Warmback, a partner at Durban-based attorneys Shepstone and Wylie, says you should seek advice from an attorney if you plan to seize a tenant's goods to secure the rent you are owed.
FORUM TO DEAL WITH LANDLORD-TENANT DISPUTES
According to the Rental Housing Act, the Minister of Human Settlements (previously the Minister of Housing) can set up a rental housing tribunal in each province. Landlords and tenants can take their grievances or complaints to a tribunal.
There are rental housing tribunals in North West, Gauteng, Western Cape and KwaZulu-Natal.
A ruling by a rental housing tribunal has the same effect as a ruling by a magistrate's court. A rental housing tribunal can impose fines and/or terms of imprisonment.
If you wish to complain to a tribunal, you need to fill in a complaint form, which you can obtain from the tribunal's office.
A case manager will open a file and enter into a register your name and the name of the person against whom you are laying the complaint. A summary of your complaint and a file or case number will also be entered. There are no costs for laying a complaint.
The tribunal will send a letter to both you and the respondent, informing both of you that a complaint has been filed.
Both parties will then be informed, by means of a summons, of the date, time and place where the case will be either mediated or heard. A copy of the complaint sheet is usually attached to the summons.
Any people you have named as witnesses will also receive a summons notice, and the respondent may file a counter-claim against you if he or she wishes to do so.
You do not require a lawyer to represent you at a rental housing tribunal hearing, but it is advisable to seek professional advice.
If there is a hearing, three members of the tribunal will be present, one of whom must be the tribunal chairperson or deputy chairperson. The ruling may be given on the same day as the hearing or at a later date.
The problems rental tribunals are able to deal with include:
- Non-payment of rent;
- Non-refunding of deposits;
- Invasion of a tenant's privacy ;
- Overcrowding;
- Determining a fair rental;
- Seizing a tenant's goods illegally;
- Discrimination by a landlord against a prospective tenant;
- Failing to issue receipts;
- Maintenance and repairs;
- Locking out a tenant illegally;
- Eviction; and
- Disconnecting services illegally.