Mr Smith has been working at a company for most of his adult life. He sees himself as a conscientious man, who pays his taxes and contributes to a retirement fund and took out an additional retirement annuity 5 years ago. He goes to the gym twice a week, goes for annual physical check-ups and generally considers himself in good health.
One day his boss calls him in. He explains that the company is restructuring and they are offering an early retirement plan to all employees over the age of 60: retire, get an additional bonus and then, in the new year, there will be the possibility of working for the company again on a part-time contractual basis.
A great opportunity at just the right time!
Mr Smith is bored with his job and has lately been dreaming of doing something else. Retiring early sounds like a great opportunity! His golfing buddy tells him about passive income and how rental property in a beautiful location is the way to go. Once the property has paid for itself, you can retire in luxury for a second time.
The perfect cottage
Mr Smith buys the perfect cottage for R1 million with his retirement pay-out. It is situated in an idyllic setting – about 5 kilometres outside the small coastal town where he grew up. Though he now lives across the country in Johannesburg, he knows it is a thriving town with good infrastructure.
He does his homework: he asks his co-workers what they would pay for a two bedroomed cottage near the ocean. He searches the internet for properties to rent in the town. He only finds a few holiday accommodation offerings, but decides to get an idea of what they charge anyway. He works out an average and adds ‘a bit’ to defray hidden costs.
Make this house your home
He settles on a rental amount of R10 000 per month. Always having been a sensible, practical man, he decides to handle the whole process of interviewing for tenants himself. It seems simple enough! What could go wrong?
He places an ad on Gumtree and even takes out an ad in the local newspaper. He decides that he will interview four potential tenants, for safety sake. It takes longer than anticipated – in two months, only one person contacts him, but only wants a short-term lease. In the third month, a single mom with two kids contacts him and ask if they can move in immediately. She is divorced and seems responsible. She asks if she can pay off the deposit over three months. He agrees, Googles a lease and signs off on the deal.
Long weekend woes
Three months later, on a Sunday at 1 am during a long weekend, the geyser bursts. The only plumber in the area says he can only go out the afternoon of the next day, as he is out of town. He will send out a ‘guy he knows’ to turn the water off ‘soon’. The water is only turned off four hours later… At the end of the month a water bill arrives. An eye-watering amount in penalties is due!
A month later, the tenant skips rent. The next month she pays late and does not add the agreed amount for the deposit. When confronted, she apologises profusely and says her ex-hubby had not paid maintenance. Three months later, she still has not made up the shortfall and she is not answering her phone.
The short trip that becomes a long-term nightmare
Mr Smith decides to take a trip to the property. He finds the cottage in a terrible state. The children have drawn on the walls, three windows are broken, refuse has not been removed in weeks and the garden has turned into a jungle. Even though he could hear the sound of dogs yelping in the backyard, it seems that no-one has been home for weeks. The neighbour’s house seems no better. In fact, they seem to have thrown their trash over the back wall that has fallen down.
What went wrong?
(Paid) guardian angels of rental property investment
To save R1 500 pm, Mr Smith failed to appoint a professional property manager. The property manager would have been able to set a realistic rental price and dealt with identifying and managing tenants. She would also have done a credit check before signing the lease with the tenant in question. She would have been responsible for the timeous collection of rent as well.
Mr Smith didn’t know the procedures for checking with the previous landlord, which would have brought to light that the ex often failed to make a payment, which is what led to this tenant becoming homeless previously.
He would have told Mr Smith that the cost of applying to expel her legally set him back nearly R30 000. Most professional property managers understand the landlord-tenant laws, thereby reducing the risk of a lawsuit.
Learning on the go can be rather expensive
Hiring the wrong repairman or taking too long to fill a vacancy can quickly eat into your potential income and lead to all sorts of unintended, longer term consequences and security issues. These can lead to a rapid decrease in the value of your investment.
Distance does not make the heart grow fonder
As Mr Smith realized, the more kilometers between the landlord and his investment property, the harder it becomes to manage.The manager would have been closer to the property and would have been able to check on it on a regular basis. She would have had a list of approved repairers who can be trusted to do emergency repairs at 1 am.
A professional property manager would also have told him that the first year’s rental could be covered by an insurance policy and would have advised him on the documentation and record keeping that is required for tax and insurance purposes. The mandatory administration and investment of the refundable security deposit would have been the responsibility of the property management company.
Time is money
If you are considering whether you should invest in the services of a property manager you should also consider the hidden costs. Time spent on renovations may mean a delay in finding a tenant. Some major repairs may require the tenants to move out temporarily, at the cost of the landlord. Good property managers are skilled at finding and screening tenants quickly.
The time and expense of traveling to and from the property as well as dealing with and the oversight of contractors may take you away from your ‘day job’ for significant periods of time.
Property managers do not come free – bad ones can be very costly
Apart from the monthly fees payable to the property management company by you as the property owner, some property managers will charge a non-refundable tenant placement fee (sometimes referred to as an administrative fee) which is a bonus for finding a tenant. These fees go to the property management company and may or may not include the administration and investment of the refundable security deposit. It is always beneficial to have even a ‘standard’ contract with a property manager reviewed professionally.
Just as property managers have the ability to make decisions on your behalf, they can also make mistakes on your behalf, and the mistakes can cost you dearly. As the property owner, even though you did not commit the violation, you hired the person who did, so you could be liable.
Outsourcing property management is not the same as handing over all responsibility. As with any investment decision, it is important to educate yourself and to have a good financial advisor with experience in passive income management on board.