What to know before investing in the rental market
The rental market is experiencing high demand across most areas, especially the big metros and urban areas, driven by the continued influx of people. May areas are reporting stock shortages which offer excellent opportunities for rental investors to invest in an immovable asset which will grow in value over the long term while earning good rental income over the short term.
Rental market indicators such as PayProp and TPN reflect robust performance, with landlords earning solid returns. That said, rental investments require hands-on management and are not as liquid as other assets. Non-paying or disruptive tenants could introduce unforeseen costs, and investors should therefore make an informed decision given that property is a long-term commitment.
Nonetheless, making a sound rental investment can be lucrative in the long term, and the longer you hold onto the property, the more it will grow in value, and the higher the yield that you could earn on your investment. Rental specialists from the Seeff Property Group say there are a few important steps that investors must take before leaping into a rental investments.
The first is to choose the location wisely after doing proper research. Look for a high demand area, but also factor in the quality of tenants that the area will attract. Location remains the primary driver of value. Proximity to commercial hubs, transport infrastructure, and lifestyle amenities is essential to minimize vacancy rates and ensure consistent demand.
When selecting an investment property, choose one in high demand within your area. Apartments and townhouses are favoured for their security and lower maintenance, leading rental growth. However, three-bedroom houses near schools and homes in estates also attract tenants. Ultimately, your decision should be shaped by what is most desirable locally. Keeping up with demand is essential for consistent returns.
Assessing the potential rental income and return on the investment is another vital consideration before taking the leap, say the Seeff agents. A high-performing investment in the current market should aim for a net yield of at least 5.5% after all operating expenses are deducted, depending on the area. Here, the guidance of a local area rental specialist will be vital to assess the potential rental income.
Investors should carefully budget for all the extra costs associated with owning a rental property. In addition to mortgage repayments, they need to consider ongoing expenses such as municipal rates and any levies applicable to complexes or estates. Basic utilities are generally paid by the tenant, but owners must ensure they plan for all other property-related costs.
Additionally, landlords should set aside funds from the rental income for property maintenance to keep the rental in top condition. Modern tenants expect features such as fibre internet, and in higher-income areas, extras such as backup power solutions to mitigate against loadshedding. Ensuring the property remains fit for use and meets these expectations is crucial for attracting and retaining quality tenants.
Investor must have regard to the legal and operating environment. Safeguard against potential risks by ensuring legal compliance including a comprehensive, written lease agreement which sets out every detail applicable including relevant dates, the rent, deposit, inclusions and exclusions, early termination penalties, breach clauses, and rights and obligations for both parties.
Landlords are also legally obligated to provide monthly receipts for rent paid. Importantly, the security deposit must be held in an interest-bearing account, with the interest accruing for the benefit of the tenant upon the expiration of the lease. No deductions may be made during the lease period, only at the end of the lease if there are outstanding amounts or damage due to tenant negligence, subject to certain conditions.
A joint incoming inspection and a Condition of Property Report are legal requirements for potential damage claims. An outgoing inspection must be conducted before reconciling the deposit. Landlords should also, with prior tenant approval, inspect the property periodically to ensure it is well maintained. These essential steps will protect both parties and ensure the property remains in good condition.
The Strategic Role of Professional Management
Professional management is the key to turning a rental property into a high-yield asset. Experienced managers such as Seeff reduce risk by thoroughly vetting tenants with credit and background checks, ensuring dependable occupants who care for the property and consistently pay their rent. This safeguards the investment and maximises returns through expert oversight and strategic tenant selection.
Professional management extends beyond tenant placement, ensuring seamless rent collection, maintenance coordination with vetted contractors, and strict legal compliance. By utilising market data and expert knowledge, managers help safeguard the property, maintain its value, and optimise returns. This structured approach allows investors to enjoy peace of mind and consistent performance throughout the tenancy.
