What to know before investing in a rental income property

And while the benefits of buying a rental property are many, there are risks and considerations that need to be taken into account before diving in.

Below we outline a few things to keep in mind before investing in a rental property.

What are the upfront costs?

As the name suggests, your upfront costs need to be covered before you can start looking at renting out the property. These include bond costs, transfer costs, attorneys’ fees and bank initiation fees. It is important that you budget for these costs before putting in an offer.

What are the ongoing costs?

Once you’ve bought the property, there are a few ongoing costs that need to be budgeted for. These include things like levies, rates and taxes, insurance and maintenance. Another necessary expense is income tax on the rental received. It is essential to note you can deduct the other costs referred to above and the interest you pay on your bond from the income. On that note, before buying a rental property, we suggest you seek estate planning advice. A good tax consultant will help you purchase the property in the most tax-efficient way (e.g. put into a company instead of your personal name, or in your spouse’s name instead of your own name etc.). Please feel free to reach out to Ulrik Strandvik, who is a tax specialist, for assistance in this regard.

What rent will I receive?

Although it is ideal for the rent to cover the levies and rates and taxes while still providing a decent income, in some cases, this is simply not possible. Deciding on the monthly rental cost will depend on factors such as location, amenities, and supply and demand. Buying a property that meets most of these needs will likely provide a higher rental income.

Can I afford to have a vacant property?

As is the case with many rental properties, there will likely be a time period when the property does not have any tenants. As the owner, you need to make sure that you have the funds to cover the bond installment (if any) and the ongoing costs in this case.

Do I know the legalities?

There are a few legalities to consider before investing in a rental property, including the ownership legalities and the laws that surround the tenants’ rights. It is important that you understand these legalities before putting in an offer on a property. As such, we advise that you take the following steps before you sign the lease:

1. Do your due diligence on the tenant. Ask them for bank statements, credit and reference checks. A professional and competent rental agent (like Knight Frank) has the resources and experience to assist with this process.

2. Ensure the lease agreement is drafted well and covers all eventualities and regulatory issues. We recommend employing the services of a rental agent or asking an attorney to draft and/or review the agreement.

3. Negotiate at least two months’ deposit to cover unexpected eventualities.

Do I want to be a landlord?

This may seem like an unnecessary point to mention here but it is a critical point to consider. Being a landlord takes hard work and dedication beyond simply purchasing the property. As a landlord, you need to ensure that you understand all of your responsibilities, including maintaining the property and making sure that the right tenants are chosen. Therefore consider engaging a rental agent that can assist with the complexities.