The investment risk that all property entrepreneurs should know about

Updated on 10 May 2016

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The investment risk that all property entrepreneurs should know about

The foundation of property investing lies on two fundamental aspects: capital growth and rental income from the investment property.

With property investing being a medium to long term investment option for many investors to enjoy high capital growths on the value of their properties, many rely on rental income to advance their investment strategies in order to reach their long term goals.

Similar to any type of investment, investing in property to generate rental income also has its own disadvantages, which if not well managed can turn a good investment into a bad one.

For property investors to be able to mitigate these risks they need to know and understand the disadvantages of renting out their properties for rental income.

1. Excessive damage to property
With no supervision or regular inspections by the property owner, reckless occupants can cause excessive damage to the property in which they reside. As a property owner renting out a property, one might find themselves spending a fortune on maintenance cost due to damage caused by tenants.

As a result, it has become common practice for landlords to request a deposit equivalent to one month’s rent or more which can be used to fix the property in the event tenants have damaged property. A deposit should be payable by the tenant before they can take occupation of the property and must be reimbursed upon final inspection of the property when the lessee vacates.

“A tenant that is disorderly during their tenancy period can cost a landlord a lot of money in fines from governing authorities”

2. Defaults and late payments
By neglecting to conduct any screening of tenants first, a landlord is at risk of placing a tenant which is either unable to pay rent on time every month or has a history of defaulting on their rental payments. Many inexperienced investors take this stage of tenant placement for granted and end up having to face months without any rental income.

This can lead to landlords being forced to approach a court and apply for an eviction to lawfully remove the tenants off their property, a process which is costly and time consuming. By screening every tenant, a landlord can reduce the risk of placing a bad tenant who could potentially give them problems in future.

3. Disruptive tenants 
By not taking time to select tenants well, a landlord runs the risk of finding themselves paying fines or resolving disputes with neighbours due to their tenant being a nuisance and disturbing other households nearby.

A tenant that is disorderly during their tenancy period can cost the landlord a lot of money in fines from governing authorities. It is therefore very important for a landlord to communicate with a tenant the rules and regulations of the local governance or the body corporate before they take occupancy of the property.

It is vital that every property investor follow the correct procedures when dealing with tenants and ensure that correct documents are completed and relevant checks are conducted before allowing any tenant to take occupation of their property. Although property owners might find themselves under some pressure to urgently place tenants so that they can collect rent monthly, it is advisable to delay placement and follow the right steps rather than to risk placing a bad tenant in your property.

About Lesiba Mooka: Lesiba Mooka is the  founder and CEO of Cobalt Blue Properties an all-inclusive property services firm. Mooka is a real estate entrepreneur from Mahwelereng, Mokopane in Limpopo, with an undying love for investing in different kinds of properties and helping others build a solid property portfolio of their own. You can also find him on Twitter at @CobaltBlueProps

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