Buying rental property is a huge financial decision. What you want is a property that will help you generate sufficient income in the years ahead with minimal stress.
To help you stay on track when shopping for rental property, we will highlight the advantages and disadvantages of owning a rental property as well as what to look out for and the things you should avoid.
Advantages of Buying a Rental Property
A rental property is a tangible asset, which explains why more Nigerians are embracing it as an investment option. Here are some advantages of buying rental property.
1. Appreciation of Value
Most properties have a strong tendency to appreciate in value with the passage of time. What this means is that if you buy property in the Victoria Island axis of Lagos, it would appreciate in value over the years. The level of appreciation depends heavily on general inflation and other factors including location, market, condition, and neighborhood.
2. Source of Income
When you buy a rental property, it becomes a source of income for you. In Nigeria, rent is paid by your tenants on a yearly basis as opposed to monthly rent. A 2-bedroom apartment in Victoria Island in Lagos ranges between N4 million and N10 million a year, while the same apartment in Yaba falls between N400,000 and N600,000. This could translate to your yearly constant income.
3. Flexibility of Payment
You don’t necessarily need to have the total value of a property to own it. There are several arrangements that allow you pay only a fraction of the value of the house. Some of these include banks and real estate establishments that cater to specific mortgage options. The Mortgage Bank of Nigeria caters to the needs of mortgage institutions in Nigeria with the provision of long-term credit facilities.
Disadvantages of Buying a Rental Property
There are certain downsides to owning rental property and they are things you should bear in mind as you make your decisions to buy.
1. Awful Tenants
When you buy and own a rental property, there will always be a risk of renting your property to a tenant who constantly runs into trouble with the law or people he/she interacts with. Such tenants could include a tenant who gambles and clashes with thugs who will not hesitate to damage your property. Your tenant could even have a penchant for engaging in fisticuffs inside your property and damaging the property in the process.
In a situation where your tenant runs into trouble with the law while his/her rent is overdue, it leaves you at a disadvantage. Awful tenants also have a habit of stretching your unexpected expenses. When they damage things like the wiring, walls and plumbing system in your house, you find yourself with a tenant who denies being responsible for the damages to your property.
2. Liability and Lawsuits
What happens if the roof of the garage of your rental property collapses on your tenant’s car? The difficulty of quantifying emotional distress as well as frivolous lawsuits are serious headaches you have to keep in mind when buying rental property.
There are responsibilities that you have to shoulder especially when it concerns your tenant’s safety.
3. Unforeseen Expenses
Over the course of time, there are different parts of your house that will call for financial commitment. Some might be quite expensive to take care of depending on the level of repair or servicing needed.
You cannot possibly be prepared for every possible repair that your rental property will need. There will always be those that will be unexpected e.g repairs due when a new tenant is moving in. You can work on minimising this by having previous tenants cover costs for any damages when moving out.
Checklist of Things to Look Out For and Those to Avoid
There are several ways you can cut down the disadvantages of buying rental property. Here are tips that will go a long way in helping you make the right decisions.
1. Are Your Expectations Realistic?
A rental property will create a steady cash flow for you but you have to keep your expectations realistic. You should not fantasize about buying a Lamborghini within your first year of buying a rental property.
You can’t wake up one day and decide to ask your tenant for two years worth of rent. The Tenancy law in Nigeria will not permit this.
2. Has the Property Ever Been Used as a Rental Property?
In some cases, you get to buy a new house that has never been used as a rental property but this is not always the case. If it has been a rental property in the past, dedicate some time to look into its reputation.
You don’t want to buy a rental property that has a bad reputation in the neighborhood. A negative reputation might prevent you from getting the best from the value of the property.
3. Are You Familiar With the Law?
You should know that federal and state laws in Nigeria outline your responsibilities and liabilities as a rental property owner. You should be familiar with what the law says about your property especially the Land Use Act of 1978.
Would you rather spend a couple of weeks reading and understanding what the law says about the rental property or would you rather tell the court that you did not really have time to read? Alternatively, you can hire a property lawyer.
4. Have You Checked Out the Location?
The location of your rental property plays a very pivotal role in how much you earn and the kind of offers you will get from prospective tenants.
Rental property in prime locations in Lagos like Lekki, Ikeja, and Ikoyi will cost more than houses in Egbeda, Oshodi, and Ikorodu. The property in highbrow neighborhoods are pricey but they offer you a higher return on interest as opposed to property in other suburbs in Lagos.
As a landlord, you can peg your annual rent for a 4 bedroom apartment in Banana Island within the range of N10 million and N20,000 but you can’t do this for a property you own in Orile-Agege.
5. Have You Arranged an Inspection?
If you want to cut down the possibility of unexpected expenses on your rental property, you should carry out a thorough inspection of the house. You can enlist the service of a professional to do this on your behalf.
6. Does the Property Have Existing Tenants
You don’t want to acquire liabilities so you should know everything about the house and this includes knowing if there are tenants in the house with their rents still running.
7. Are Your Lease and Terms Legal?
As a rental property owner, it’s crucial to spell out the lease and your terms to prospective tenants in a way that is legitimate. A lease is a contract outlining the terms under which you agree to rent your property. It guarantees your tenant the use of the property and guarantees you regular payment over a specified period of time.
Don’t append your signature to lease documents over bottles of alcohol with friends and family.
8. Have You Run Background Checks?
Don’t take things for granted or at face value alone. Before you agree to lease your home to a tenant, consider running background checks. Does he/she actually reside in his/her current address? Does your prospective tenant have a steady source of income? You are better off with an empty property than having a tenant you would regret renting your property to.
9. Does the Neighbourhood Have a Landlords’ Association?
Find out if the neighborhood where the property you want to buy is located has a landlords’ association. If it does, seeking out the association or becoming a member will provide you with vital information about the property and the location.
There are some associations that are flexible enough to allow you become a member even before you buy a property in the neighborhood.
10. Have You Made Friends With Professionals?
When you are ready to invest in rental property, make friends with a banker, a property lawyer and a tax professional. These three will provide you with all the knowledge and experience you need to become a successful rental property owner. You can also leverage your relationships with them in finding more opportunities in the real estate market.
11. Do You Have an Emergency Fund Account
This is the account you set up to take care of all unexpected expenses that might crop up. There is a specific figure that is cast in stone but going for 20% of the value of the property would be a good idea.
The moment you begin earning income from your rental property, you can channel the money into an emergency fund account until you have hit your target.
12. Have to Looked at Insurance Options?
It is important to get the right insurance to cover your liability. There are insurance experts who can take the stress of doing this off you. You don’t want to take this for granted.
13. Are You Planning to Manage the Property Yourself?
You can decide to manage your rental property yourself or you can choose to hire a property manager to do this for you. To manage your rental property yourself, you will have to be on the ground at all times to attend to the needs of your tenants.
If you decide to delegate this responsibility, you will need a trusted property manager to oversee the affairs of the property.
Regardless of whether you manage the house yourself or get someone to do it for you, it is crucial to visit the property from time to time to see things for yourself.
14. Is the Pricing Realistic?
No matter how amazing a rental property, make sure you are financially buoyant enough to cover things like tax payment, general repairs, and maintenance. The cost of the house will play a huge role in this. Don’t depend entirely on the income that accrues to you from your rental property.
Options for Starters
Reach out to real estate experts who will offer you valuable advice and guidance on the prime rental property and neighborhoods to invest your money in and how to optimise your steady flow of income.