GUIDE TO BUYING A RENTAL PROPERTY AS A REAL ESTATE INVESTMENT
Buying rental property is a major but rewarding financial decision when done properly. The ultimate goal of any rental property is to have an investment that gives guaranteed rewards with minimal maintenance costs.
If you need help in making the right decision on your property investment journey, check out our full guide on ‘Buying a Rental Property as a Real Estate Investment.
Advantages of Buying a Rental Property
Rental properties provides a direct stream of income and are usually financially rewarding. Here are some advantages of buying rental property.
- Appreciation of Value
With time, properties are expected to appreciate. However, the appreciation levels are dependent on several factors including location, market, condition and neighbourhood. Ensure that the property you invest in has room for steady appreciation.
A tip is to buy an ‘off plan’ property. The property usually appreciates once construction is complete. A 4 bedroom terrace in Ikate bought off plan at N70 million will most likely appreciate by a minimum of N2 million at the end of a 12 month construction period.
- Source of Income
A rental property is a great source of income. Please note that In Nigeria, rent is paid by your tenants on a yearly basis as opposed to monthly.
- Extra Space
Landlords tend to enjoy an extra accommodation for family or personal use when required, without having to rent out an additional space such as an air b n b or short let apartment. Additionally, international investors or Nigerians in diaspora can create a flexible system whereby they have accommodation whenever they are in Nigeria.
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.
- Bad Tenants
Bad tenants come in different forms, e.g. tenants that don’t pay their rent on time (or at all), tenants that are careless with the property. This can be avoided by collecting a security deposit and using a credible agent to source your tenants. Our firm will ensure that you have the right tenants for your investment.
2. Liability and Lawsuits
As a landlord, you will have the responsibility of ensuring that your tenants are safe within the ambits of the law. Ensure you are conversant with the law.
- Unforeseen Expenses
It is natural to have routine repairs and maintenance on your property as it ages. Some can be prepared for e.g. routine painting. However, there are others that may need your urgent attention e.g. a broken pipe or electrical issues.
To reduce the hassle be sure to engage a credible agent to manage your property. Collecting a security deposit will also help in managing maintenance costs.
Our firm, Wren Regent Properties Limited will be happy to ensure that your property is managed properly.
Checklist For Buying a Rental Property
Here are some great tips that will help in choosing the right rental property for you:
1. Are Your Expectations Realistic?
It is important to set realistic expectations according to the rental yields expected for that location. E.g. a 3 bedroom apartment in Lekki Phase 1 is averagely on the rental market between N4million and N6million. It is unlikely that the apartment will be rents at N10 million irrespective of how beautiful it is.
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.
Engaging a lawyer to handle such matters or to educate you is the best solution.
4. Is the location ideal?
The location of your rental property plays an important role in setting your rental property goals.
Naturally properties in highbrow neighborhoods e.g. Ikoyi, V.I and Lekki, command higher rental yields than properties in Ikorodu, Egbeda and Oshodi.
6. Does the Property Have Existing Tenants
Properties with existing tenants has its pros and cons. A property with existing tenants implies that you have instant returns on your investment. However, you may be carrying on tenants that are great liabilities. A background check on the current tenants is ideal or evacuating the property and getting new tenants is an alternative.
7. Does the Neighbourhood Have a Landlords’ Association?
Find out if the neighbourhood 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.
8. 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.
9. 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. Manage your rental property yourself, can prove to be stressful.
You may engage a property agency, such as ours to manage all matters pertaining to your rental property. This way, the tenants don’t have your number on speed dial!
10. Is the Pricing Realistic?
The cost of the house should be realistic in comparison to the returns on the investment (ROI). The average ROI should be over 18 years or less.
The ROI can be calculated by dividing the equity in the property by that property’s costs.
