When people speak to us about becoming a property owner, we suggest they consider being a property owner as a business rather than an investment. When you make an investment, you spend your rime choosing where you want to make the investment but in general someone else manages the operational portion of that that investment. Buying stocks and shares on the stock market. You are buying into bona fide business but someone else, the management team run the business. Buying into a REIT, yes you are invested in property, but the management team of the RIET manage the business. 

A LANDLORD IS BOTH A BUSINESS MANAGER AND AN INVESTOR

Becoming a property owner requires you to be a business manager and an investor. To understand this, we need to unpack where your returns come from as a property investor. As a property owner you invest your capital in a property, secure a tenant and then gather income from that tenant in return for providing them with a place to live in or run their business from in a manner that the Tenant feels that the rental is worth the value they receive. 

THE LANDLORD’S ROLE AS AN INVESTOR

Your first decision is to select what property you will purchase. This is an especially crucial decision and is crucial to your long-term success as a property owner. The ideal property is one where you will get a great rental return and it will see a good appreciation in value. The problem is that at times these two goals can be quite difficult to achieve. Often great rental returns in respect of the cost of the property mean its in a less desirable area where other investors are not buying which means that the capital appreciation may be low. When the property is in a fast-growing area where its appreciating in value the rental return may be low. Every property investor has their own blend of rental return versus capital appreciation. 

This is something that you will have to determine for yourself. The questions you will have to decide are. 

• Are you focused on capital appreciation or rental yield? If its all about capital appreciation, will you subsidize the monthly costs or intend to break even. Or do you need to make a monthly profit. 
• If its all about rental return, are you prepared to see no capital appreciation. What will happen if the capital appreciation is negative. That means your property will be worth less then what you paid for it the future. This is a scenario that you do not want unless your rental returns are huge. 

Once you have determined which property or properties you intend investing it you must consider how you will manage your business. 

THE LANDLORD’S ROLE AS A BUSINESS MANAGER

Possibly if you are only interested in capital appreciation and the rental returns are exceptionally low you would leave your property vacant. But most property investors will seek to achieve a return on their investment from rental income. In terms of managing your property you can choose to manage it yourself or use a variety of professional firms. 

• The first consideration is finding a tenant. There are agents who will find you a tenant. You normally pay a commission based on the value of the rental agreement signed, that is the monthly rental times the length of the contract. Ideally you should make sure you have a clause that if the tenant terminates the lease early you get a refund of apportion of the commission or the agent finds a replacement tenant. Or you can advertise your self via

• word of mouth, social media, and property sites. The rental agent or you should make sure that the prospective tenant comes with referrals and credit vetting. 

• The next consideration is who will manage the property monthly, collecting rental, arranging maintenance items, and dealing with any other issues. Often there are regulations in this regard. If you hire an agent to do this, make sure they follow all the regulations. If you do this yourself, make sure that you are aware of all the regulations. Agents normally charge a commission based on the monthly rental or a flat fee to manage this. If you hire an agent, make sure you are aware of the termination clause and if there is any notice period. 

• There will be maintenance that needs to be done during the lease period. If you have hired an agent to manage the lease for you, they will use their service providers. If you are managing the property yourself, you may hire contractors or do the work yourself. Be aware that as it is a rental property you may do some items yourself but there may be requirements to use certified professionals for items such as electrical repairs. To do this yourself may open you up to certain liabilities. 

Managing your property daily is particularly important. Firstly, if you have secured a good tenant, you want them as your customer to be happy and stay with you. In any business retaining a good existing customer is cheaper in terms of money and time then looking for new customers. Secondly maintenance costs are important to you returns. You need to be on top of maintenance so that outstanding issue do not develop into more complex and cost problems and off course no tenant wants to live with outstanding maintenance issues. At Eyime we built an integrated maintenance ticket system into our messaging chains to ensure that costs are kept under control and tenants are happy. 

YOUR RETURNS AS A LANDLORD

Your returns as a property owner will then come from two sources. Monthly profits and capital appreciation. 

To determine your monthly profits, you need to consider all the monthly and annual costs and income. The calculation is:

Rental less (letting commission, monthly management commissions, maintenance, damages, insurance, interest, rates and taxes, fees charges by the building manager for apartments, utilities where these are not paid by the tenant in terms of the lease and any potential bad debt and legal fees if you wish to recover these. Any other costs)

To work out the percentage rental return it is the answer to this calculation divided by the all-in purchase cost multiplied by one hundred. 

Capital appreciation is determined by the increase in value of the property but remember to consider the cost of selling the property and to include in the cost of the property all the initial costs not just the property purchase price. The calculation is:

(Sales price plus any selling costs) less (Purchase Price plus any purchase costs less)

To work out the percentage it is the answer to above divided by the all-in purchase consideration multiplied by one hundred.           

When considering capital appreciation gearing is an important part of the consideration. If you have borrowed to fund the purchase, then you must consider the debt. In that case you need to amend the purchase consideration to include only your outlay and amend the sales price to reflect the portion you will receive after settling the debt. If the property has increased in value, you could make a better capital return if you have financed the property with debt. But of the property has declined in value you could lose all your outlay and still have a debt to settle. 

Becoming a property owner can be an attractive proposition. If you are prepared to spend time finding the right property to invest in and managing your property as a business. 

RESOURCES FOR LANDLORDS

The UK times has a good site with further information. While its UK centric it has good advice for anyone considering investing in property:

www.thetimes.co.uk/money-mentor

For US approach have a look at:

www.moneygeek.com/insurance/homeowners/how-to-become-a-landlord/