Baba Fela is a typical old-time Lagos Landlord. He has property in choice areas like Ikoyi and Victoria Island but lives in a modest house in Surulere. “I can’t afford to live in such expensive areas. Rather, the rent I collect acts like my pension. So I am not a burden on my children”. Rental returns in Baba Fela’s time were a very good and safe source of return. Rents used to go up regularly. Also where the rent was stated in US dollars, it was a hedge against the depreciation of the Naira. Is that the same situation today? What advice should we give anyone looking at investing for rental returns in 2018? This is the question we will try to answer in simple terms in this article…
Which property will give the best rental returns for the amount you want to spend? If two properties will cost the same amount to acquire and one will give higher rents than the other, then the investor should go for the one with the higher rent. It is important that you don’t allow emotions to cloud your judgment if you are looking at investing for rents. You don’t need to like the house; you need to like the returns!
As an investor, you also have to compare this profitability against alternative investment options such as the stock market, treasury bills, fixed deposit etc. Rental income is usually between 5% and 10% but investment in Treasury Bills was as high as 18% at a time.
However, investing in property for rental income is usually for the long term and over time the value of the house may increase. This is called capital gains. But you cannot get the capital gains until you sell the house. So the investor must weigh all these in considering purchasing a house for rental income.
Another factor you have to consider are the associated risks that might prevent you from getting your return. Fire, vandalism etc are potential risks to the property, although they are rare. Other issues may not affect your property directly but can impact the rents you get. An example is the Badoo cult in Ikorodu may make people leave your house in that area even though they have not been attacked.
More common problems are non-paying tenants and void periods (when you are unable to get tenants into your property). Most Landlords can relate to the experience of having an unreasonable tenant. A stubborn tenant might decide to stay put in your house without paying rent. The landlord loses the income from the rent and he has to spend money to get the tenant out. A landlord in this situation would wish he had invested in fixed deposit or Treasury Bills.
COSTS OF HOLDING THE INVESTMENT:
There are costs involved in holding property as an investment. Generally, there are some obligations landlords have to meet. Painting the exterior of the house, keeping the house wind and watertight are some examples.
But there are some costs that are not obvious. For instance, you buy an apartment in 1004 Estate in Victoria Island, you will have to pay service charge if tenants are not in the property. Otherwise, you risk accumulating the service charge. In fact, it is double trouble when you have an uncooperative tenant who has refused to pay the service charge or leave your house. When such tenant eventually leaves, the onus is on you to clear the accumulated service charge before a new tenant comes in.
Landlords in the high-end locations like Ikoyi have found out that when tenants leave, they have to commit substantial funds to ‘updating’ the property. If not, they will not attract tenants. These are all cost against the house and borne by the Landlord. In essence, while we say the return is the rent as a percentage of the cost of the house at the time you bought it, in reality, you should include these other costs. Effectively, it could mean that your return can be far lower than the initial calculation obtained when other costs are factored in.
Many consider rent as an almost foolproof source of income. But the market itself is changing and landlords have to keep up with the times in terms of how they can ensure they get the best rent.
This article appeared first in Castle Nigeria