Property investing is using money to purchase a property type with the assurance that you’ll make profit from it. The key aspect in any type of investing is to make money. Note – make money. While waiting for the value to increase, some property owners subsidize their properties by topping up rates and taxes or bond repayments. They do this hoping to make money later, but our expert, Sylvia Milosevic says ‘…subsidizing and speculating is not investing, it’s gambling.’ She, herself, learned this fundamental lesson the hard way. Read further to learn why you shouldn’t roll the dice on profiting from property.
Causes and effects of subsidizing
Rental properties enable investors to earn a passive income while paying off their home loans. This sounds great, right? It is indeed. However, there are times when investors find themselves in a pickle; instead of making money they’re contributing their own money towards a property. These are the effects and causes of subsidizing properties that should’ve been cash flowing investments:
One of the fastest and easiest ways to make mistakes is to do-it-your own way rather than getting education or training. Although it’s been proven that property helps create wealth, most people underestimate the fact that successful property investing is a learned skill. In addition to the DIY method, here are other reasons why properties that cash flow negatively end up being subsidized. Aspiring investors:
- buy cheap properties because someone told them they’re great opportunities
- buy properties in their neighbourhoods because they know those areas well
- buy properties without viewing them inside
- sign OTPs without first getting an attorney to read over contracts
Effect 1 – No profit, no cash-flow
A property that doesn’t cash flow positively affects an owner financially and sometimes even emotionally. It’s very difficult to be enthusiastic about an investment that’s not making you any money. Consider this, without an increasing level of net cash flow you won’t have more money to reinvest, pay off the home loan faster and diversify your portfolio.
Effect 2 – Funding tenants’ lifestyles
The other downside about owning property that empties your financial pockets is paying the cost so that your tenants enjoy. Think about it, that’s really what it is. You’re basically using your own money to pay for a property you’re not residing in just because it’s in your name. In other words, your property is not an asset but a liability. This might be a hard pill to swallow but property investing is all about the numbers making sense and not speculation.
Effect 3 – Exposed to possible financial loss
On that note, the idea of using your own money to maintain a place unused by you because the value will increase is risky. There’s a difference between buying a property based on speculation and investing with a clear plan that also factors in possible risks. For example, when you buy a property based on its value increasing in the coming years you don’t know when there’ll be a recession. Apart from economic decline, property prices decrease during recession. This is a huge loss for those that invest speculating that they’ll only start making money once appreciation has occurred after some years.
The South African law for rentals
Renting out your property with the hope of making money later is financially risky. The way the law is set, it’s already challenging to evict a tenant even if they’re not paying rent. But when you’ve gotten them used to paying an amount that doesn’t cover all costs, it’s worse. As a landlord, you need to understand your rights and obligations, this will enable you to know when a tenant is taking advantage or when you are abusing them unknowingly.
In order to make sure that the lease agreement created is mutually benefitting you need to be familiar with the law. See below these basic rights and obligations that binds tenants and landlords as per the statutory law:
- A tenant must pay rent and other charges outlined in the lease promptly and regularly
- During the cancellation period, a tenant is responsible to pay full rent and utilities on the due date and cannot request a landlord to use the deposit for rent
- Both the landlord and tenant can give each other at least one month’s notice to cancel any lease agreement between them
- But a tenant has more rights because they are allowed to cancel the lease at any time provided they give notice within 20 business days
- While a tenant cannot modify a property without the owner’s consent, a landlord must also consult them about any projects affecting them
- Both parties are required to attend at least two inspections of the property – incoming and outgoing
- In the case of breaching an agreement, the landlord or tenant can inform the other person to make corrections within a certain time in writing
Steps to deal with profitless property
Be honest with yourself
Sometimes it’s hard to face the facts but being honest with yourself will save you time and money. Rather than holding on to a property that’s not cash flowing, you need to establish why you’re so invested even when it’s taking money from you. Start by asking yourself why you are still holding on to that property. Perhaps you’re too attached, embarrassed or afraid to sell it.
Weigh your options
Once you’ve dealt with your emotions, you’ll be able to exercise sober judgement regarding what to do with your property. So before you decide to continue holding on to it, at least find out the following:
(a) Can you refinance your property since interest rates are currently so low?
(b) Will the property appreciate in value over the years?
The best thing to do is to sell your property when it is not cash flowing. But if you decide to continue keeping it, then use reliable research to determine if there’ll be growth in the area you’ve invested in. Perhaps, the growth that’ll take place will allow you to make profit later – if this is supported by reliable research.
Make a decision to sell it
Selling your property doesn’t have to be the end of your investing journey. The great thing about letting go is the freedom – to start afresh, reinvest in better opportunities and strategize your way forward. Look at it this way, once you get that property out of your hands you can find better, cash flowing properties that pay themselves and get a passive income.
Still need guidance?
We at Riches and Beyond have a group of experts with valuable experience and insight regarding property investing. Through their guidance you’ll be able to make an informed decision. Come and join us, register for our FREE online investment webinar.