Investing in real estate has long been considered a reliable investment strategy, especially during challenging economic times because, unlike stocks and bonds, property is a tangible asset which offers unique advantages that can accelerate wealth accumulation over time.
So says Claude McKirby, Co-Principal for Lew Geffen Sotheby’s International Realty who adds that real estate market fluctuations are generally not as extreme and property tends to appreciate steadily over time, making it a reliable long-term investment.
“Property ownership therefore tends to offer better long-term financial security and, on another level, being a physical asset with intrinsic value it invokes a sense of security and stability.”
However, McKirby says that one of the most critical decisions investors face when acquiring a property to enter the rental market is choosing between letting it on a long-term lease or opting for short-term rentals.
“Each option has its unique attractions, challenges, and benefits, shaped by market demands, the investor’s lifestyle, investment goals and risk tolerance.
“For example, investors looking for a hands-off approach may prefer the relative ease of long-term leasing whilst those seeking maximum returns and who are willing to engage more actively with their investment might gravitate towards short-term rentals.”
Long-Term Leasing
Attraction: The traditional appeal of long-term leasing lies in its predictability and simplicity. Investors are generally attracted to the steady, predictable income stream, reduced turnover costs, and lower operational demands.
Pros:
- Stable Income: Long-term leases provide a consistent and predictable income over the contract period, typically 6-12 months or more.
- Lower Operational Costs: Fewer tenant turnovers result in reduced costs associated with cleaning, repairs, and marketing for new tenants.
- Less Time-Intensive: Once a reliable tenant is secured, the day-to-day management of the property is significantly less demanding than with short-term rentals.
Cons:
- Lower Flexibility: It's more challenging to adjust rental prices in response to market changes due to the fixed nature of lease agreements.
- Potential for Long-Term Headaches: Dealing with difficult tenants or ensuring rent is paid on time can become ongoing issues.
- Limited Access: Owners lose immediate access to their property, making it difficult to use personally or sell during the lease period without complications.
Short-Term Rentals
Attraction: The rise of the sharing economy has propelled platforms like Airbnb, appealing to investors due to potentially higher returns and flexibility.
Pros:
- Higher Potential Income: Short-term rentals can command significantly higher nightly rates compared to the monthly rate of long-term leases, especially in high-demand or tourist-centric locations.
- Flexibility: Owners can adjust pricing dynamically in response to market demand, seasonality, and special events. There's also the flexibility to block out periods for personal use.
- Market Responsiveness: Investors can quickly adapt to real estate market changes, adjusting their rental strategy as needed.
Cons:
- Increased Management and Operational Demands: Short-term rentals require more hands-on involvement, including managing bookings, communicating with potential and current guests, and handling cleaning and maintenance more frequently.
- Income Variability: Earnings can be significantly higher during peak seasons but may drop off during off-peak times, leading to less predictability in cash flow.
- Potentially more volatile property values: Although some coastal regions are thriving due to semigration, the values of properties in holiday locations are traditionally more volatile, booming in the good times and crashing when the markets are down.
- Regulatory Challenges: Some regions have introduced strict regulations around short-term rentals, including licensing requirements, limits on the number of days a property can be rented out, and additional taxes.
McKirby says that whichever option you choose, there are a number of ways in which to minimise risk and optimise returns:
Ensure you buy in a prime location: Buy the best you can afford in the best location as your investment is most likely to not only retain its value but also grow and yield better returns.
In the holiday let market, this is important because in peak season in popular towns, most holiday properties perform well, but out of season and tougher economic times, units in secondary locations could well suffer from low occupancy rates.
Consider sectional title: The upkeep required on older properties and homes on large grounds can easily eat through returns, so unless you are able to put a portion of the rental earned away as a maintenance fund, low maintenance options like lock-up-and-go properties are a better choice.
There will be a body corporate with trustees who are responsible for the maintenance of the common property, and the upkeep of the complex which significantly reduces the owner’s involvement in maintaining the exterior of the property. One word of caution – the levies in some complexes can be quite high.
Know your market: It’s essential that investors research the general demographic of the area and decide which segment of market they will be servicing, especially in the long-term rental arena.
For instance, in the student market, the buyer should choose a suburb close a campus with easy access to public or student transport routes, while families will need to be in close proximity to good schools and sports and shopping amenities. Corporate tenants will favour an upmarket suburb which has quick access to freeways leading to the airport and typically close to business hubs.
Familiarise yourself with the relevant legislation: Legislation regarding the rental sector and short-term rentals have been tightened in recent years for both your and your guests’ protection so make sure you operate within these stipulations to avoid potentially costly and stressful pitfalls.
Consider professional management: This is especially important if you don’t live in the area because there is likely be a guest or an issue that needs your attention on a regular basis. They will also have a thorough knowledge of all the relevant legalities.
And an experienced and professional rental manager could well make the difference between an empty and an occupied property.
Adequate cover: Ensure that you are adequately insured as you don’t want to have to fork out if a geyser bursts or a window is broken. And, in short-term lets with more people coming, accidents and incidents are far more likely.
Also bear in mind that some policies include a clause about vacancy, and properties that are vacant in excess of 60 days, which could introduce limitations in cover, so when shopping around, be sure to read the policy terms and conditions carefully.
Do your sums: When you are calculating how much you can afford to spend on an investment property and what your returns will be, make sure you include all expenses, including insurance, rates and taxes and management fees.
Be especially careful if you are looking to enter the short-term rental market because holiday rental prices are usually much higher than long-term rentals, often increasing even more in peak season, your initial calculations are likely to look very good. It’s important that your sums allow for longer vacancy periods and fluctuating occupancy levels from season to season as well as maintenance costs which can also be higher than normal what with so many different people using the property.
“Both long and short-term rentals have their place in an investment portfolio, each offering distinct advantages and challenges. However, it’s critical that investors understand the local market and the regulatory environment and are clear about their personal investment goals and available time before taking the plunge,” says McKirby.
READ: Landlords: A guide to finding the ideal rental candidates
What is a lease agreement?
A lease agreement is a legally binding contract between a landlord and a tenant that outlines the terms and conditions of the rental arrangement. A well-drafted lease agreement should cover all aspects of the tenancy, including rent, security deposit, maintenance responsibilities, and tenant obligations. It should also provide a framework for resolving disputes and terminating the tenancy.
Why does a landlord need a watertight lease agreement?
Having a proper lease agreement is essential for landlords for several reasons. Firstly, it helps to establish a clear understanding between the landlord and the tenant about their respective rights and obligations. This can help to prevent misunderstandings or disputes that may arise during the tenancy.
Secondly, a lease agreement can protect the landlord’s property by setting out guidelines for maintenance and repairs. This can help to ensure that the property is maintained in good condition and that any damages caused by the tenant are addressed promptly.
Thirdly, a lease agreement can provide a framework for resolving disputes that may arise during the tenancy. This can help to minimise the risk of costly and time-consuming legal proceedings.
Fourthly, a lease agreement can help to protect the landlord’s financial interests by specifying the terms of rent payments, late fees, and security deposits. This can help to ensure that the landlord receives the rent on time and is adequately compensated for any damages or unpaid rent.
A sound lease agreement is essential
In summary, a well-drafted lease agreement is essential for landlords to protect themselves and their property. It provides a clear understanding of the terms and conditions of the arrangement, establishes guidelines for maintenance and repairs, provides a framework for resolving disputes, and protects the landlord’s financial interests.
Speak to a legal expert
As a landlord, it is important to seek the advice of a legal professional to ensure that your lease agreement complies with all relevant laws and regulations, and is tailored to your specific circumstances.
Our attorneys have considerable legal experience with all matters related to tenants, landlords, lease agreements and dispute resolution. Please contact our Conveyancing and Property Law or Litigation and Dispute Resolution team to assist with your issue.
Author* Abrahams & Gross’s Litigation and Dispute Resolution attorney, Henno Bothma
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