A few words on rental properties BY ABIODUN DOHERTY

Rental properties are one of the most interesting and attractive sectors of real estate investing primarily because of cash flow. When you own a rental property, you gain cash flow in the form of rent and you also gain indirectly from the appreciation of the property. Due to these factors, many investors either build or buy properties with this at the back of their mind.

Another attractive aspect of rental properties is the ability to give you passive income. Passive income is the money that comes to you without you ‘labouring’ for it in the usual sense of the word before you meet your financial obligations.

This was the logic a property developer shared with me several years ago when he invited me to come and view a project he was working on. He was building about ten units of detached houses within a prime estate. As it was his usual practice, I expected him to sell the buildings and make good profit, so I asked him how much he wanted to sell a unit after completing them. He simply smiled and replied that the buildings were part of his retirement plan. Each building had the potential of generating N1m per annum and he expected them to be his source of cash flow in the years to come.

However, there are a few words of caution and advice for those who desire to venture into such a path. The first rule is location, location and location. First, the location of the building will determine the type of tenants the property will attract and the maintenance issues that you will likely face.

We all know that not all areas can be treated the same. There are areas that have issues with security and infrastructures more than others. And these areas always attract certain types of individuals that most people with taste and options would not like to have as neighbours.

In addition, where you have such classes of people, the state of infrastructures is often pathetic, sometimes not because the government did not make a provision for these things but because the people living in such areas do not have the communal spirit or the resources and ability to co-ordinate themselves and attract development to their area or maintain existing infrastructures. Almost by default, such areas also command lower rents since those who can afford a better environment will definitely not live in those areas. So, if you are considering building or buying rental properties, make sure you approach the location with a ‘critical and analytical’ mindset.

Secondly, whenever you are considering rental properties if you are building, be observant of the area and be selective as to the type of building that will command the best rent in that area. I am often amazed at how simple this rule is and how many investors break the rule.

Many investors build houses that are not suitable for their specific target market. For instance, in a low-income area, a self-contained room or a single room with facility commands greater rent and experiences lower vacancy ratio. This means that often, before a tenant vacates the property, another tenant is waiting.

However, in such areas, if you build a detached house of five rooms with modern finishing, you will find it difficult to let it out and when you do get a tenant, the rent may not meet up with your expectation.

However, in a predominantly middle income earner neighbourhood, a three-bedroom flat with all the rooms having their own bathrooms is the major income earner. Such neighbourhoods are full of young families and those planning to have one. They also have a preference for privacy and are ready to pay a premium to have these things.

In high income areas, quality and class are the key words. If you can, you may consider niceties such as a swimming pool and other services. Due to the cost of land in such areas, high rise apartment buildings are in vogue and most of them are serviced apartments. The requirements of these tenants are different from the first two categories and the rents they are willing to pay are significantly higher.

Another important trend to consider is the direction of growth and development. Always remember that wherever there is employment and jobs nearby, the rental property will boom.

People really love to live not too far from their work places except they really cannot afford to pay the rent. This will naturally put pressure on the rental market and the value of land can skyrocket. This is simply by the operation of the law of demand and supply.

Growth trend also means demographic trends. There are new areas that are opening up rapidly either as a result of new roads being constructed or promised to be constructed or as a result of the movement of companies into those areas or as a result of its proximity to a high growth area that is reaching saturation level or is experiencing high rents, rates and cost of living.

Whatever the factors, don’t build or buy a rental property just anywhere, consider all the above factors and decide intelligently. If you get it right, you’ll keep laughing all the way to the bank for a long time.

Copyright PUNCH.