Two, three or four cheaper properties give better returns

ALTHOUGH managing several tenants rather than just one can be irksome and time-consuming, in today’s property market it is almost always wiser to invest in two, three or four cheaper homes rather than one expensive unit.

This is the view of Bill Rawson, chairman of the Rawson Property Group, who has a significant number of tenanted properties in his private portfolio.

Rawson says he would not advocate totally shunning expensive properties, because they could be sold at a “substantial profit”.

“However, right now it’s the smaller units that appreciate in value the fastest and earn the best rents in relation to the capital outlay.”

“Two R1 million units will probably give a better return than one at R2m. Similarly, three at R700 000 will probably bring in a better return than one at R2.1m.”

With one unit, Rawson says, the risk is focused and concentrated on a single tenant – but spreading the risk is one of the oldest and wisest investment strategies and has always been favoured by landlords.

In the current conditions, says Rawson, landlords are sometimes approached by three or four people to split the rent among them and bill them each individually.

He believes this can be a dangerous course of action because often one or perhaps two of the signatories to the lease default and their cotenants are either incapable of carrying them or don’t feel obliged to do so.

“It’s essential to have one person accepting the responsibility and being accountable to the landlord,” says Rawson.

He says he is often asked why he’s such a devoted proponent of residential property when the returns (on average about 5 percent after cost deductions) are half those of commercial property, which can earn a 10 percent or 12 percent return.

“The danger with commercial properties is that if tenants leave or default it can take months – even years – to replace them. There is so much demand for residential property that new tenants can almost always be found within one or two months.

“Also, while tenants living in homes will often do all they can to stay there, businesses in financial trouble are inclined to put landlords at the bottom of their payment list and are often only too glad to get out of the premises and ignore the lease conditions.”

Rawson warns, too, that property investors without legal backgrounds or years of experience should always consult good lawyers and rental agents when drawing up leases.

“Here again, it is only too easy to leave loopholes that unscrupulous tenants can exploit. Leases have to be so drawn up so that they cover every possible contingency.”