The lowdown on letting out your property

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From security deposits and credit checks to a range of various insurance policies to consider, the importance of each and how these more complex aspects of the rental industry are crucial for both landlords and tenants to understand.

Understanding security deposits

It is general practice in today’s rental market for landlords to request a deposit from their tenants before they move into a property. Understanding what these security deposits are actually meant for and the laws that preside over them is vital for both landlords and tenants. According to The Rental Housing Act (RHA), which governs residential tenant-landlord relationships, the security deposit is held by the landlord (or agent) until termination of the rental agreement and final inspections of the property are made.

When a tenant pays the deposit, the landlord is required by the Rental Housing Act to place the money in an interest-bearing account, held with a financial institution.

Under the Act, final inspections have to be made jointly by the landlord (or agent) and the tenant, both at the commencement of the lease agreement - before the tenant takes occupation - as well as at the end, at least three days before the lease is due to expire.

Even though the deposit is paid to the landlord, it remains the tenant’s money. The landlord is merely holding the money as a security measure, should the tenant default or breach the rental agreement. If the tenancy runs its normal course, the deposit along with all interest earned must be paid over to the tenant at the end of the lease agreement period.

Credit checks - selecting the right tenants

Tenant selection will have a massive impact on the financial success of the property rental. For this reason, each tenant should be carefully vetted before they rent out the property. The landlord should enquire about details of the tenant’s previous rental history, reasons they are moving, their place of employment and income. Landlords should contact the given references in order to verify as much of the information as possible.

The tenant selection process is where the services of a rental agent will come in handy, as they will be able to professionally vet all possible tenants. While it is not legal to discriminate against any tenant, it is also not wise to simply accept tenants on a first-come-first-serve basis.

Insurance

Property is one of the largest and most costly investments available and although undoubtedly a sound investment, there are circumstances that can cost the owner dearly. Therefore, taking out various insurance policies is a must, as the reality is that unfortunate events happen and you need to be prepared for them - especially in the case where you are the landlord.

Various insurance policies to consider:

• Building insurance - covers the physical structure of your home and its associated outbuildings. This insurance typically protects you from any damage that may occur to the property as a result of natural disasters such as flooding, fires, thunderstorms (hail and/or lightning damage), or perhaps a tree has fallen and damaged the property. Some insurers include a burst geyser as part of building insurance but, as always, make sure you read the fine print and know exactly what your policy covers.
• Indemnity insurance - aimed at providing protection against financial loss resulting from a legal liability to a third party. In other words, this kind of insurance will protect you from any damages or deaths that might accrue to a tenant or a visitor of your tenants. For example, what if there was a fire? Your building insurance would cover any damage to the property but what would happen if your tenant was injured during the fire? Who would protect you from your tenant?
• Non-payment of rent - this safeguards you against defaulting tenants and decreases your risk by ensuring that you always receive an income from your property.
• Damages to the property by the tenants - again, this decreases the risk factor by removing the element of chance and making sure you, as the landlord, are covered and protected.

Annual increases in the insurance premium can also be recovered from the tenant (once the fixed period has passed) in South Africa. The landlord, however, is not allowed to charge the tenant for the initial insurance, only the increase, especially if caused by the tenants themselves. Just make certain that your insurance company is made aware of any changes - the more they know the better.

To avoid complications or misunderstandings it is best for all stipulations to be clearly stated up front in a detailed contract. If all the important elements are included in the document there will be no areas that are left open for interpretation.

While owning a rental property and becoming a landlord can be hard work, it is also an opportunity for the landlord to create wealth over the long term. The key element to success is to always view property investment with the future in mind.