The Kenyan Dream for most people definitely involves owning some apartments and getting paid rent every month. The security and predictability of rents as an income stream beats many investments hands down. However, while many people fantasize about this, very few talk about the problems that come up during operationalizing of the property. The myth out here is that rental properties are a “set-it and forget-it” investment. Having quite a number of years in the business, I can confidently tell you that the work only begins after construction. In this blog, I will be highlighting some of the mistakes that first-time landlords make and how you can avoid them.
Mistakes Landlords Make when self-managing Units
1. Setting the wrong rent
The profitability of your investment is real estate is pegged on the amount of returns you get in the form of rents. Many new landlords will either underquote or over-quote the rent without any solid research behind their numbers. What many people fail to understand is that the rental market is like any other market where prices are dependent on what is widely agreed on. When you set low rents, you are leaving a lot of money on the table and delaying your payback period. On the flip-side, higher rents than the market averages will leave your units vacant for a long time. This then leads to our second mistake.
2. Setting rents after construction
Many new landlords will only come up with their rents after they are done with construction. However, this is not how savvy investors play the game. You see before you even buy land or start your construction, you already need to have some ball-parked rent figures guiding you. Ideally, you should have calculated your total cost of construction and come up with rent estimates that will allow you to recoup your investment in a decent amount of time.
If you do your calculations and see for instance that based on your investment of KES 10 million, and taking into account market rents in the area your payback period will be too long. Your better of building units elsewhere. In Kenya a return period of 10 – 12 years is ideal. This means that your total rents over a period of 10 – 12 years should give you back the money you invested.
For example; if you have spent KES 10 million on a rental investment, the monthly rent you should make to recover your investment in 10 years will be;
- KES 10,000,000 / 10 years
- KES 1,000,000 per year
- 1 year has 12 months so each month should give you;
- 1,000,000 / 12
- KES 83,300 per month in total rents
You can now divide this among the number or units you have say 10 units and you will arrive at a rent of KES 8,330 per unit. If the local rents in the area are way below this, then your investment may take more time than ideally needed.
CAVEAT: The example above should be treated as just an example and not investment advice. Borrow the concepts and see how they work for your property.
3. Not Signing a landlord tenant agreement
This mistake could potentially land you in the wrong side of the law. If you don’t have any legal agreement with your tenant, enforcing evictions becomes an issue. Your landlord-tenant agreement is the document that guides the relationship you have with your tenants. It should indicate the rights and obligations of each party and helps to safeguard your rental business from bad tenants. You can get a lawyer to draft it for you or reach out to us for a template of the same.
4. Being Too casual with Tenants
Maybe the reason your tenants are not prompt with paying rent might be the manner you interact with them. I am not telling you to be vicious or inhumane with how you handle your tenants, but you must recognize that you need to set boundaries in your interaction. Many new landlords become too casual with their tenants who in turn abuse their kindness. Always be professional in your interactions while also being kind with clear boundaries. When you respect your tenants, they will in turn respect you and your money.
5. Failing to delegate management tasks
When you are new to the rental business, without guidance you might end up making several mistakes. Many people are often taught that real estate is a passive form of investment but a lot of work goes towards operationalizing. If you are new to this, you either lack enough time or are stretched too thin. That is why I always advice getting some assistance from either a caretaker or where possible a property management company.
6. Being Too Conservative with Marketing
When a tenant leaves, your unit is left vacant and you are now challenged to get a new tenant as fast as possible. Rental property math can be summarized best as “vacant properties lose you money while occupied units make you money.” Many landlords only print out a “TO LET” sign and hang it on the gate of their properties. While this is a good strategy, your unit will often go for a long-time without any tenants because you are limited by the few number of people passing by your property.
In today’s digital age you have many ways of getting your vacant property the right tenant. You could list it on platforms like your local Facebook group or a dedicated listing website like kejafinder.com. If your unit has stayed for too long without a tenant, just reach out and we will see how we can help you.
7. Failure To stay organized
The operational side of real estate involves a lot of transactions and documents that need to be kept well. From tenant agreements, your title deed, land rates certificate, utility registration to maintenance logs for facilities like lifts. Most landlords I have come across rarely have a place where they store these crucial documents. This can make it quite difficult for you to retrieve in the instance of a dispute with a tenant, you need to sell the property or stay compliant.
Some landlords even fail to keep rent records and as a result tenants go without paying on some months. With life becoming fast paced, it is not a good idea to rely on your memory in managing your units. I recommend getting a good box-file for storing your documents. You could also get a hardcover book to store details on rent or use an excel spreadsheet.
