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Reducing tenant risk for buy-to-let property investors

by | Oct 2, 2011

There is a perception that the South African legal system gives tenants more rights than property owners. People assume a tenant can default on rent for months, and there is nothing the property owner can do about it – you certainly can’t evict him.

But this perception is wrong. It is certainly possible to obtain an eviction order against defaulting tenants, provided you follow the correct procedure.

However, it is worth noting that the number of defaulting, problem tenants is tiny when compared to the total number of residential properties that are being rented by good, law-abiding individuals and families.

Nevertheless, it’s good to know that there are legal remedies available and practical steps buy-to-let property owners can take to reduce the emotional strain and financial implications of having to deal with a bad tenant.

The first thing to remember is that the procedure for evicting bad tenants begins long before the default occurs. In fact, it must begin before the tenant moves in by ensuring there is a valid lease agreement in place which has been signed by both the property owner and the tenant.

The lease must set out the rights and obligations of both the property owner and the tenant, including the date by which rental must be paid and any other conditions the property owner may wish to impose.  This could include, for example, the fact that the premises are to be used only for residential purposes; that there is a limit to the number of people who may occupy the unit; and whether or not pets are allowed.

Should the tenant breach any of these conditions, he must be sent a letter setting this out and be given a certain number of days (usually as specified in the lease agreement) to remedy the breach.

If the tenant fails to do this, the property owner may cancel the lease contract. This is done by sending a letter to the tenant and requesting him to vacate the property within 30 days.

Should the tenant refuse to do so, the property owner will then have to obtain a court order from the magistrate’s court for eviction.

This whole process can take six to 12 weeks.  It can be time consuming and potentially expensive, which is why P3 recommends that our members take out “Property owner Protection” insurance.

This insurance covers property owners for loss of rental income for up to three months as a result of defaulting tenants. Valid claims are usually paid out within two days – considerably easing the burden faced by property owners at risk of falling into arrears on their home loans.

It also provides up to R40 000 to cover the legal fees to cover the costs of obtaining an eviction, and it provides the necessary qualified legal resources who will deal with the entire process. All the property owner has to do is inform the insurer within 96 hours of the tenant defaulting to have the wheels set in motion.

While the cost of this insurance is extremely affordable – around 2,5% of the monthly rental – the cost of the policy can usually be deducted from the property owner’s rental income for tax purposes, making it even more affordable.

However, even with this insurance (or without it), we recommend that every property owner has a small buffer fund that can be used to pay for any cleaning and repairs required when a tenant – good or bad – vacates the premises.

Finally, the best way to avoid having to evict tenants is to try and ensure that you only rent your property to good tenants. This requires a thorough check of the tenant’s rental history (has he previously been evicted would be a good place to start); as well as his financial situation.

A good letting agent should be able to carry out these checks for you.

This article was written by Dr Koos du Toit, CEO, P3 Investment Group 

 

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Maya Fisher-French author of Money Questions Answered

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