Ask a property investor – Can rental income loss ever be justified?
I placed a tenant in my sectional title apartment four years ago at a slightly below complex rental as she was a good tenant and I really wanted her to tenant my apartment. Her rental escalates by 7% per year.
Since then we have had a number of interest rate increases, levy hikes and a CSOS levy added. I’m starting to lose more and more on the apartment (cost vs income), but because I work for myself I have convinced myself that the loss is justified as I can claim it against my tax.
I have also only had the apartment for just over 6 years and the market is flat so selling is not even an option.
Based on my scenario, is my thinking justified or am being short-sighted? – Pat
Hi Pat, thank you for the question as it highlights a few key points to take careful note of when investing in property. Firstly, offering slightly below market rental is a great strategy to retain a good tenant. Very few landlords understand that void or vacant periods are one of the most expensive costs in property letting.
I am unable to determine whether the investment produced positive cash flow from day 1, or whether it has always been a negative cash flow investment and is now simply worse due to the additional expenses being incurred. Either way the error seems to have been made upon entering the investment, rather than obtaining a tenant at a slightly discounted rate.
Either way, I think it is unlikely that the investment, at its inception, created enough positive cash flow to absorb increasing costs that are outside of the control of the landlord.
Amateur property investors often forget to include maintenance, vacancy periods, insurance and other increases in expenses when initially running the numbers on a potential property investment. Another step often ignored is stress testing the numbers for unforeseen situations such as longer-than-expected vacancy periods and large unexpected maintenance costs.
Lastly, you ask if your thinking is justified. As mentioned earlier, the mistake was made at the inception of the investment, which means that your only option at this moment is limiting the loss you are making until you are able to dispose of the asset or until it is producing the returns you expect of the investment. You would need to seek tax advice as to whether the rental loss can be offset against other income in order to at least recoup some of your losses against tax paid.
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Who is Grant Smee?
Grant Smee, MD and franchisor at Only Realty, has been operating as a property investor since 2005. He has a solid financial foundation gained through tertiary studies in finance and accounting, and experience gained in large international financial institutions. Extensive property investment and rental knowledge has been gained through personal property investments and property business ventures since 2005 in both South Africa and the UK. Smee’s specialties include property investment and rentals in the residential housing market.