UGANDA, Kampala | Real Muloodi News | Buying a rental property is one of the most sought after ways to generate a passive income. However, the investment comes with risks. Before diving in with hundreds of millions of Uganda Shillings, it is important to do your research.
According to Tim Parker, a financial journalist, by taking the time to understand the basics of the real estate market and property management, you’re one step closer to becoming a real estate muloodi.
Here are some important things you must consider before you purchase your first rental property.
1. Weigh the Pros and Cons
Consider whether you are cut out to be a landlord. Some property owners who only have one or two properties to manage do so themselves to save money. But, some tenants can be a challenge.
Additionally, as a first-time landlord, cash flow may be limited which may result in you as the owner having doing repairs to your building yourself. If you find it difficult to picture yourself dealing with demanding tenants or learning how to do repairs, then being a landlord may not suit you.
You might be better off partnering with someone that has strengths in these areas. Of course, you can always hire the services of a property manager, particularly as your investment portfolio grows.
Owning rental properties is a great way to earn passive income. However, if you have to do a lot of maintenance and deal with challenging tenants yourself, it may not be so passive.
2. Pay all Debts, and Don’t Overextend Yourself
It is always a good idea to pay your personal debt before you start investing in rentals. Ask yourself whether it is a good time to take on a property. Do you have any loans or unpaid bills? If so, you might put yourself in a position where you cannot make payments on your bills or debt.
Sudhir Ruparelia’s secret? Don’t overextend yourself with too much debt. Anyone striving to succeed in the real estate business should attentively listen to Sudhir’s advice.
“Do not expand quickly, outside your means,” Sudhir cautions, “Allow organic growth. So long as you have a good amount of cash flow coming in, you need to first focus on projects which you can fund,” he says.
“I believe that your success in real estate will only come if you don’t borrow money. Real Estate can be an excellent business but also extremely dangerous. If you make a mistake and overstretch yourself in leveraging or borrowing, it will bring your downfall,” advises Dr Sudhir.
“My biggest advice to anyone is, first, work hard at one or two jobs or businesses. Create your cash flow and build your first house with no borrowings. If you want to expand beyond that, you can take some loan knowing that you have got rental income from four unique properties,” adds Sudhir.
3. Find the Right Property
The goal is to look for a profitable rental property that also has the ability to grow in value over time. Look for a location that has easy access to roads, plenty of amenities and good security.
Even though it is tempting (and perhaps even necessary) to buy a cheap property, do not overlook the location or you may be stuck with a property that is difficult to rent out, and even more difficult to sell, leaving you in debt.
If you are looking for a run-down property to save money, a general rule is to buy a house that needs minor repairs, or even better, that is already in workable condition and in an upcoming neighbourhood.
It is worth investing in an inspection by a professional contractor before purchasing your property, so that you don’t end up pouring all your profits into unexpected expensive repairs later.
4. Know Your Legal Obligations
All landlords should be familiar with the landlord-tenant laws in Uganda. You must have a good understanding the tenants’ rights and your legal obligations as a rental owner, including lease requirements and eviction rules, to avoid any legal issues.
For example, you need to have a tenancy agreement in place for rental transactions of over USh 500,000, with transparent terms and conditions.
Unless otherwise stated in the terms of the tenancy agreement, landlords must give tenants an eviction notice of six months. Therefore, it is in your interests as a landlord to have an agreement in place with terms and conditions that protect your investment.
5. Calculate Operating Expenses
Operating expenses on a new property may be between 35 and 80 per cent of the gross operating income. First-time landlords should plan for potential emergencies by saving about 20 per cent of rental income for these expenses.
It is also important to be aware of your tax obligations related to rental income, and to do tax planning from the moment you get into the rentals business.
Anybody who earns rental income from land or buildings in Uganda must pay tax to Uganda Revenue Authority (URA) on the income they earn. The tax rate is 30 per cent of rental income. However, landlords can deduct expenditures and losses incurred regarding that property, capped at 75 per cent of the rental income. This leaves landlords with an effective tax rate of 7.5% after expenses are deducted.
Expenses include things like utilities, ground rent, property tax, maintenance costs, commission to letting agents, adverts for tenants, management fees, etc. The expenses should be incurred wholly and exclusively as a result of renting out the property and should not be capital in nature. In order to claim these expenditures, it is important to keep good records and all of your receipts.
Tax evasion will cost you. URA has a well equipped, well-trained and efficient legal team to tackle non-compliant taxpayers. Just two of the penalties that may affect a non-compliant landlord include:
- If a landlord or entity cannot maintain proper records, they may incur a fine of USh 2 million, or imprisonment for up to 6 months. Landlords are required to maintain records for five years after the relevant tax period.
- Making a false statement to URA could lead to a fine of USh 4 million, or imprisonment of 10 years or more.
Note, these fines do not include the original payment owed, or interest accrued.
6. Determine Your Return
The Knight Frank H2 2020 Kampala Market Performance Review shows that rental yields in prime residential suburbs in Kampala are on average between 8 and 10 per cent.
Similarly, Tim Parker shares that a 6 per cent return in the first year as a landlord is very healthy. He adds that these returns rise over time as the property value increases.
Even though real estate is considered a stable investment, make it a habit to calculate your return on investment annually. Use this to reflect on how your property compares to the real estate market in Uganda.
7. Check Property Validity
As a buyer, it is in your best interest to verify the authenticity of any property you wish to purchase. Take the extra step to obtain a property search from the land district office, speak to the local leaders in the property area, and visit the neighbours to make sure that the seller has a right over the property.
A property is a significant investment, so you must be thorough in your research to avoid any disasters down the road. As a first time investor, visiting the property in person is recommended. You’ll have a better idea of whether you need to set some money aside for minor repairs or renovations before your tenants move in.
In the same spirit, you must do due diligence on any potential tenants. Your success is based on whether your tenants pay their rent consistently and on time. Not to mention the legal implications for evicting tenants without just cause. Take time to advertise the property and find tenants that are a good fit for you.
Like any other investment, you need to be patient and realistic in your expectations. As mentioned above, investing in rental property is one of the best ways to earn a passive income, but initially, you might not get a huge paycheck, so give time to your investment to bring profits. Now that you have these tips, you have the information you need to succeed.
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