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Q: Many real estate companies are advertising buy-to-rent schemes for investment. What should an inexperienced investor be looking for before taking such a scheme?
A: Buy-to-rent is a fairly young market in the UAE, so it's always advisable for inexperienced investors to be cautious.
The attractions are obvious. Short of "flipping" your property (selling it around the time of completion or even before), buy-to-rent can offer the fastest return on an investment in property.
A furnished, managed rental property can offer a balanced return-on-investment over time and - in an era when property prices and rents continue to rise - provides you with a hedge against inflation.
However, an important first step is to ensure that you have sufficient resources to cover any mortgage payments, and also that you are comfortable with the speed of return on your investment. If the buy-to-let option places you in a position where you are financially dependent on your tenants to cover your outstanding mortgage costs, then it is probably not right for you.
You should also examine your current credit-rating, since this will be critical in determining the kind of mortgage you can raise. Lenders take different approaches to providing buy-to-let mortgages, but your credit history and the rental valuation of the property will be critical in determining the amount you can borrow.
Second, you should take independent legal advice as to the status of the property and its suitability to use as a rental property.
New regulations being introduced this year mean that all tenancy agreements must be ratified by the Real Estate Regulatory Authority (Rera), and all freehold homeowners will need permission before leasing property. Understanding your rights and responsibilities in this area is critically important for first-time investors.
Practicality
Once you have established the legality of the situation, consider the practicality of the property as a rental location. There is an old adage that you shouldn't buy where you would want to live; you should buy where tenants want to live.
Look at properties that would suit professionals and new arrivals in Dubai - close to the planned metro, with good access to shopping and community facilities and close to people's places of work. A property in the middle of the desert is less likely to be well-occupied than one that is next to Dubai Media City.
Another key factor to consider is the extent to which you will be using property management services for your investments.
Many buy-to-let packages offer a comprehensive service, whereby a professional third party covers issues like finding tenants, maintaining the property and collecting rent.
However, there is normally a fee for these services. You should have a professional advisor examine the deal to fully understand how this fee is calculated, and the extent of services it covers.
An additional issue to consider is the type of lease the real estate company plans to offer. If the company is offering short-term leases, you might benefit for less wear-and-tear on the property.
However, it may be the case that the company does not rent the property for a full year, while you still have to make monthly mortgage payments. Again, a professional third party can help you understand the potential risks in this area.
Finally, to increase the likelihood of satisfactory returns, you need to be sure that you have sufficient insurance cover in place. Your home and home content insurance should be suitable for leased properties and should cover fire and accidental property damage, in case your tenants leave the iron on, or the taps running.
The writer is director of general insurance at Nexus, a leading regional financial adviser. The opinions expressed above are the writer's and don't necessarily represent the views of Gulf News.
Please send your questions to advice@gulfnews.com.
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