Buying a rental property can be a lucrative proposition as it offers a steady income almost instantly. However, this could turn into a nightmare without proper due diligence. The first thing one needs to do is to check the validity of the title deed and ensure the seller is the real owner of the property.
“If there are multiple owners, you will need the permission of all parties to proceed with the sale,” says Abdulla Bin Sulayem, CEO of Seven Tides, a Dubai-based luxury property developer. “Then check if the property is tenanted; if so ask for a copy of the tenancy agreement.”
He further suggests to personally inspect the property. “Make sure the property you are purchasing is accessible to you, i.e. not in a restricted zone for GCC clients only,” he cautions.
If using the services of a real estate broker, check the agent’s track record. “When issuing cheques, make sure these are never in the name of the broker as all government cheques should be made payable to the Dubai Land Department and all other cheques should be made payable to the seller,” says Bin Sulayem.
Landlord and Tenant Law
If the property is tenanted, check the terms of the existing lease and the historical compliance of both landlord and tenant with the lease terms, says Peter Greatrex, partner at Trowers & Hamlins. As per the Landlord and Tenant Law, sitting tenants have a right to complete the contract they signed with the previous owner.
“It is not possible to simply evict a tenant in favour of a new one, and eviction can only be sought in limited scenarios,” says Greatrex. “Similarly, it can be difficult for landlords to impose new terms on tenants even on a renewal of the tenancy.”
There are certain situations the new owner can terminate a contract: when the tenant breaches the tenancy agreement or the law; the landlord wants to sell the property; or the landlord wants to occupy the property.
Know tenancy terms
Mario Volpi, sales manager at Engel & Volkers, also tells buyers to know beforehand the exact rental amount, the frequency of the payments and the amount of the security deposit. “The deposit is a big issue. Where is it and how much is it? You will also need evidence of the property’s condition at the start of the rental agreement to be able to work out if the deposit will be used to rectify any changes or not,” says Volpi.
Greatrex also points out that it is rare that the sale of a property coincides with the renewal of a lease, therefore, the parties need to consider how they can manage and apportion the payment of future rent and service charges to the buyer.
Possible disputes
Despite all the precautions, Bin Sulayem says disputes could still arise when a tenant is not willing to vacate as agreed or in cases of maintenance issues that predate the new ownership.
“Any form of legal case that’s raised can take months of going back and forth and should be avoided at all costs,” advises Bin Sulayem. “Get everything in writing and keep all forms of communication with all concerned parties.”
Greatrex adds that disputes commonly arise from money matters or the state of the premises. “There is no substitute for good and complete due diligence on the property and the tenant, backed up in the sales contract to ensure that the seller will stand by the information provided,” he says.
Ensuring better ROI
To achieve good returns, Volpi says the investor should buy a property in an area that is currently or will potentially be in demand, has existing or upcoming infrastructure and has good transport links. Other things to look out for are facilities and amenities, attractions in the area, views and retail and dining amenities. “These factors will also ensure capital appreciation,” says Volpi. “Renting the property fully furnished will increase the rent but can limit you to only a certain section of the market. The most common fully furnished property is a studio apartment.”
However, an easy way to ensure a good return is to buy a property with a sitting tenant. Another method would be to buy property from a developer that is offering a guaranteed rental return, says Bin Sulayem.
