The decision to buy a house with the view to renting it out as an investment can potentially be profitable, but needs to be carefully weighed up against other types of investments that may be more readily accessible and easier to manage.
This is according to Tommy Nel, Head of Credit at FNB Home Loans, who says because the South African property market has historically seen good returns, people could assume that it’s a fail-safe investment.
“However, returns are by no means guaranteed. Investors must commit to an initial capital outlay, ongoing funding and a fair amount of administration before seeing returns,” says Nel.
He says before launching into buying an investment property you will need to take stock of your current financial position.
Property is a long-term investment that will need upfront cash to fund the costs associated with buying a property, such as the transfer duties, bond registration fees and deposit, if necessary.
There are also certain costs involved in realising one’s investment, like estate agents’ commission, bond cancellation costs, along with the capital gains taxes that investors would become liable for at the point of disposal.
“Property is also illiquid, which means it cannot be converted easily into cash because of the process involved in the selling. This means you need to be very sure that you won’t need to tap into the funds that have been allocated to the property in the near future,” says Nel.
Once the owner has raised finance and purchased the property, there will be ongoing associated costs with the property that will not automatically be covered by the rental income.
“Many new investment property owners simply add up the bond repayments along with the rates and taxes to come to the rental amount,” says Nel.
“This is wildly overoptimistic and with an investment property you need to know that you will most probably, unless you have paid in a substantial deposit, be paying into this investments every month for the near future.”
He says to make sure you do research into your area and market-related rentals to understand what type of rentals you can expect.
It could take up to around seven years or even longer before inflation has pushed rental income up into a place it will cover both the home loan repayments and rates and taxes, he says.
One of the biggest ‘angsts’ for investment property owners, and this is not a financial issue, is the admin that comes with managing tenants.
Nel says owners can either manage the property and rent collection themselves or hire an agency.
Managing on your own can be administratively heavy and time consuming. While an agency will take this away, they will charge a fee to find and place tenants and manage the property, which will also need to be built into your budget.
“Whether you use an agency or not, you need to ensure that you are in a position to continue paying the bond if the tenant cannot make their monthly rent or suddenly absconds,” says Nel.
“It is highly unlikely that your property will have continual occupation, which means that when doing investment calculations you need to be able to fund the property in months there is no rental income.”
Other costs that need to be included are the ongoing maintenance costs, as well as potential interest rate increases. These costs need to be managed accordingly, with sufficient cash reserves, should some of these kinds of risks play out.
“Once you have worked out all the calculations that are associated with investment properties, including upfront and ongoing costs, potential rental returns, as well as your own time allocated to the investment, you will be in a good position to ascertain if you should invest in property,” says Nel.