If you’re considering buying a property as an investment, you’re probably aware that as an asset class, it currently offers one of the best possible returns on investment and the view of respected economists is that growth in this sector is likely to continue for the rest of the year at an average rate of between 20 and 25 percent.
Stick to the following basic rules when buying to rent:
Assess the market
Determine what rental you can expect by speaking to a professional letting agent in the area in which you want to buy. Look at newspaper and property magazines to compare rental prices for similar houses.
Location is critical
Buy in a popular area with good access to main roads, shopping centres, schools and medical facilities.
The advantage of investing in property is that you can often raise a bond without having to invest your own capital, although the banks might ask for some sort of deposit from you. The expected rental income can be included in your income for the loan calculation.
The rental received from your tenants should be adequate to cover your monthly bond. While the rental income will be liable for income tax, any loan interest may be offset against rental income for tax purposes. Expenses related to the property may also be tax deductible.
Buy with your head not your heart
The decision to buy an investment property must be based on rational reasons, never forgetting that you are investing to maximise your return on investment. Do a detailed cost benefit analysis to ensure that your decision makes economical sense.
First income, then potential capital gain
When buying an investment property, your focus should be on the monthly rental income and only afterwards on the potential capital gain. By focusing on the cash flow first you will ensure that your investment will break even sooner than it would if you were focusing on capital gains.
Its a long-term game
Property investment is long-term investment, so you need to build your portfolio over time and be prepared to sit out any downswings in the property market.
Put it in writing
When buying or selling a property, everything should be in writing and signed by both parties. Become familiar with sale agreements and the terminology, and watch out for any clause that prejudices you unnecessarily.
Spread the risk
You may want to buy the property with a group of friends or investment partners, however you need a very clear idea on what your legal and financial commitments are should your investment partner(s) default on payment or become insolvent.
Who will handle the letting?
For a fee of between 10 and 15 percent of the gross rental income, a professional letting agent will advertise for and screen tenants, check their references, draw up the rental agreement, and assist with the inventory, as well as collect the rent. The property must have Home Owners Comprehensive Insurance (HOC), and, if the property is being let out partially or fully furnished, it’s a good idea to take out some sort of contents cover. Do a reference check on your letting agent to ensure that they will deliver a good service.
Generally, your existing loan repayments and the repayments on the new investment property should not exceed 30 percent of your joint gross monthly income. Be warned that a property investment costs a lot more than just your monthly loan repayments so factor in costs such as insurances, rates, taxes, water, electricity, maintenance, and letting agents into your budget.
Capital Gains Tax
You will only pay tax on the profit you make when you sell your second and subsequent properties, not on the total proceeds from the sale. So you can deduct the cost of buying and maintaining the property from the amount you realise from the sale. Keep all documentation and receipts of expenses relating to the purchase and improvements made to the property.
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