What is a buy-to-let property investment?
Buy-to-let investment is very different from owning your own home. When you become a landlord, you’re effectively running a small business – one with important legal responsibilities.
How does buy-to-let property investment work?
To buy a residential property, you can use your own cash or take out a buy-to-let mortgage with a cash deposit. Keep in mind that a mortgage comes with risks – if you need to sell the property for a loss, the sale price may not cover all that you owe on the mortgage. You would need to make up the difference. Also remember, that if your tenants leave and there is no rent coming in, you still need to make your mortgage repayments.
Once you buy a property, you can potentially earn a profit in two ways:
- Rental yield – what your tenant(s) pay in rent, minus any maintenance and running costs, like repairs and agents fees.
- Capital growth – the profit you earn if you sell your property for more than you paid for it.
Buying to let is a big commitment.
Many investors and private individuals choose to invest their time and money in buying property to let.
Buying property with the sole purpose of renting it out can be exceptionally lucrative, especially in today’s property market, with stock shortages being reported in parts of SA.
Steve van Wyk, Seeff’s Managing Director in Centurion, says there is a large demand for rental housing in the greater Pretoria area alongside a shortage of suitable properties. “The strict bank lending criteria when it comes to obtaining a bond contributes to the constant demand for rental property, but when investing in this type of property it is still important to keep it in good condition to be assured of better tenants at higher rentals”.
Van Wyk also offers the following advice to the property owners of rental stock:
- It is in your best interest to appoint a streetwise estate agent to assist you in dealing with tenants. An agent will ensure that your contract with the tenants is watertight and covers all possibilities as well as conducting an ITC to check the tenant’s history of bad debt.
- In addition to your bond repayments, as the owner you will also have hidden costs such as transfer duty, transfer fees and bond fees and ongoing costs such as maintenance, upkeep, insurance, rates and taxes.
- Rental income depends on a number of factors such as supply and demand, position, finishes and security.
- It is a tedious procedure to evict a defaulting tenant. The PIE Act (Prevention of Illegal Eviction from and Unlawful Occupation of Land Act 19 of 1998) tends to be biased towards the tenant. The process of eviction begins with a letter to the tenant to make payment by a certain date, followed by another letter stating that the tenant is in breach and giving the tenant seven days to make payment or they will be reported to a credit bureau. After this a letter must be sent via registered post informing the tenant of the cancellation of the lease agreement and demanding that the tenant vacate the property. Should the tenant still not comply, the services of a legal firm would be required to grant an eviction order. This process can take up to eight weeks.
- Rental agents usually have a team of electricians, plumbers and handymen on call who will quickly attend to problems at a reasonable fee. Prior to occupation as well as at the end of the lease the agent along with the Lessor and Tenant must inspect the property, take photographs and list the property room by room including outbuildings and the garden, and note any defects. All three parties must sign this document. It is also strongly recommended that quarterly inspections are carried out as well.
- It is strongly recommended that landlords insist on a double deposit as security to cover damages and if the lessee fails to pay the last month’s rent.
- It is a good idea to install a prepaid electricity meter.