Buy to let property and the implication in South Africa
If you are fortunate enough to own and live in your own house, perhaps it’s time to think about investing again – in your first buy-to-let property? Property investment has paid off extremely well for thousands South African investors over the last few decades, both in terms of income and capital gains, but understanding the ins and outs is vital if you are to make a success of it.
If buy to let property investment is something you’ve been considering, this short guide will help you to understand the benefits, consider the risks and take the first steps towards entering this lucrative market.
Why invest in buy to let property in South Africa?
Low Barrier to Entry
You don’t need to have an enormous lump sum to invest. Whereas a bank will never give you hundreds of thousands (let alone millions) to buy shares, you could very well receive a mortgage bond of up to 100% to purchase a property, particularly if you have a good credit record and already have a property as collateral. Banks tend to offer favourable terms for 2nd or 3rd property investors. Absa for instance offers a specific buy to let home loan, allows existing proven rental income to be factored into affordability on the new loan.
Your tenant pays off your bond
You also don’t need to fork out a lot of money every month, as the rental income you receive from your tenant should cover most – if not all – of the monthly bond instalment. You will obviously have to consider other costs like taxes, levies, maintenance and any fees payable to your rental agent, but if you choose the right property, with a good purchase to rental ratio, you should be able to cover most of your expenses.
Inflation works for you
Inflation may cause food and petrol prices to go up, but salaries, property values and rentals increase too. So you will not only generate an ongoing, inflation-linked passive income, your property value will also increase over time, providing you with multiple returns on the one investment.
Make a profit (eventually)
Buy-to-let is a long-term investment because eventually the rental income (which increases by around 10% each year) will start to exceed the monthly expenses. At this stage, the property will produce a regular monthly profit.
You are in control
Your money is invested in an actual building, rather than an intangible investment vehicle. This means you can renovate, upgrade, add on and generally be more in control of your investment and increasing its value.
Your retirement is taken care of
Once your buy-to-let property is paid off, you have an additional monthly income – or paid-for accommodation, either of which will come in very handy should you be at retirement age.
What are the risks?
This type of investment carries relatively low risks, provided you do your research, make a clever investment by choosing the right property in the right area, and avoid making emotional decisions or throwing in the towel before you start to realise a profit.
Another pitfall to avoid is to over-extend yourself by spending too much of refurbishments. Ensure that your costs are still (mostly) covered by your rental income.
As with any property, there could be damages, or tenants could disappear without giving notice or paying their last months’ rent. This is mostly mitigated by the upfront deposit (often 1.5 x the monthly rental).
You also run the risk of the property going un-let for a period of time, meaning you will have to cover the bond instalments until a suitable tenant is found.
Tips for successful buy to let investment
- Research the market; speak to other buy-to-let investors, estate agents and financial advisors to get a good idea of which areas are the most lucrative.
- Properties near good schools are always popular and fetch good rentals. You might want to look at buying near to where you live, to make management and easy – but at the same time, consider properties further away if they meet your buy-to-let needs and goals.
- The middle rental market is the best performing, with the most growth shown in the R5000 to R7 500 segment, followed by the R10 000 to R15 000 segment.
- When looking at areas, consider public transport, road linkages, shops, schools and other amenities and facilities. Try to see each potential property through the eyes of a tenant – what are the highlights of the property?
- Since you are not reliant of selling your current property to buy the new one, you are a in a great positon to negotiate price. Even a few hundred thousand will make a big difference to your eventual returns.
- If you have time on your hands, consider managing the property yourself. If not, utilise the services of an agent who will take care of everything on your behalf. This could include phoning plumbers, chasing rent and advertising and showing the property to prospective tenants. Consider carefully whether you are up for the job or if the management fee is worth paying instead.
- Think about your ideal tenants and then make your house the perfect house for them. If you would like a foreign family who earn pounds or euros, you will obviously need to furnish the house. If you want a high income, professional couple, ensure the finishes and fittings are suitable to a high-end tenant.
- Make sure that you screen tenants thoroughly to avoid any nasty surprises and ensure the perfect fit for your house.
- Make sure you have at least 2 months’ “rental” in the bank in case of the property standing empty or any maintenance emergencies. It’s important to keep up with the maintenance, so that your tenants will want to stay for a long period of time. If they love living there, they will probably have friends lined up to move in when they are ready to move on.
- If you are planning to pass the property on to a child, or use it as your retirement home, you should consider those future needs to.
The bottom line is, this type of investment is tried and tested as one that continues to appreciate even long after it has been paid off. Start speaking to the right people and keeping an eye out for properties – you could soon be entering the exciting world of buy to let investment.