Buy-to-let property investing for beginners

One general misconception is that property investing is only for a select few. At IGrow, we make buy-to-let property investing easy for you, this is how you can start your property portfolio.

For the sake of our argument, meet Zizipho. She earns a respectable salary and has decided to invest her savings into property. GRAPHIC: Amber Dawson/ Envato Elements.

How do you invest your hard earned cash? This is a question many South Africans have heard before.

Some investors opt to finance their savings into stocks and ETFs, which can offer varying returns.

According to Sean Johnston, general manager of property portfolio planning at IGrow, this is because these investment vehicles are dependent on a company’s performance on the stock market, which is not always predictable. 

“There are several risks such as political, economic, social, and technological that can impact the performance of a company. This, in turn, impacts the value of the share price,” Johnston said.

Others, meanwhile, choose to invest their money into cryptocurrencies, which are more volatile than other investment vehicles.

“[Cryptocurrencies] are purely based on supply and demand, however, the demand can change rapidly and this impacts the price of a crypto coin. A simple tweet from an influential person can send the price of a coin tumbling overnight,” Johnston quirked.

But what about investing in a buy-to-let property portfolio? The risk is often low, and in the long-term the returns can be substantial.

According to Johnston, the biggest advantage of investing in property is the investor can leverage the bank’s money to start their property portfolio.

“With other investment vehicles, they have to invest all their money in order to make money in the form of interest,” Johnston said.

Still, a buy-to-let property portfolio does come with its challenges. If you opt to invest in the wrong property in the wrong area, you can lose your investment. 

However, if you have a plan and you make the right investment at the right time this investment formula can work for you. Let us look at the following scenario.

Meet Zizipho

For the purposes of this explanation, meet Zizipho, a 30-year old mother. She holds down a steady job and income of R25 000 per month.

At this stage, she knows she’ll have to start saving so she can afford her daughter’s university tuition in the future, so she’ll have to invest her money somewhere.

With IGrow Wealth Investments, we have the perfect investment just for her. A two-bedroom, one-bathroom apartment in one of the fastest-growing nodes of Cape Town is selling for R899 000.

Together with the help of bond financing, and other strategies provided by IGrow, this amount is easier to pay off than you might imagine.

The key part of Zizipho’s strategy is she will get someone else to pay her bond for her. By immediately renting out this apartment she’ll start to earn a passive income, meaning she’ll slowly knock off a portion of the bond each month.

As long as Zizipho holds on to her investment, it will start making a surplus in the future. She is expected to lose R9 289 for her first year but will begin to make a surplus of R362 210 in year 30. Calculations have been made on included rental assist, 100% bond financing, expected interest, and a range of other mitigating factors. GRAPH: Jordan Wright.

Bills, bills, and more bills…

Investing in property is not as simple as paying off a bond. There are rates and taxes, levies, maintenance, and rental management fees Zizipho needs to keep in mind. 

Altogether, she will make a shortfall of R9 288 for the first year, based on receiving 100% bond financing at the current interest rate of 7% over 30 years.

The following year, due to a rental escalation, her shortfall will shrink to R5 112. Zizipho will continue to make a smaller annual loss until year five when her bond instalments, and other expenditure, except for maintenance, is covered by the rental income. 

But property is a long-term investment, it does not reward instant success.

Once Zizipho starts to make a surplus from her investment in year five, she will have the opportunity to refinance this property and purchase another development if she wishes to grow her portfolio. 

Interest rates

Given the current economic climate due to the Covid-19 pandemic, it becomes crucial to mention the role of interest rates determined by the South African Reserve Bank (SARB).

At 7%, the current prime lending rate in South Africa is at one of its lowest points in our history, compared to pre-Covid-19 rates which were around the 12.5% mark.

According to Justin Abrahamse, marketing manager and property investor at IGrow, Zizipho could now save up to R1 500 per month on interest.

Johnston echoed these claims. He explained that, due to the current interest rates, current bond owners can pay less on their monthly instalments.

“This is particularly beneficial for property investors who have a monthly certain budget when purchasing buy-to-let real estate,” he said.

In addition, Johnston also highlighted when the prime lending rate is lower, the income requirements for bond financing lowers too.

“If you increase the prime lending rate to what it was before Covid-19, the same property at the same purchase price would require a higher income to qualify for up to 100% finance,” he said.

However, Johnston also warns investors should be aware of the prime interest rate increasing in the future. 

“If the property purchaser had a certain budget and the increased interest now increased their shortfall, this may result in the purchaser having to sell the property if they are unable to meet the shortfalls,” he said.          

As a precaution, Johnston advised property investors to calculate potential rate hikes into their budget when investing in property with abnormally low prime lending rates.

Investment property – Long-term appreciation

In total, Zizipho will pay approximately only R20 880 towards her total bond of R899 000. Her tenants will pay off the rest of her bond over the 30-year bond term.

By year 30 she will have totally paid off her bond. Now she can start enjoying a larger portion of her R48 377 per month rental income.

Over time, Zizipho’s property is poised to appreciate significantly. Her most growth periods can be highlighted between years 20 and 30. Calculations have been made on included rental assist, 100% bond financing, expected interest, and a range of other mitigating factors. GRAPH: Jordan Wright.

But this is not the mainstay of her investment. Over the course of these 30 years, her property would have experienced strong capital appreciation. By year 30, this property should be worth in the region of R9 046 329.

“Investing in property requires understanding the bigger picture,” started Johnston.

“Property is an appreciating asset and it takes time to build up wealth in order to provide financial freedom.”

The key to building your property portfolio is to surround yourself with a team of professionals, he maintained.

“You, therefore, need to have patience and also work with a team of professionals who can take away the guesswork of sourcing properties and finding tenants over the long term on your behalf. This also includes the accounting and fiduciary aspects of running a property portfolio.”

At IGrow, we’re ready to help you invest in property. To start your journey, like Zizipho, book a no-obligation consultation with one of our property investment strategists by clicking here.

Please note these calculations are based on a unique set of circumstances and true performance may vary. Therefore these graphs and examples must not be interpreted as a true financial forecast.