Buying an investment property
Category Services
An additional stream of income in the form of rental property is a savvy investment, but just as you did with your primary residence, you need to carefully consider a location with long-term value.
Because of the current economic climate - characterised by low growth rates, high inflation, high unemployment, volatility in financial markets, and dwindling consumer confidence - there are two contrasting factors to bear in mind before investing in a buy-to-let property:
- First, when interest rates go up, so do the monthly repayments on your bond, which has an impact on the rent you charge, and how affordable your rental property will be for tenants.
- Second, a spike in interest rates makes it more difficult for people to buy property, resulting in more consumers being forced to rent as they cannot obtain a home loan from banks.
While this presents an opportunity for you to try your hand at becoming a landlord, let's look at the factors you should consider before you put in an offer on your first buy-to-let property.
CONSIDERATIONS WHEN BUYING AN INVESTMENT PROPERTY
- Location and property types
- Identify all the costs involved
- The advantages of investing in property
- Risks to consider in investment property rental
- Enlist the services of a property agent
1. Location and property types
Pinpoint appreciating and depreciating areas. Factors like rezoning of districts and crime statistics affect the value of property in certain areas.
Property close to schools, centres, services and main arteries is more attractive to most middle-class tenants. However, over-supplied areas that are undergoing mass development could force you to drive your rental price down to compete with similar properties in the area.
Research property sale and rental trends before making a decision about where to invest or purchase a report on your desired suburb from Property24.com before approaching an agent.
2. Identify all the costs involved
If you're not able to pay the cash amount upfront for the property you've chosen, you need to ensure you have a deposit for a bond before applying to a bank for finance. You can acquire this amount (usually 10% of the cost of the property) from savings, or family and friends.
Other costs involved in the purchase include bond and registration fees, and transfer costs if the residence was owned by someone else previously. If you have saved a large sum, but it isn't enough for the deposit, this amount can be used for lawyers' fees during the course of the sale.
Should you choose a property that is a sectional title unit, levies are applicable.
Other costs to consider are:
- Rates and taxes
- Electricity and water
- Maintaining the residence
- Repairing damages to the property
It may take some time before you make a profit, so be prepared to cover some of these costs for the first few years to supplement rental income as your property appreciates.
3. The advantages of investing in property
- You're building wealth without putting in a huge upfront investment. You can use your home loan to finance your purchase, while only paying a small initial percentage from your pocket
- Once you have a tenant paying you, banks regard this as additional income and this creates the opportunity to build a property portfolio over time. A good relationship with the bank means future properties can be acquired for a lower deposit amount
- Property investment appreciates over time, so what you paid for your estate initially could double in value when you decide to sell. Property appreciation also warrants annual rental increases.
4. Risks to consider in investment property rental
- Legislation protects non-paying tenants, so it's difficult to vacate your premises if your occupants can no longer keep up with rental payments
- Maintenance and upkeep costs can escalate in bad weather, or through general wear-and-tear
- You need to set aside an emergency fund to cover months where the property is vacant due to low occupancy, repairs/renovations, or other reasons.
5. Enlist the services of a property rental agent
A managing agent serves as the middleman between you and the tenant, minimising administrative tasks like conducting background checks on tenants, ensuring there are regular inspections of the property and drawing up contracts - and ensuring tenants abide by the lease agreement.
Author: Standard Bank
