As property is still the best performing investment after shares, many investors believe that one way to take advantage of this is to buy property in order to rent it out. Investors can find real bargains at the moment – with repossessed and mandated properties providing excellent value for money. The current economic climate has also resulted in an increased demand nation-wide for rental property. The interest rate is also currently at a point that makes it easier to buy property as an investment.
The good news here is that you do not need a massive property portfolio or piles of cash to invest in the buy-to-let market. Most of the major banks in South Africa have developed specialized home loan products for buy-to-let investors.
The process called ‘gearing’ is when a potential investor needs to borrow money in order to finance the income-generating asset (property), and is expressed as a ratio. This means that if, for example, you wish to buy a property for R500000 and you require a loan for R250000, you will have a gearing of 50%. In general, banks will not grant 100% loans on for buy-to-let investors, so it is important that one is aware that you will need a deposit and be able to meet the bank’s other criteria in order to obtain your financing. Make sure of the specific criteria required from your personal bank.
By and large the amount that you qualify for will be affected by your personal credit profile. In other words your credit history, overall indebtedness and ability to pay back the loan will all be taken into account. One nice bonus element that buy-to-let financing includes is the fact that you can include a percentage of the potential rental income from the property as part of your income when applying for finance.
Once you have secured financing and purchased a property it is important to remember that the loan repayment will not be your only monthly expense on the property – you will also be responsible for maintenance costs, levies, rates and taxes as well as the attorney and bond registration costs.
Some pertinent advice to keep in mind is that you should consider buying-to-let a long-term investment, as with any property you buy. Make sure to do as much research and obtain as much information as possible in order to make an informed and thought-out decision.
When looking at property to buy-to-let, location is everything. Make sure to find out what other rental prices are in the area. It is vital to find the right tenant for your property, and to acquire the specialized knowledge of laws and managing a property as a landlord. Should you not be comfortable or able to dedicate the time to do so it is important to find a property management agent or company that can manage the tenants and rental on your behalf. One of the more distressing situations arises for a landlord when tenants misuse and damage the property, usually resulting in unforeseen expenses.
According to rental experts, however, a wise property owner will set aside a portion of the monthly rental income in order to maintain and upgrade the property regularly. This practice will allow the owner to raise the rent from 8% - 12% each time a lease is renewed or a new tenant moves in to the property.
Conclusively, buying property to let is a smart and profitable investment to make – provided the investor is smart and informed.