Buying a property and having tenants pay off the bond can be a very successful investment option — if you do it right.
While buy-to-let can lead you to the land of milk and early retirement, this type of investment is not without risks. The property crash that started in America in 2008 and led to a worldwide economic recession is an excellent case in point. There are probably also easier ways of investing that don’t include having to maintain a property and cater to the needs of tenants.
The key to growing your wealth through buy-to-let is experiencing adequate capital growth in the value of your property while the bond repayments are being covered by your tenants. In the current market, with house prices experiencing limited growth countrywide, this could be easier said than done. On the other hand, with demand for property currently being on the low side, astute property investors should be able to acquire the right property, in the right area, at the right price.
Industry experts agree that smaller, newly built properties in areas that are in high demand, i.e. close to significant transport routes, shopping centres, schools and hospitals, are ideal. Apartments or communal houses near universities are also a good bet, as they will always be popular rental options.
If you are in a position to put down a healthy deposit on your buy-to-let property, you should be able to cover the monthly bond repayments from your rental income, as rentals, especially in urban areas, are currently on the high side. Be aware that, should interest rates increase, you may find it difficult to increase the monthly rental sufficiently to cover the increased instalments on your bond. Paying the shortfall on the mortgage out of your monthly salary is not a wise investment strategy.
If you are not buying a new property, it will be worth your while to spend some money on refurbishing, as this will increase demand for the property and justify a higher rental. A general rule of thumb is to spend 10% of the value of the property on renovations and improvements.
While obtaining the services of a rental agent to manage the rental of your property will come at a cost — generally 10% of your annual rental income — the time and hassle that this will save you could make it money well spent. A rental agent will also be able to assist you in obtaining the correct tenants, a determining factor in the success of your buy-to-let investment that cannot be over-emphasized.
Find out from your insurer regarding the options available to you for insuring the property, including the contents and fittings. Suitable insurance cover affords you a safety net against unforeseen events that could have a devastating effect on your financial wellbeing. Ideally, your cover should ensure that your financial position is virtually unaffected by damage or loss. Choosing a reputable insurer is a vital part of ensuring that your investment pays off when you need it the most.
Don’t neglect to discuss the tax implications and requirements of your buy-to-let investment with your tax adviser prior to kick-off, as you do not want to be red-carded by SARS come tax-filing season. You also do not want to be paying more tax than you need to, and good record-keeping will go a long way in this regard.