Buy-To-Let South Africa: A Great Opportunity To Invest In Property
Buy-To-Let South Africa: Do It Right & You'll Acquire An Asset With Valuable Equity
Buy-To-Let Property in South Africa could be a very smart investment in today’s climate.
Furthermore, if you want to invest in a buy-to-let South Africa it’s not only a really good time to do it, but having your tenants pay off your bond is a great financial model that’s worked well for many.
The good news for prospective buy-to-let property investors is that rental growth is predicted to continue into 2022
Personally, my buy-to-let property in South Africa has not only generated a decent rental income but it’s proven to be a smart investment strategy too.
Some of the buy-to-let properties that I’ve invested in through the years have doubled in value from the time I purchased them to the date of sale.
2 Compelling Reasons To Invest In a Buy To Let Property In South Africa
1. Interest Rates
The repo rate, or the bank interest rate, has recently been slashed to 3.5% making it the lowest in 4 decades.
The repo rate shouldn’t be confused with the prime commercial lending rate which is 7%.
Depending on your credit score & risk lending profile you could negotiate a percentage point or two lower than prime for your bond or home loan.
This means that the finance for a buy-to-let property, in the form of a bond or home loan, will come at the lowest interest rate since 1973.
Therefore, since your bond repayments on your buy-to-let investment property will be lower, you will be making more money than before.
2. Property Market
Another compelling reason to consider a buy-to-let property investment is the current state of the property market in South Africa.
Not only were property prices were driven down in 2019, but since the COVID-19 pandemic, the property market has come under further pressure.
What this means for the smart property investor, is that there is some great buy-to-let investment opportunities all over South Africa.
It’s worth noting that property prices in some areas have been affected more than others by these factors.
For instance investment property in Cape Town, especially along the Atlantic Seaboard, has started to recover.
This apartment for sale in Sea Point would make a great buy-to-let investment as it’s in the perfect area and always has potential real estate investors looking for property in Cape Town.
On the other hand this apartment for sale near Fourways in Johannesburg would make the ideal property investment as the demand for rental property in this area is high.
Not only is it a reasonably cheap investment for great value, but it’s priced at less than R1 million which means you don’t pay transfer duties.
However, not every buy-to-let deal will turn out to be a great property investment in South Africa as there are many pitfalls for the unsuspecting buyer.
The 3 most important aspects of investing in a Buy-To-Let property are Location, Location & Location.
For successful property investment, it’s imperative that you choose an area that has a high demand, for instance the Atlantic Seaboard in Cape Town where growth is always high
5 Tips For a Successful Buy-To-Let Property Investment In South Africa
1. Financing a Buy-To-Let Property
Most buy to let property investors will look to securing a home loan, or bond, to pay for the house or apartment.
However, banks generally aren’t that keen on providing home loans for the purchase of an investment property.
They much prefer financing their clients’ primary residences.
Their thinking is probably that a home owner is more likely to ensure that their bond payments are always made on the house they live in.
Whereas, if the going gets tough, bond repayments on their rental property could take a back seat.
Therefore banks will often charge 1% to 2% more on buy-to-let bonds than they would on residential bonds.
Not only will the financing be more expensive, but they will want to know that the rental income will be at least 125% of the bond repayment amount.
However, if your credit score is high, you stand a good chance of securing a mortgage on your buy-to-let, with a 10% deposit.
The other option of financing your investment property is to pay cash if that’s possible.
Whilst you won’t have to worry about getting bond approval, you’ll also lose out on the tax benefit of being able to deduct interest charges from your rental income.
Other costs to take into account when it comes to financing your buy to let property are the following;
– Transfer duty – this will be zero on properties less than R1 million
– Conveyancing costs will be approximately R35,000 on a R3 million property
– Bond registration costs will be around R40,000 on a similarly priced property.
2. Potential Return & Rental Yield
It’s useful to calculate your property’s potential rental yield to give you an indication of it’s viability.
To calculate this figure, you need to divide the annual gross rental by the value of the home, expressed as a percentage.
So if a property worth R1,2 million earns R10,000 per month in rent, the annual rental of R120,000 is divided by the value (above), giving a gross yield of 10%.
The net yield will be after all property costs have been accounted for.
Therefore, if the levy, rates & taxes, bond repayment and other costs amount to R8,000 per month, your net profit (before tax) will be R2,000.
This means that your net rental yield will be reduced to just 2%.
It’s therefore important to do all these calculations, and rent projections, before signing an offer to purchase on a potential buy-to-let.
3. Property Costs
The most important you need to ensure with your buy to rent property, is that the rental will at least cover all the property costs.
The costs that the rental need to cover are included in this list.
– Bond repayments (including interest)
– Insurance – this is the insurance premium applied to the actual dwelling & not to be confused with household contents insurance, and is usually factored into your bond repayments.
– Rates & taxes
– Levies
– Maintenance & repairs
– Agent commission for placing the tenant which usually works out to between 5% to 8%
– Property management fee if you’re going to have a specialised company manage the property in terms of rent collection & taking care of any maintenance issues.
4. Where To Find a Buy-To-Let Property For Sale
These are some of the factors to consider when searching for your ideal rental property.
Area – ensure that you buy a house in a reasonably upmarket area to ensure price stability and growth.
Easy Access – if you’re planning to maintain & run it yourself, you’ll want it to be close to where you live as you may need to pop out regularly to attend to some issue or other.
I have agents managing my properties, which adds to my costs, but it’s unavoidable as I live too far away from them.
Demand – buying in an area where there is a strong demand for rental properties.
Proximity to amenities – it’s useful to have schools, shopping malls, and easy access to buses & trains, is always a benefit to tenants.
So now you’ve identified the area you’d like to buy in, how do you find the perfect buy to let property for sale?
Here are a few ways you can use to find some real gems.
Estate agents – do some research online to see which agents are the most active in your area & use them to source a property according to your price range & specs.
I picked up a bargain in Sea Point, Cape Town by using an agent in the area.
Property auctions – I’ve never purchased a property on an auction but apparently you can pick up some real bargains if you have the nerve to go up against experienced property buyers.
Web search – researching all the properties available in your preferred area will give you an idea of what you can expect to pay & you may even find the perfect one.
New developments – not only will buying a property off-plan give you a brand new apartment or house, but you’ll avoid paying any transfer duty no matter what the price.
Furthermore, there are many ideal buy-to-let properties available in new developments, everything from studio flats to fancy penthouse suites like this one in Rosebank.
5. Buy-To-Let Property For First Time Home Owners
If you’re a first time home owner looking to take advantage of the low interest rate, a good option is to buy a property for yourself to live in.
After a while of living in your home you may decide to upgrade, in which case you could put your current property on the market for renting out.
This would allow you enough time to evaluate the market and see exactly how much rental income you could expect to generate.
You’ll also have a very good handle of all the monthly property costs of your home which will allow you to make an accurate calculation of exactly what monthly rent you would need to realise to make a profit.
This way of getting into the buy-to-let market affords you the luxury of providing you with a home to live in, whilst giving you time to assess the rental market.
Lastly, as mentioned above, buying a property off-plan is a great option for first time home owners as you not only save money by not paying any transfer duty, but you also get to live in a brand new home.
5 Buy-To-Let Risks You Need To Know
Whilst the buy-to-let game can be a sound property investment as well as providing a steady rental income, these are some of the risks you should be aware of.
1. INITIAL CAPITAL REQUIREMENTS
Buying an investment property to rent out will require a certain amount of capital up front for the following;
- Deposit which will usually be 10% of the purchase price
- Bond registration costs
- Transfer duty on the property if it cost more than a R1 million and not bought off plan
- Agent commission will also be payable up front and will come from your tenant’s first month rent
Furthermore, assuming you’ve been approved for a home loan, you’ll need enough money to pay property costs, for at least 6 months depending on the timing of placing a good tenant.
These monthly costs would include the following payments;
- Bond
- Levy
- Rates & taxes
- Unexpected maintenance & repairs
2. ANNUAL RENTAL INCREASES
If you’re depending on a 10% annual escalation of the rental amount, you shouldn’t be surprised if this is not possible.
Presently the rental market in many areas is saturated with properties available to rent.
Consequently, this has created a tenant’s market which has driven rental prices down.
In some of my properties I’ve been happy just to renew the leases, in some of my properties, at the same price just to keep reliable tenants in them.
It’s risky to let a good tenant go in the hope of replacing them with another one at a higher rental as you may go months without a tenant.
No tenant means no rental income, leaving you to pay all the monthly property costs out of your own pocket.
3. INTEREST RATE INCREASES
If the interest rate in your bond agreement is linked, it’ll mean that your monthly bond repayments will increase every time the repo rate is increased by the SARB (SA Reserve Bank).
Therefore, you need to be prepared for this scenario as it will eat into your profits without you being able to adjust the rent accordingly.
This goes for all the other property costs too.
For instance when your rates & taxes, or levies, go up, your profits will decrease without you being able to increase the rental amount.
4. UNPLANNED TENANT VACANCY
This is a real threat as it can leave you without a tenant and no income.
It can occur when you’ve had to evict a tenant, the tenant has left unexpectedly or the tenant’s vacated at the end of the lease period and you haven’t been able to replace them.
Not only can it cost you a few months in lost income, but once you’ve managed to place one, you’ll usually have to pay most of their first month’s rent over to the agent in commission.
5. BAD TENANTS
I’ve experienced the good, the bad and the ugly when it comes to tenants.
Not only can they cause you undue stress, but a bad tenant can be costly too.
When tenants are disruptive, or just plain noisy, you can usually get this sorted out yourself or let your managing agent act on your behalf.
However, when they stop paying, you’re usually promised that it’ll be made up the following month, or suchlike, but before you know it they’re a few months behind.
Your next step is to enlist the services of a property lawyer which not only costs you more money, but doesn’t always deliver quick results, leaving you out of pocket for longer.
Furthermore, the situation is only made worse when you can’t get the tenants to vacate, leaving you with a property that you can neither derive an income from nor rent out.
Taking a heavy handed approach by using force to evict your non-paying tenants can land you on the wrong side of the law as they’re protected by the PIE Act in South Africa.
This leaves you with the only option of going down the legal eviction route, terms of the PIE Act (Prevention Of Illegal Eviction Act) which is lengthy and costly.
It’s therefore, better to cut your losses and just ask them to leave and hope they haven’t left too much damage.
Speaking as a landlord, I would recommend having a competent, no-nonsense property management agent handling all the tenant & property issues on my behalf (see below).
Property Management
Once you’ve secured your property investment and placed your tenant you may want to consider having it professionally managed.
Whilst it will cost a little bit, which is tax deductible, these are the advantages to having it managed on your behalf.
- Collection Of Monthly Rent – the property manager will invoice your tenant for the rent as well as utility usage (lights & water) & pay the amount over to you less their management fee.
- Unruly Tenants – it’s quite common to get complaints regarding your tenant’s behaviour, in which case your managing agent will address this with the tenant & hopefully get it resolved.
- Repairs & Maintenance – When there’s an emergency that needs attending to your agent can get this done. In the case of a blown geyser, I’ve only had to provide my property manager with my bond account number & they’ve had it replaced, under my property insurance, without me having to get involved at all.
Buy To Let Property - Conclusion
Whilst purchasing a buy-to-let property can be an effective way of not only generating an income while paying off your property but also enjoying the growth in value of the house or apartment.
Getting the income & growth benefits from your property investment is by no means guaranteed.
It all depends on combining & maximising the above factors to provide you with a buy-to-let property, bought at a good price in a good area, to generate a consistently good return.
Buy To Let Property In Cape Town
Looking For a Buy-To-Let In Cape Town?
Take a Look At This Apartment For Sale In Sea Point »
Demand For Rentals Is Always High In Sea Point & the Atlantic Sea Board
Just a Stone’s Throw From the Famous Sea Point Promenade
