Bitten by the buy-to-let bug? Tips for beginner property investors
Apartments are among the most popular rental properties and offer excellent opportunities to build your wealth. They are often ideal for young property investors, but Samuel Seeff, chairman of the Seeff Property Group warns that property buyers should know that purchasing property to live in compared to property to let are two very different sides to the coin.
READ: Have you got what it takes to be a landlord?
He says a rental property can be a great investment, provided you buy in the right area and ensure there is demand for the type of property. By investing in property, you can build wealth, but ensure you are financially secure.
Some things to consider include:
Financing the purchase of your property. You could make use of a mortgage loan if you do not have the cash. You will need to pass the credit and affordability checks. Some banks offer buy-to-let products, but you may in all likelihood have to pay a higher deposit.
How much rental can you charge? It is vital to investigate the neighbourhood and ensure you invest in a property which is in demand. Generally, the monthly rental may still fall short of the mortgage loan repayment, and you will need to cover the shortfall.
Budgeting for maintenance. Unlike most other investments, property requires maintenance and upkeep so that you can maximise the rental potential. It is also legally required that the property must be in a fit and habitable state.
Other costs associated with rental property. In addition to the transaction costs associated with the purchase (transfer duty, attorneys' fees, and so on), there will also be costs associated with sourcing and vetting a suitable tenant, and to draw up the lease agreement.
Which costs can be passed on to the tenant? The lease agreement should set out who pays for what. The tenant is usually responsible for the rental and utilities used and the landlord for the property taxes, levies (if applicable), and maintenance not due to tenant negligence.
READ: How to go from property owner to first-time landlord
Who should insure the property? It is the responsibility of the property owner or landlord to insure the property itself. The contents will be for the tenant to insure, except if it is furnished, then the owner or landlord should insure the contents.
Managing the property and tenant. The lease agreement should make provision for you to inspect the property at certain periods with permission from the tenant. For peace of mind, it is recommended that you make use of a rental agent to manage the property, especially if you are a novice investor.
Tax and your rental investment. The rental income will be taxable and should be added to your income on your annual return. You will be able to deduct certain expenses pertaining to the property. Visit the SARS website and get advice from a tax consultant.
An article published on Property24 on September 11, 2020, features FNB Home Finance Growth Head Mfundo Mabaso, who suggests that first-time buyers should consider these 6 reasons why paying a deposit is important when buying property:
1. It demonstrates commitment towards buying the property
A deposit demonstrates that clients have the financial means to make the purchase and are comfortable to take on some level of risk until the deal closes. It's also an excellent way to further prove that you are ready to take on the costs that come with home ownership.
2. It increases the strength of an offer/ or the chances of having the offer accepted
Paying a deposit will also improve client's chances of having your home loan application approved by the bank and will place them in a better position to negotiate for more favourable terms.
SEE | 8 creative ways to boost your home deposit savings this year
3. It reduces the risk of lending
The benefit of paying a deposit when applying for home finance is that clients are seen as providing equity into the deal thus reducing the bond amount required. This views the deal more positively by the bank and will also reduce the clients' instalment as they are borrowing a lower amount. By reducing the amount you need in a loan, you are also reducing the amount of home loan interest you pay over time.
4. It increases the customers' ability to negotiate a better rate
Putting down a deposit will not only improve the chances of having a home loan application approved, but will also place the client in a better position to negotiate for a more favourable interest rate. This further reduced the amount of interest a client will pay over the term of the loan.
Read | Here's one of the best ways to negotiate a better interest rate on your bond
5. It allows saving on interest over the term of the loan and lowers monthly repayments
Putting down a deposit for a home loan will further reduce the interest rate and monthly instatements allowing clients to repay faster before the term completes. When paying a deposit, the overall value of your loan will be smaller meaning that you will be able to pay it back sooner.
6. Saving for a deposit mentally prepares clients for a home loan repayment
Saving for a deposit sets the tone of what's to come. It is a great practise run for the commitment that will be required to ensure that clients have the required funds and mind-set to fulfil the obligations of monthly repayments in the long term.
Finally
"Now is the right time to get into the property market. We encourage first time home buyers to look carefully to assess their circumstances and work out how much they can afford to pay back each month," says Mabaso.
09 Mar 2023
Author Property24