Investing in a buy-to-let property can potentially be profitable but needs to be weighed up carefully against other investment options.
It’s easy to understand the appeal behind investing in buy-to-let property. South African property has historically performed well, particularly in areas such as the Western Cape where property values have increased fairly significantly. However, the historical performance of property in general shouldn’t be used solely as the basis for investing in a buy-to-let property as this can change at any time. There are of course other factors which need to be carefully considered before investing in a buy-to-let property.
It goes without saying that as an investor, you need to take stock of your current financial situation before extending yourself to a buy-to-let property. Property of any kind is also a long-term investment that requires up-front cash to fund the initial costs associated with a property purchase. Up-front costs include, amongst others, transfer duties, bond registration fees, a deposit, the estate agent’s commission and bond cancellation costs (if necessary).
As is the case with any property, there are also ongoing costs which need to be planned for too. Maintenance is the most obvious. Other less obvious costs include potential rates and taxes increases and damage which although technically for the tenant’s account (depending on the nature of the damage) will probably cost you in some form or other too. The term insurance excess comes to mind.
It goes without saying that you need to calculate what you can viably ask for a rental and what costs it will cover. When calculating this, be careful not to fall into the trap of simply adding up the monthly bond repayment along with the rates and taxes to determine the rental amount. Chances are you will have to pay over and above what you derive from the monthly rent to cover the costs of the property for several years to come and you need to prepare for this eventuality.
Another important factor to consider when weighing up whether or not to invest in a buy-to-let property is whether you want to manage it yourself or if you want to use a rental agency to do this for you. If you do handle the rental yourself, you will need to undertake all the duties relating to the property which can be stressful and time consuming. An agency will essentially carry out the same duties but at a cost.
It's also worth pointing out that owning a rental property doesn’t mean the rent paid is yours for the keeping. As a landlord you need to pay tax on the money received from tenants. Failure to do so can land you in hot water with SARS.
Lastly, property is illiquid, which means if you need to divest and get your hands on the money you have invested in the property in a hurry, it won’t be easy. In other words, you need to be very sure that you won’t need to tap into the funds invested any time soon. Again, this is why it’s so important to make sure you are on a strong financial footing before engaging in any buy-to-let investment activity.
Once you have crunched all the relevant numbers, determined the potential rental return and carefully considered all the other related elements, you should be able to ascertain whether or not investing in a buy-to-let property really is for you.
Article from privateproperty