Top tips for buy-to-let properties
Category General News
Many property investors, whether first-time buyers or experienced moguls, purchase properties with the aim of renting them for extra income - the idea being that the tenants will pay off the bond.
While the returns can potentially be massive over a long period, this type of investment is not without its risks - as the property crash in 2008/2009 demonstrated. It is also not easy being a landlord. It takes many long hours and, often weekends, to look after the property and the tenants’ needs.
Rising rent prices and increasing property values (especially in Cape Town) have allowed property owners to make good returns on their investments, but if you’re looking at buy-to-let options then make sure you do your research. Your money could perform better somewhere else if you are not ready to dedicate time and effort to your property.
Having said that, if you are certain that renting out a property is the way to go, then ponder these tips for buy-to-let investments:
1. Shop around for the best bond - Doing your research and spending more time at the beginning stages of the process could save you a large sum of money in the long run. Different banks offer different packages with varying interest rates. Familiarise yourself with what packages you can expect and arm yourself with the knowledge that when you walk into a bank, you can have a serious discussion with the consultant and end up with the best deal for your financial position. Similarly, you should try to negotiate prices when buying a property, especially if the market is slow and houses are taking longer to sell. Many agents would rather take a slightly lower price for the benefit of a quick sale.
2. Know your borrowing limits - Most people pay a cash deposit when buying a property, and borrow the rest of the money from a bank (in the form of a bond). Borrowing this money will leverage your initial investment (the cash deposit), and will mean that your annual income from rent will be a higher percentage of your investment, even after monthly deductions for the bond. This is a great way to ensure higher returns, but borrowing money is not without risk. High rental costs in many urban areas mean that you may not be able to increase rent further if your mortgage costs increase. It also goes without saying that you should never borrow more than you can afford to pay back - leading on to the next point.
3. Make sure rent covers bond costs - Most experiences landlords pay close attention to their short-term cash flow, making sure that bond or mortgage costs are covered by the rent income. Remember, a property is only an asset if pays for its own costs - you should never have to pay from your own salary to cover the bond repayment.
4. Don’t rely on property price rises for long-term profit - In theory, you could buy a property, hold onto it without renting and then sell it years later for a profit. That’s if property prices rise steadily and consistently, year on year. The reality is that the property market is more fluid, and as 2008/2009 showed us, property prices can crash.
5. Find your niche - Knowing your target market and preferred type of property will make the process easier. Are you wanting to rent to students, young couples, families etc.? This will lead you to what type of property to look at - from communal houses to small apartments or free-standing homes. A safe bet is to buy a newly built, two bedroom apartment as the maintenance costs are low and they are highly popular with young professionals. Buy in an area where there is high demand, in close proximity to major transport routes, and close to shopping centres, schools and hospitals. Other options could be communal houses where each room is rented separately. This can increase returns and is popular near university campuses (especially in university towns such as Grahamstown).
6. Refurbish before renting - Spending a little extra money on the property before renting it can increase returns. Redecorating and refurbishing can add value to the property, making it more appealing and increasing rental costs. Some property investors argue that you should spend 10% of the purchase price on refurbishing.
7. Compile detailed inventories - Before renting your property, make a list of everything in the house, from appliances to dustbins. Note the make and models of electrical appliances. This will ensure that tenants can’t swop them for cheaper makes or dispute when you deduct money from their deposit at the end of the lease agreement for any damaged or missing items.
8. Choose between time and money - Being a landlord means that most of your weekends will be dedicated to advertising, house viewings and repair jobs. Using an agent to handle this admin might save you time but it will cost you. Up to 10% of your annual returns could go to letting agents’ fees. If you only have one or two properties, you’ll save money by doing everything yourself.
9. Be comprehensively insured - There is an ever-increasing range of insurance options tailored for landlords. You can opt to cover just the building or all of the contents too. There are even options that cover the loss of rent. Make sure you cover everything, as accidents such as fire and flooding can happen, and not all tenants take care of the contents of your property either.
10. Keep meticulous financial records - SARS is an effective agency and you don’t want to be caught on the wrong end of one of their hefty penalties. Document all income from rent and spending on maintenance - this will save you time when submitting tax returns and will help with any tenant disputes.
One final thing to note when renting out a property - look after your tenants, and in return, they will look after your property and your interests. Happy tenants will want to stay and re-sign a lease agreement. If they have to move out for some reason, they will be more likely to recommend your property to their friends and family, reducing the downtime of an empty property. Keep up the maintenance and work on building good relations with your tenants.
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Author: Berman Brothers