By Jason Vorster, National Sales Manager at Just Invest
For many buy-to-let looks an attractive income investment in a time of low rates and stock market volatility. But if you are considering investing in property in 2014, or improving your returns on a buy-to-let you already own, it’s important to do things right.
Buy-to-let may not be quite the hot property of the boom years, but it has seen a resurgence in recent times. As an income investment for those with enough money to raise a big deposit, buy-to-let looks attractive, especially compared to low savings rates and stock market volatility.
But beware low rates. One day they must rise and you need to know your investment can stand that test. Many investors who bought in the boom years struggled as mortgage rates rose before the Interest rate was slashed to 8.5% which is the lowest prime interest rate in SA since January 1974 and interest rates will rise again.
Despite the potential for costs to rise, lower house prices, rising rents and improving bond deals are tempting investors once more.
Like any investment, buy-to-let comes with no guarantees, but for those who have more faith in bricks and mortar than stocks and shares below is some advice to get you on on your way:
Location, location, location
It doesn’t matter how many times you have heard it before – it remains the most important factor when buying property. When you are buying for investment, in other words buy-to-let, you have to look out for locations that have high rental demand. Look out for major facilities in close proximity like schools and shopping malls. Notice if there are any infrastructure developments taking place in the areas which would be more profitable and attract rentals.
Don’t be over ambitious
We have all read the stories about buy-to-let millionaires and their portfolios. But the days of double-digit house price rises are gone, say for income not short-term capital growth.
To compare different property values use their yield: the annual net income (Gross income less expense received divided by the purchase price.Although you can calculate yield for smaller time periods, a year is the minimum for a meaningful figure. Landlord expenses tend to spike a few times per year, due to repairs or maintenance or legal fees that aren’t part of the normal rental property expenses For example, a property delivering R60 000 worth of rent annually after expenses that costs R650 000.00 (purchase price) has a 9.23% Nett yield.
If you can get a rental return substantially over the bond payments, once you have built up an emergency fund, you can start saving or investing any extra cash. Remember though, people rarely buy a home outright and they come with running costs, so bond costs, agents fees must be worked out and they will eat into your return.
Once bond, costs and taxes are taken into account, you will want the rent to build up over time and then potentially be able to use it as a deposit for further investments. This means you will have benefited from the income from rent, paid off the bond and hold the property’s full capital value.
Think about your target tenant
Instead of imagining whether you would like to live in your investment property, put yourself in the shoes of your target tenant. Who are they and what do they want? If they are students, it needs to be easy to clean and comfortable but not luxurious. If they are young professionals it should be modern and stylish but not overbearing. If it is a family they will have plenty of their own belongings and need a blank canvas.
Remember that allowing tenants to make their mark on a property, such as painting, or adding pictures or taking out unwanted furniture makes it feel more like home – these tenants will stay for longer, which is great news for a landlord.
Consider looking further afield or doing a property up
Most investors look for properties near where they live. But your town may not be the best investment. Having a property close by has its advantages, but if you will be employing s reputable agent they should do that for you.
Cast your net wider and look at towns that are popular with families or have a sizeable university.
It is also worth looking at properties that need improvement as a way of boosting the value of your investment. Tired properties or those in need of renovation can be strongly negotiated for a better price and then spruced up to add value.
This is one way that it is still possible to see a solid and swift return on your capital. However, ensure that the price is low enough to cover refurbishment and some profit to allow for the inevitable over-run on costs.
A good rule to follow is the property developers’ rough calculation, whereby you want to the final value of a refurbished property to be at least the purchase price, plus cost of work, plus 20 per cent.
Shop around and get the best bond
Do not just walk into your bank and ask for a bond. It sounds obvious, but people who do this when they need a financial product are one of the reasons why banks make billions in profit.
If you are looking for advice consider using a specialist Bond Originator whom will shop around for the best offering. Remember asking them for information means you are under no obligation to use them.
Partner with specialists
There are two areas that you need to have managed by experts: your investment and its process, and the rental. In both cases, with the right assistance and guidance, you would not be only investing in your wealth, but also in your time. Make sure the property works for you, not the other way around.
Letting agents will charge you a management fee, but will deal with any problems and have a good network of plumbers, electricians and other workers if things go wrong. You can make more money by renting the property out yourself but be prepared to give up weekends and evenings on viewings, advertising and repairs.
When picking an agent, select a shortlist of agents big and small and ask them what they can offer you and weigh up their services, costs and what works for your investment model.
Have sufficient capital
An investor preferably must have a safety buffer that can tide over repayments and living costs for three to six months, should the need arise. Determine the length of period you would be able to afford a vacant property and make sure your budget could handle costly maintenance problems. Expect the unexpected and be prepared.
Get the right mindset
This might sound like a strange piece of advice, but it is also very important. When buying income-producing property it takes a different mindset than purchasing a home. Buying a home is an emotional purchase, whereas an investor buys a property because of its value, the income it will generate and its potential for capital appreciation. So make sure you view the property and investment with the right perspective and the end-goal in mind.