Power through property
In uncertain economic times, buy-to-let real estate remains an attractive investment opportunity
Property investment allows you to make your own decisions and grow your own portfolio. With a mortgage loan, you can purchase a property and let it to tenants to assist in repayments. This means that even if you don’t have a lot of money to start with, the combination of rental income and property value increases the worth of your asset. We asked two private investors to share their experiences.
Sello Latakgomo (29) grew up in a township in Pretoria. After completing his studies, he was employed by one of SA’s major banks and, after doing some research, he realised that property investment was within his reach.
Six months ago, he found an affordable twobedroomed flat in a secure complex in Boksburg. The asking price was R475 000, but – after negotations – the seller agreed to reduce the price to R455 000.
Latakgomo had managed to save just enough to cover the transfer fees and pay for some renovations to the property, so he told the bank he’d need a 100% bond. Luckily, it granted him this and he was able to buy his first investment property.
“I have a 20-year loan and my current monthly repayments are R3 700. You can get a longer repayment term, but the more years you take to repay the loan, the more interest you pay. So it’s best to stick to 20 years or less,” he says.
The rental income from Latakgamo’s current tenants is R4 700. This almost covers the bond repayment and the levy of R1 400. Latakgomo also pays R1 000 of his own money towards the bond each month to settle the debt as soon as possible.
He says he didn’t struggle to find reliable tenants. He simply signed a new 12-month lease with the people who were already occupying the property.
“I was lucky. If you go the route of employing a rental agent, you have to pay them 10% of the amount the tenants would be paying and this is expensive. So I’d rather manage it on my own,” he says.
However, while he hasn’t had any problems with his tenants, he’s aware that things sometimes go wrong and rent payments can become an issue. He takes a pragmatic approach. “It’s about building a relationship. If you know what’s going on in their lives, it’s easier to understand and be lenient. However, to do that, you need to have some back-up savings in case things go wrong.”
Every landlord has a responsibility to maintain the property, but Latakgomo was lucky because the complex has a very efficient body corporate who care for it. He advises other investors to enquire about the quality of the body corporate before purchasing in a complex: speak to other owners in the complex and, crucially, ask to see the financial statements of the body corporate for the past two years in order to ensure it’s in good standing.
Other considerations are insurance and tax. Latakgomo pays tax on his monthly income from the tenants, but the bond insurance is already taken care of by the body corporate.
“I’m hoping to be able to buy a second property in about six months’ time, perhaps in a place like Tembisa, where the rates and levies are quite low. I’ll find tenants on social media,” he says.
Denzel Adams* (59) still owns the first property he bought 30 years ago for R75 000: a three-bedroomed cottage in upper Wynberg, Cape Town
“I knew very little back then. I didn’t make a lot of money and I was just very excited to own my own house. I’d saved a bit of money for a deposit and transfer fees, and managed to get a bank loan of
R67 000 on a 20-year bond,” he recalls.
“I knew I’d eventually use the property as an investment, but I wanted to do some improvements myself while I lived there. It was only after I’d moved in that I realised what a bad state the house was in. The agent had said nothing about the rising damp or the rotting floorboards and I didn’t have the experience to ask. So fixing that up cost a lot of money. I tried to do it myself, but in the end, professionals always know better.”
Adams lived in the house for six years before he relocated to Pretoria. He then rented the house out to students for about R2 000 per month.
“In the Southern Suburbs in Cape Town, you never have a problem finding tenants, especially if you cater for students. But you need to be aware that they’ll be having lots of parties, so if you let the place to them furnished, be prepared to have your lounge suite and carpets ruined! You’ll need to do a decent cleanup and replace some items when they leave. Also, students aren’t around for the full year. They often go home over December and only move in when the varsity term starts in February, so they may quibble about paying rent for the months they’re away. You need to negotiate that carefully and reserve some savings as back-up,” he says.
Like Latakgomo, Adams paid additional money towards the bond whenever he could until it was almost paid off in 1997. “But I was advised not to pay the bond off completely, as I was able to deduct the loan interest from my income tax,” he says.
By then the rental income was more than covering the bond, so Adams was actually making some money on the property. However, by 2008 he was tired of dealing with difficult students and maintenance issues from so far away.
When the tenants’ lease ended, he rented the house to a mature couple. The man had very strong
handyman skills and offered to take over all house repairs and even make some improvements for a reduced rental fee.
“That suited me just fine, so I let them have it for R6 000 per month. That’s now gone up to R7 200, which is still a big discount,” he says.
The value of the property has increased significantly, with similar houses in the area selling for about
R2,5 million or being let for R12 000 and upwards.
* Not his real name.
TIPS FOR NEW INVESTORS
• Start your search for properties online and compare values. Look at the rental income of similar properties in the area.
• Do an online affordability calculation. You can find this on banks’ and property search websites
“Before purchasing in a complex, speak to other owners there and ask to see the financial statements of the body corporate to ensure it’s in good standing.”
such as Property24. This will allow you to estimate how much you can afford to spend, based on your current income and savings.
• Look for properties whose value will increase – eg, an affordable house which you can improve in an area close to schools, shops and transport.
• Make sure you can afford the transfer fees.
• Check out the structural problems before you buy. It’s a good idea to take an experienced owner with you to view the property.
• Consider the rates and taxes, as these will increase your monthly payments.
• Make sure you check your tenants’ legal documents.
• You have to declare rental income on your tax return. However you can deduct any expenses incurred in conducting this trade, as well as the interest on the loan.