Power through prop­erty

In un­cer­tain eco­nomic times, buy-to-let real es­tate re­mains an at­trac­tive in­vest­ment op­por­tu­nity

Destiny Man - - MONEY -

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.

THE BE­GIN­NER

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.

THE VET­ERAN

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.

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