WORDS: MIRIAM MANNAK IMAGES: SHUTTERSTOCK
Residential property is regarded as the Holy Grail of investment. But how can buyers make their purchase work for them financially to make the most of their investment?
Clever bond financing
Investors can eventually buy two low- to medium-cost properties with one bond while keeping repayments low and paying off the mortgage quicker, says Just Property Invest sales manager Pieter Piek. He says a R1m flexi or access bond typically involves repayments of about R9,800 a month for 20 years. However, a paying tenant in your property can change this. If their rental income covers the bond repayments, you could increase your payments by R5,000. “The bond will be paid off in less than half the time,” says Piek.
Because flexi or access bonds allow you to withdraw money, you could take out the excess after five years to buy a second property at R500,000 without a new bond. Piek says this unit should achieve a rental income of R4,500, to be put towards your original bond. “This means you now have two properties paying off one bond and you still have 15 years left in which to pay it off.”
Save, save, save
Put bonuses, 13th cheques, tax rebates and other windfalls into your bond. “This allows you to pay back more than just your monthly repayment rate,” says Mike Greeff , CEO, Greeff Christie’s International Real Estate in SA. “The increased payment paired with any potential cash injections could cut your bond period by up to five years.”
Defaulting on payments negatively impacts on your credit score and opens the door to added interest and potential charges on returned debits, Greeff warns.
Remortgage, don’t sell
While it may seem attractive to sell a home that is appreciating fast, capital gains tax payments on the profit need to be considered. Remortgaging your home or using your property’s higher value to obtain a larger mortgage, may be a better alternative.
“This is called releasing equity,” says IP Global head of Africa George Radford. “This lump sum can be used to diversify a portfolio or invest in new properties in different markets to mitigate risk – each with their own mortgage.”
Beware of a bargain
A bargain may become a rip-off due to unforeseen renovation bills, which can impact on bond repayments. Piek’s advice is to buy newer units. “You might pay a little more but you’re getting new geysers and know that the plumbing and wiring have been done recently.”
QUESTIONS TO ASK BEFORE SIGNING
- Buying property to let requires an investor’s mindset free of emotion. The perfect investment location is an area with high rental demand and may not be your own preferred location.
- The low- to mid-end market has a higher demand for rentals than the upper end. Entry-level residential properties almost always appreciate in value faster.
- Set up an emergency fund for unexpected costs not covered by insurance.
- When purchasing to let, calculate the potential yield of the property (the annual rental income minus expenses, divided by the price of the property) and compare it to the yield of other rental properties in the area.
- Do a comparative marketing analysis of the area. Make sure your rental income covers your monthly repayments and that you can afford potential shortfalls.
- Find an experienced management agent to find the right property, an approved tenant, manage rent collections, and take on maintenance issues.
- Be aware of all legal aspects and capital tax implications.
Source: Maryke Beyers, property investor consultant and attorney