Homeloans and home ownership always remains interesting.

We return to buy-to-let.

Here are some solid thoughts for those of you privileged enough to afford a property investment.

1. Remember to buy close to home. Think of it this way: Trouble equals distance squared. Ever tried to find a plumber to fix a geyser in another town. ever tried to sort out a non-paying tenant in Durban when you live in Johannesburg? One of the benefits of investing in property is that you can “touch and feel” the investment; be close enough to do so simply.
2. Avoid maintenance as far as possible. That beautiful lawn, the sparkling pool, both can become nightmares in the careless attitude of a tenant. Similarly, look for a property where painting on the outside is kept to a minimum. There are many lovely complexes that are built with face bricks and only gutters, window frames and doors to be painted. Linked to this thought is the question of high rise buildings. A lift replacement in the retirement village in Hermanus has just cost R2.5m for only one floor and the Body Corporate has been saving for 3 years to do it. what you can see immediately is that it has come at the cost of painting and other maintenance. So try to avoid buildings with lifts in favour of stairs.
3. Remember to retain a kitty for unexpected repairs. Stuff happens and your tenant will not appreciate a slow deterioration of carpets and fittings as you annually increase the rent. Prepare for some push-back and ongoing renovation. You also don’t want to lose on resale because your property is old and tatty.
4. Secure your tenant contractually. I have just has reason to negotiate a Rental agreement. Rawsons have an excellent offering and the agent was highly experienced in his field – something it is always good to enquire about. However, Just Letting have Rentsecure for almost the same monthly fee. This policy enables your rent, less the 8% fee in total, to be guaranteed every month. If the tenant hasn’t paid, Rentsecure ensures the collection process until the tenant is up to date and will even initiate eviction processes if required. That’s cool to have when needed – collections and evictions can be expensive and time-consuming. Contract with your tenant without exception. a handshake is very difficult to manage legally if and when required. Furthermore, details around behaviour, alterations, pets etc are left in the air if you cannot prove what is considered acceptable. Finally, contracting collections and inspections by a reputable letting agent may look expensive but is well worth the while when required.
5. Pay off the bond as quickly as possible and make sure it is an access facility. The purpose of having an investment property is to provide an asset to invest further. Just because the bond is being paid by the tenant is not a reason not to pay it off quicker as you are able. once you have the bond reduced or paid off, use it to invest again in whatever you choose. This does two things, a. It enables you to take risks using a non-primary property as collateral so in the event the business does not go well, you don’t lose your family home, and b. The ability to access your bond gives you the chance to take advantage of investment opportunities that arise in a number of markets, for some, even the stock market.
6. Pick your spot wisely. Close to the Gautrain is popular and tenants will always be plentiful. On the other hand, close to schools and amenities will be popular for young families who often become good tenants. To the later point, a good tenant does not always pay the highest rental – I will often reduce a rental for a longer term or decrease a contracted increase percentage in appreciation of a tenant who looks after my property as their own and always pays on time. Often new property investors struggle with the thought of vacancies and to them I would say: There is always a tenant, there may not always be a high rental. Pretty cheesy if you have to earn a certain amount of rent to pay the bond but then maybe you should have waited and saved a bigger deposit before buying your investment property.
7. Check out the returns: the following calculations are contentious but when I calculate my return on a property, I use the total cost as the base. See the following example:

Total cost: R645000

Rental per month net of services and levy: R6000

Return per annum: 11.2% [72000/645000*100]

By the way, this is a good return and you could expect less, say, 6-8% net. For this reason it is important to buy where you can expect a sustained capital growth.

Some would say that if I put down only a R100000 deposit and the bank financed the rest, then I could calculate my return as 72% [72000/100000] but I think this is nonsense particularly as the period of the bond increases and repayment occurs on the capital – you obviously use the net rent to do this so how can the return be so high. One thing is for sure in property investment – you don’t need to pay cash and can “gear” your investment with a smaller deposit relative to your bond size.

I’ve said it many times, an investment property or two prove a good long-term asset and give you financial choice when needed.

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Jack Trevena

With over 30 years of experience in the banking and home loan industry, my hope it is share what I have learnt over the years with my blogging community, inspire conversation around the subject and in the process discover unique insights into this ever changing environment.

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