6 Important things to consider before investing in a rental property.
Category Rental Property
You may be looking to expand your property portfolio, either by investing in a holiday home, or in a property from which you expect to accrue a rental income.
And while property is among the surest investments, many buyers can be caught out by factors that they had not anticipated or underestimated.
According to mortgage originator BetterLife Home Loans, the following questions will provide buyers with the depth of knowledge they need to rationally evaluate whether they should buy their second property:
1. Can you afford the bond on the new place?
In today’s market, deposits on bonds for properties are high – the current average deposit in South Africa is 22% of the purchase price. Bond repayments are likely to be the largest regular payments that the buyer will make, but they’re not the extent of the costs that the buyer will have to anticipate.
2. Can you afford the costs?
Costs on a property can stack up. Some costs will be fixed, others one-off – fixing up the new property may be crucial if it is not a new development. Taxes on second properties can be prohibitive and might tip the second property away from becoming a reality. Being aware of the full extent of the costs of the second home is vital to ensuring that you don’t regret your choice.
3. Can you handle tenants?
For investment properties, securing reliable tenants is an integral part of having the property work as an investment – rental income has to cover the bond and other costs.
Dealing with tenants can be stressful – if the tenants decide to leave the property, the buyers may not be able to cover the costs of the second property, putting their financial health in jeopardy.
4. How are you structuring the ownership?
In South Africa, tax laws can constrain those looking to buy a second home. The second property may put you in a bracket that you can ill afford, with capital gains taxes being levied on income from the property. How buyers choose to structure ownership in their second property will have important ramifications for the affordability of the property.
Putting the property in a trust, instead of the buyer’s personal name, will let the owner protect the property from creditors, as well as inheritance costs, but means that transfer duty are a flat 8%, and, if the property is sold and the money kept in the trust, a capital gains tax of 20% will have to be paid.
5. Do you know the rules of the property and of the country?
If the second property that you want to buy is not a freehold, there may be rules that you have to adhere to from a body corporate or similar governing organisation. Some of these rules may restrict the buyer’s plans. In the case of a time-share, the buyers should be comfortable with the rules of divisions of the property.
6. How will you take care of it when you’re not around?
The practicalities of a second property with tenants require the owner to be responsive to issues that might come up for the tenant. In the case of a holiday property, can the buyer be confident that the house will be ok while they’re away?
While the buyer might be reluctant to cut into their investment profits, it may be in their best interests to rely on the services of a reputable agent to manage the property in their absence. www.businesstech.co.za
Author: Businesstech
