Buy-to-Let: 5 Key Consideratons (The Bugle)

A recent article on Property24 about the Buy-to-Let investment option as an alternate to traditional retirement saving vehicles caught my attention. The on-line responses from members of the public ranged from enthusiastic to negative. As a buy-to-let investor I regard it as an essential part of any long term saving strategy. As with all savings vehicles, the earlier you start in your career the better. Property investment should be seen as a long term strategy and as with most other asset classes can be cyclical by nature which means that timing the initial investment will remain an important aspect in determining your eventual yield and return. For those considering a buy-to-let strategy here are the 5 key considerations to get you started:

1.   Planning: It is important to have good legal and accounting advise to ensure the correct vehicle is chosen to acquire the properties. Capital Gains Tax and Estate Duty are significant considerations to take into account. I decided on a trust to acquire long-term investment properties, which is excellent for estate planning but not as tax efficient for capital gains tax. Laws are also subject to change and this may tip the balance in favour of one vehicle rather than another.

2.   Research your market: It is essential to have a clear understanding of pricing and the property market cycle of the market you are looking to buy into. I have kept my investments local and close as this is what I understand. Others have invested further afield such as London, Sydney or Florida. This can be good as a Rand hedge although the capital cost of entry may be prohibitive.

3.  Decide on how to finance: The significant advantage of property investments is that mortgage finance is readily available meaning that you can leverage your investment and use the bond as an excellent savings tool. The amount of mortgage finance to use on any property should be carefully considered – associated costs should first be deducted from your gross rental before finance costs are factored in. Ideally you want to end with a paid off portfolio of buy-to-let properties providing you a passive monthly income.

4.   Consider all additional costs: Property transaction fees can be high as transfer duty is payable on every purchase. The case for investing in lower value, high yielding properties is strengthened when you consider the sliding scale of transfer duty below the R1,5m level. It is only above R1,5m that transfer duty is a flat 8%. Up to R600,000 zero is payable, only 3% from R600,000 to R1m and only 5% from R1m to R1,5m. My perfect price range for a buy-to-let opportunity is therefore R1m. The other major monthly costs are Body Corporate and Estate levies, Municipal Rates and repairs and maintenance. When well managed and considered as part of the overall investment cost, these items need not be a deterrent to a successful buy-to-let strategy.

5. What property type is best? Tenant Profile Network have published detailed research on tenant behavior and shown that the R7,000 to R12,000 rental per month range is represented by the most reliable tenant group. Properties offering a high initial yield (a gross 8% or higher would be considered good) and within a high rental demand area are ideal. Location is always the critical factor as it equals demand.

Published in The Bugle, 25 June 2014: Author: Andreas Wassenaar