Should you buy to let? First, answer these 7 questions…

Article summary

• A well-managed buy-to-let property can be a very attractive investment opportunity.
• To ensure you don’t overpay for your buy-to-let property, you’ll need to get a realistic idea of market-related rentals in your chosen area.
• Obtaining the best possible deal on your bond is a crucial part of maximising the return on a buy-to-let investment.

Renting out a property can be a good way to bring in a regular income. The surge of new developments taking place throughout Cape Town and Johannesburg hint toward a bright future.

“If you can find the right property and the right home loan, it is possible to make a rental yield of as much as 5 to 10%, depending on where you’re based,” says Rhys Dyer, CEO of ooba Home Loans, South Africa’s largest home loan comparison service.

Investing in buy-to-let properties: What you need to know

Indeed, correctly managed buy-to-let properties can be one of the most attractive investment opportunities out there. But before you become a landlord, here are the important questions to ask:

1. Does it make financial sense?

To ensure you don’t overpay for a prospective buy-to-let property you need to get a realistic idea of market-related rentals in your chosen area, says Dyer. “The best way to do this is to consider the rentals of other properties let in the same suburb.”

Sources for rental information include property-related websites, as well as the classifieds section of the local newspaper. You can also use Property24 to check property sales and rental trends throughout South Africa.

“Charging a market-related rent will also mean that it will be easier to find and retain tenants,” he adds.

Low interest rates make it a good time to buy a property, but ensure you can cover the bond if the property is untenanted for a period of time, for whatever reason.

2. What are your financing options?

Once you’ve found a potential investment property, you’ll need to secure the finance necessary to buy it. “Getting the best deal on your bond is a crucial part of maximising the return on a buy-to-let investment,” says Dyer, explaining that you’ll need a home loan specifically designed for buy-to-let.” A professional bond originator will help you find the best possible home loan deal by approaching the banks on your behalf.

“Existing bondholders can also apply for a second bond,” he adds. “Typically, as a small to medium investor, you should have some equity saved from other sources. You would normally set up your financing in a way that your second bond is paid off or cash flow neutral to take the long payment off the bond and slowly grow equity. With rental increases and positive cash flow, you will develop equity to invest into the next property.”

3. Have you got the right deposit?

While 100% bonds can be awarded depending on your credit risk profile and affordability assessment, lenders generally expect borrowers to put down larger deposits on buy-to-let bonds, Dyer notes. “You may find it difficult to get away with a deposit of less than 10% of the purchase price and, for the best deals, you’ll need as much as 20%, depending on the purchase price and your risk profile.”

Buyers Trust, a subsidiary of the ooba Home Loans group, offers a strong alternative to the transferring attorney and estate agency as a place to invest your deposit. Buyers Trust creates a bank account with one of the major banks in your name, transfers your deposit into that account, and administers the account under a specific investment mandate provided by you.

When signing the Offer to Purchase, select Buyer’s Trust as the financial service provider with whom you wish to invest your deposit. You’ll gain the advantage of an account in your own name with one of the major banks, a great rate of return on interest, transparency and high-level security.

4. Will the rent cover the repayments?

Bear in mind that most banks do not take potential rental income on the property into account when assessing your bond application. However, if they do approve the home loan, rental income you generate on the property will of course help you pay it off. Taking advice from an expert bond originator will help you find the most competitively priced home loan.”

5. What is the potential return?

You’ll often hear buy-to-let investors talk about the rental yield on their properties (or property portfolios). “It’s an important figure and it’s simple to calculate,” says Dyer. “The yield is simply the annual rent you’re earning on the property divided by its value, expressed as a percentage. So a house worth R1 million, on which the annual rent is R120 000 (R10 000 a month) would be yielding 12%.”

6. What about the costs?

However, this is a gross yield, meaning a yield calculated before costs. Dyer explains that, out of that rent, you’ll have to make bond repayments, cover buildings insurance premiums, find money for maintenance, and possibly pay a letting agent’s fees. “Let’s assume those costs come to R8 000 a month, leaving you R2 000 profit. That reduces the net yield to 2.4% a year. And remember that you will probably need to pay income tax on this money too.”

This example shows just how important it is to do your sums before embarking on a buy-to-let property investment. You’ll want to be sure you can earn enough rent to make the investment worthwhile – and you’ll need to factor in safety margins for emergencies such as a very large unexpected bill or a period when you don’t have a tenant (or when a tenant doesn’t pay the rent). The bond is the largest cost for most buy-to-let investors, but don’t forget about other bills too.

7. Where can you get independent advice?

Dyer explains that buy-to-let investors have the same bond options as other borrowers – whether to go for a fixed or variable rate, for example. “As a result, it’s just as important that they identify the best possible deals. In practice, the best way to pick the right product and find the best value is with the help of an independent bond originator.”

Time to make the investment

When you’ve found the property you want to invest in, bear in mind that ooba Home Loans offers a range of tools that can make the property-buying process easier. Start with their Bond Calculator, then use the ooba Home Loans Bond Indicator to determine what you can afford. Finally, when you’re ready, you can apply for a home loan.