Should you buy to let? First, answer these 8 questions…

Article summary

• A well-managed buy-to-let property can be a beautiful investment opportunity.
• You need to do your research, such as investigating the state of the market, and the potential profit of buy-to-let in the area where you wish to invest.
• Incorporate costs, such as payments on the home loan, additional costs such as bond registration; and so on, when calculating your potential profit.

Renting out a property is a good way to bring in a regular income. The surge of new developments throughout Cape Town and Johannesburg hints toward a bright future.

Questions you should be asking yourself before taking the plunge include what to look for in an investment property, how the buy-to-let market is performing, and how you will finance the purchase.

Investing in buy-to-let properties: What you need to ask yourself

1. What is the state of the market?
2. Does it make financial sense?
3. What are your financing options?
4. Have you got the right deposit?
5. Will the rent cover the repayments?
6. What is the potential return?
7. What are the costs?
8. Where can you get independent advice?

1. What is the state of the market?

• As of 2023, buy-to-let investments are surging in the Western Cape despite having the highest average purchase price for homes.
• ooba Home Loans data shows that 32.9% of Western Cape’s property demand stemmed from buy-to-let applications in June 2023 alone, an increase from 21.5% in March 2020.
• The increase in semigration has resulted in a shortage of properties. Foreign investors are competing to snap up those that are available, and rising house prices mean more people are looking to rent.

2. 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.
• Sources for rental information include property-related websites, as well as the classifieds section of the local newspaper.
• Find out what people are willing to pay and what the demand is like.
• For example, as mentioned, the buy-to-let market is on the up in the Western Cape.

3. What are your financing options?

• Once you’ve found a potential investment property, you’ll need to secure the finance necessary to buy it.
• The standard way to do this is to apply for a home loan.
• The bank will assess your credit record when determining whether to approve your home loan application.
• ooba Home Loans can help you secure the best deal on your bond by submitting your home loan application to multiple banks, allowing you to compare deals and choose the one best suited to your situation.
• We also offer a range of tools that can make the homebuying process easier.  Start with our Bond Calculator, then use our Bond Indicator to determine what you can afford. Finally, when you’re ready, you can apply for a home loan.

4. 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.
• Deposits usually amount to 10% of the property purchase price.
• The higher your deposit, the lower your interest rates on the loan.
• 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.

5. 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, the rental income you generate on the property will of course help you pay it off.

6. What is the potential return?

• You’ll often hear buy-to-let investors talk about the rental yield on their properties (or property portfolios).
• 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%.”

7. What about the costs?

• Your yield is a gross yield, which is calculated before costs.
• Out of that rent, you’ll have to make bond repayments, cover building insurance premiums, find money for maintenance, and possibly pay a letting agent’s fees.
• Other additional costs include bond registration and transfer costs, which are paid after the home loan is approved.
• Be sure to factor these costs into account when estimating your potential profit.

8. Where can you get independent advice?

• Estate agents can advise you on the movements in the property market, the best areas to invest in buy-to-let and whether it makes financial sense to do so.
• Attorneys can advise you on legal procedures such as the signing of the Offer to Purchase.

Determine what you can afford

Arm yourself with the information you need by getting prequalified. This will provide you with an estimation of what you can afford.

You can get prequalified by contacting an expert at ooba Home Loans or by using our free, online prequalification tool, the Bond Indicator.