Buy to let: a good idea?
Category Newsletter
I have just changed jobs and am looking at investing R7 000 a month.
My idea is to buy a property and rent it out to tenants. Then I can use the rent money and additional money to pay towards the bond.
I believe I can reduce the repayment of the bond from 20 years to about seven years tops.
What are the pros and cons of buying a property for the sole purpose of letting it out?
Carol Reynolds, Pam Golding Properties area principal in Durban, Durban North and La Lucia, responds:
Property is one of the most stable, secure medium- to long-term asset classes available.
Buying to let is a great investment move and has enabled many savvy investors to grow sizeable property portfolios over time.
The key is to maximise returns and to gear the property correctly for tax purposes.
In order to qualify for a R7 000 per month bond, you will need to show income of R21 000 per month.
Ideally, you should secure a tenant at a return of around 6% per year. This translates as follows:
The purchase price of the property must be R1m or less to keep acquisition costs down to a maximum of R25 000.
You should be able to let the property for between R5 000 and R6 000 per month, depending on location, parking and number of bedrooms.
Ideally, aim to buy a two-bedroomed apartment with secure parking. Your bond repayments will vary depending on the bond term:
Assuming you don't pay a deposit and obtain a 100% loan for the full purchase price of R1m, over 20 years your monthly instalments will be R9 158.67.
Your tenant will pay R6 000 and you will cover the shortfall of R3 158.67.
If you choose a 10-year bond, your monthly payment will be R12 803. This may be the ideal vehicle for you, as your tenant will pay R6 000 and you will pay the shortfall of R6 803.
If you can add a little extra every month, you will more than likely bring the term down to the desired period of seven years.
In the meantime you have a tax saving because your costs on the property are higher than your income on the property, so you win all round.
Just watch your monthly rates and ensure that these are manageable, as rates are payable by the landlord and utilities are payable by the tenant.
Wihtout question, the sooner you get into the property market the better.
Not only will the returns and gearing work, but in addition, you may be able to maximise your investment by doing a small renovation.
This will result in two positive outcomes, namely higher monthly rental as well as bigger capital gain in the long term.
In my view, there is simply no better investment than property.
- Fin24
Author: http://www.fin24.com/
