Peace – 5 steps to peaceful Buy to Rent property Investment
A significant key to successful Buy to Rent property investment is found by investing in peace. Not some unattainable religious experience found in the Himalayas. I am talking about good old fashioned, successful investment without losing a single night’s sleep!
At first this may sound like a load of stress management gobbledegook, but please stick with me. I have learnt these lessons over more than a dozen years of successful property investment and would love to share my secrets.
Step 1 – Count the cost of investing
In South Africa today, when purchasing a townhouse in the growth areas of the northern suburbs of Johannesburg and Sandton you can expect to pay about R 600 000 for a reasonable investment property. The banks will generally pay for 90% of the purchase price leaving you to cover the transfer costs (about R 24 000) and your 10% (R60 000). That is you will need about R 84 000 to step onto this exclusive property ladder.
I have seen many a serious first time investor’s plans come to nothing when he (or she) decides to dip into the family savings for the deposit (often it’s wisely held in the access facility of their homeloan). It is at this point that their spouse puts on the brakes! “Come on, property investment may be a good idea, but not now – not at the cost our kitchen renovations!”
You may laugh, but it happens, and more often than I care to remember.
Step 2 – Cashflow
Sticking with the above R 600 000 example, your rental income should be in the region of R5 000 – R6 000 (say R 5 500), less your bond repayment of about R 4400, your levies about R 900, and your rates of R200. Factor in some occasional maintenance – if you are spending much more than half a month’s rental per year, then you are doing something wrong. If my maths is correct, that means you should be breaking even every month and coughing up for maintenance occasionally.
I advise new investors to hold a rainy day fund equivalent to 4 months rental cover for those unexpected vacancies, interest rate fluctuations and repairs.
If you are planning to use agents to source your tenants and have your property managed for you, you will need to factor in those costs too. You should get away with about 8% for leasing commissions and 7% for management.
Step 3 – Consider the tenant risks
When you look at the actual risks of tenant damage and vacancies, you may be pleasantly surprised. Well sourced and vetted tenants are surprisingly loyal rental payers and contrary to popular belief, aren’t hell-bent on wrecking your prize investment. This article [CLICK HERE] goes to some length to spell out the risks in detail.
Step 4 – Buy carefully. The right property in the right area for the right price
The heading says it all. By doing your homework and making sure get coaching advice from somebody with local investment experience, you can take the guesswork out.
Am I paying the right price? – never just believe the agent, he or she is trying to make a sale. Do your research.
What rental can I expect to achieve? – the agent selling you the property may have zero letting experience. Call a local agent specialising in rentals to confirm your numbers.
Step 5 – Bargain hunting
Missing a great deal because of bargain hunting syndrome is totally unnecessary.
If you are stressing about knocking every last Rand off the asking price, then you are missing something. I have seen many investors miss out on a brilliant property, because neither seller nor buyer are prepared to budge that last 10 000. The bank and tenants are conspiring to pay 90% of the property anyway, so every R 10 000 you save is in reality only a saving of R 1000. (Please forgive me for being overly simplistic, but I am trying to make a point)
My advice is do your homework, establish market related prices and rentals and then when you find your property, do the deal.
I can personally remember the prices paid for the first few properties I bought, but after a few years, the purchase price becomes pretty irrelevant. Even paying R 50 000 less only saves you R 400 per month in cashflow in the first year. If this is going to make or break you, then you are not ready for property investment
Lastly – building your portfolio
At this point, if you were only expecting 5 steps. – Welcome to the world of property investment where over achievement is a regular occurrence!
Once you do a Buy to Rent property investment, you are almost guaranteed to do so again, and again!
When you build your portfolio, the main thing to consider is your cashflow. My suggestion is to add an extra two months rental to your 4 month rainy day fund and sleep peacefully while your investments grow and your tenants pay your bonds off.
Does this make sense? Do you have any advice to add?
Please comment freely below.
Image courtesy of [Evgeni Dinev] / FreeDigitalPhotos.net