A Guide to Acquiring Your First Investment Property
Category Property news
Recently, it's been said that now is the best time to purchase property, whether it be as a first-time buyer or if you're wanting to diversify your portfolio. If you fall into the latter group, those wanting to buy-to-let, it's imperative that you know what you're signing up for, says Mike Greeff, CEO of Greeff Christie's International Real Estate. Before making what could possibly be the largest investment you've ever made, it's important to consider the ins and outs as that can have a huge effect on your returns.
Why invest now?
First and foremost, it's a buyers' market. There is a surplus of property for sale and as a result, sellers are open to pricing more realistically and within the market value. The COVID-19 pandemic has no doubt increased financial stress with many South Africans needing to take a salary cut or who were unfortunately retrenched, but because of COVID-19 and its effect on the economy, the South African housing market now offers some of the best buying conditions than it has in previous years.
Since the beginning of 2020, and largely due to COVID-19, we have experienced four major repo rate cuts and because of this, the interest rate of 3.75% is the lowest it has been for the past 50 years. The repo rate cuts have led to the prime lending rate being favourably low at 7.25% which means that as a buyer, you will be getting ''more credit for your affordability'', says Liz Botha, Home Loan Specialist at BetterBond.
The Benefits of Investing in Property
It's a well-known fact that property is the best investment one can make and the benefits of are endless. With well-chosen assets i.e. properties, investors can enjoy predictable cash flow, excellent return on investments, tax advantages, and diversification.
- Property is a solid, tangible investment with relatively low risk. The property market offers a greater stability than the stock market, for example. Although the profits may not be as liquid, the risks are far lower. The chances of losing a large portion of your capital are much less with property.
- By investing in property, you are essentially building up equity in a valuable asset and as you continue to pay off the home loan, the amount you owe reduces and the value of your asset appreciates.
- Property tends to appreciate over time which means that when or if you decide to sell, you are most likely to be able to sell it for more than what you paid for it.
- For now, investors can also make money through rental income and because rent usually increases by 10% each year, that leads to even more of a cash flow. A tenant covers a portion of the bond through rental payments, while you, as the investor, reap the long-term reward. Once the property is paid up, you will start earning passive income on the property which means a higher cash flow.
- According to the Income Tax Act, if you own at least five new and unused residential properties in South Africa, you will be allowed to claim an annual allowance of 5% of the purchase price as a tax deduction, provided that you are renting out those properties.
Finding and purchasing your first investment property
Step 1: Decide how much you want to spend on your investment
It's important to be realistic about the size of investment you would like to make. Remember that if you are not going to purchase the property in cash, you will most likely need to get a home loan, therefore you need to know how much you qualify for. Reach out to a bond originator, like BetterBond and find out what your affordability is. Once you know what you qualify for, have one of their experts get your pre-approval started and once you have that, you can start the hunt for your perfect investment property with ease.
When looking for a property, consider the type of property you would like to invest in. Do the necessary research to determine the rental demand as well as the areas where you could potentially invest in.
Step 2: Finding the perfect investment property
Location is key when buying an investment property. Do some research on the areas you are considering and determine whether the area adds value to your property.
Consider the following:
- Market value of the entire area
- How much buying/selling activity there is in the area
- How long properties are listed for before they are bought/sold
- Proximity to schools, CBD, shopping centres, and all other necessary amenities
- The demographic as well as the income bracket that is dominant in the area (this is an important factor as it will determine the type of tenant you will attract e.g. young professionals, small families, students etc).
- Rental demand in the area
Once you have decided on the area where you will be buying, you will need to compare the prices of different properties to establish the best fit for you.
Step 3: Consider all the costs
Buying a property as an investment or as a residence is costs a substantial amount of money. Yes, it's an asset that will yield long-term returns, but the initial costs can be overwhelming. It's imperative that you are aware of these costs throughout the buying process.
Once off costs:
- Deposit (will not always be necessary)
- Bond costs, transfer costs, initiation costs, possible levy deposit if you purchase a sectional title unit
- Capital Gains Tax*
- Municipal rates
*Capital Gains Tax (CGT) is a tax levied on profit from the sale of property. This means that when you sell your investment property, the government will tax you on the profit you have made on that sale.
Regular monthly costs:
- Repayment of home loan
- Insurance on the property
- Life insurance to cover the bond
- Monthly levies if its a sectional title property
- Rates and taxes
- Electricity and water (usually charged to the tenant but if the property is vacant, you will have to foot the bill).
- Maintaining the residence
- Repairing damages to the property
Step 4: Offer to Purchase (OTP)
You've found the perfect property to invest in - congratulations! Now it's time to put pen to paper and sign your OTP. An OTP is an agreement that covers the terms and conditions of the property transaction. Everything that is agreed upon between the buyer and the seller must be included in the offer.
The Offer to Purchase will include but is not limited to:
- The purchase price that has been agreed upon
- Any conditions of sale
- The deposit payable (if there is one)
- Fixtures and fittings that are part of the sales agreement e.g. fireplace, air-conditioning units, satellite dish, carports etc.
- That the seller declares that to the best of his knowledge, the house is structurally sound and fit for occupation
- Approved house plans, if available
- If the building or property was recently built, a copy of the NHBRC certificate and an occupation certificate may need to be provided
- A copy of the electrical compliance certificate. Compliance in respect of electricity, gas and electric fencing must be adhered to.
- Any special conditions as agreed upon by seller and buyer.
- The occupation date of the property once registered or the proposed occupation date with an agreed upon occupational rental.
The property market has stood the test of time and has survived Depressions and recessions. You can be sure that your property investment will yield great rewards and in the long run prove to be an excellent return on investment.
Author: Greeff
