With house prices relatively subdued – the latest FNB National House Price Index shows renewed slowing in monthon-month house price growth and house prices down 20.1 % in real terms since the peak reached in December 2007 – many people are looking to buy investment properties , which are mostly funded via a mortgage bond . Given the tax treatment of the income and the fact that the interest component of the monthly instalments is tax deductible , the rental income should cover much of the initial bond repayments . It sounds idyllic : get someone else to buy your property for you . But before you make that decision , you need to be sure that you can really afford to buy the property . Here are six things that you ought to think about before purchasing a house for investment purposes .
1Consider whether you will be able to ride out several months with no income from tenants . It is common for residential property to be without tenants for at least a few months every now and again . This could arise as a result of tenants not being available , tenants absconding without payment or the property simply not being desirable enough . Whatever the reason , be sure that you will be able to cover the bond repayments and other costs while waiting to let the property to a suitable tenant .
2Have an emergency fund , ideally in the form of excess payments into an access bond . A property is let as a full service , so if there is any damage or the property is not liveable , you will need to make good in order to honour your side of the deal . Say , for example , the pool pump is broken . You may be able to live without a functioning pool at your own home , but you will need to repair it when you are letting a property . If your property is in a complex , you may be charged special levies to cover the cost of communal capital expenses . You ’ ll need to need to pay up , so be sure that you have cash reserves available for unforeseen expenses . Remember to build the cost of the emergency fund into your rental calculations .
3Stress test your finances so that you ’ ll be able to keep up monthly instalments in a rising interest rate environment . Interest rates follow the inflation rate , so look at prevailing inflation trends and ensure that you will be able to keep pace with higher payments . A friend of mine recently acquired a R1.5 million bond on an investment property . With interest rates at 8.5 %, her monthly payment was R13,000 . But as interest rates rose to 10.5 % so too did the monthly repayment which increased by R1,950 a month . Given that leases are generally drawn up on an annual basis , the increased cost cannot be transferred to the tenant immediately .
4Consider the economic environment . With South African inflation heavily influenced by movements in the rand – the weaker the currency , the higher our inflation rate – we can expect a certain amount of imported inflation in the wake of recent rand weakness given that South Africa remains a net importer of goods and services . The inflationary outlook is not promising for the country and we expect it to be sticky at these higher levels . This , in turn , does not bode well for interest rates .
Bear in mind that in a poor economic environment your own income might fall or not increase in line with inflation , which compromises your ability to subsidise the rental property should it be necessary . Would you be able to cope with this situation ?
5Look at the current rates and utilities for your account , such as refuse removal and sewage . In recent years , the increases in fees charged have significantly outstripped inflation . Again , these hikes cannot immediately be shifted to a tenant and the owner would need to absorb the increase for a period of time .
6Property is an illiquid asset , so if you find you are unable to afford it after purchasing it , or need the funds for something else , it may take time to realise them .
You should be cautious to get involved in investment property if you are unsure of your financial position . As with all such decisions , you need to have a thought through plan and budget which allows for absorption of ( un ) foreseen and escalating costs or cover periods of no rental income .
The above points are some considerations in a long list of concerns to evaluate before acquiring your first investment property . If , after considering the above , you wouldn ’ t want to enter the “ rental ” property market , consider investing in listed alternatives either in the form of a direct property share portfolio or a low-cost Exchange Traded Fund ( ETF ) which offers dividends instead of the monthly rental income and requires much less effort and thought .
When aiming to gain exposure to an asset class , always bear in mind the different options available to you for investing in that asset class and the various pros and cons of each .
RESOURCES
Citadel
www . reimag . co . za DEC / JAN 2016 SA Real Estate Investor 19