Invest wisely and spread the risk

Mark Brickles, Broker/Owner of of RE/MAX Ultra Select not only operates in those regions but also in Grassy Park, Strandfontein, Mitchells Plain, Lotus River, Ottery and Lansdowne.

According to Brickles, it is often best for investors to purchase buy-to-let property in the lower to middle income markets as the pricing often allows them to purchase more properties and thereby spread their risk. “For example, instead of buying one property at a cost of R1,2 million, three properties could be purchased for R400 000 each. Should one tenant default, the impact will not be as severe since there are still two other tenants paying their monthly rent,” says Brickles.

A good example of the income that could be earned from these kinds of investment properties is one that was part of the RE/MAX Ultra Select portfolio, which has recently sold for R670 000 cash to a South African investor that lives in Germany. This three-bedroom home with four attached granny flats in the Grassy Park area has a potential rental income of approximately R11 500 per month, based on an amount of R3500 for the house and R2000 per granny flat.

“If the property was bought on finance, the rental income would cover the bond repayment, which would be in the region of about R7000 per month if the buyer had a 100% bond and there would be a profit of about R4500 per month. This is very rare in higher priced areas where the rental income usually only covers around 50% to 70% of the monthly bond repayments, which means the investor has to subsidise a large portion of the bond monthly,” says Brickles.

“Furthermore,” he adds, “No transfer duty is payable up to R600 000 and it’s only 3% thereafter up to R1 million. On the mentioned property you will only pay about R3 000 transfer duty. And again another benefit as compared to a higher priced property is that the risk is spread between five different tenants. If the buyer had bought one property for R1 million and charged the tenant a rental of R10 000, non-payment by that tenant will have an enormous impact financially as you have lost the full R10 000,” explains Brickles.

Adrian Goslett, CEO of RE/MAX of Southern Africa says that, statically, the capital growth in Grassy Park full title averaged around 7% annually over the past 15 years, bearing in mind the recession period and prices in all markets dipped over the past two and a half years. These properties, however, proved to be consistent in their equity growth, which is expected to continue having similar growth in future.  Brickles says that depending on how long you keep the property as it should be viewed as a long term investment; buyers are almost guaranteed to make a decent profit when deciding to sell. Studies such as the FNB barometer report have revealed that this sector of the market is currently the only sector actually showing real growth. “Should you need to get rid of the property in a hurry, these properties sell fairly quickly as there is always high demand in the lower to middle priced property market,” adds Brickles.

Due to the low prices and quick turnaround time on sales in the area, the risks to investors are minimal.  “However,” advises Brickles, “it is important to do a Comparative Market Analysis before purchasing a property to ensure that you do not pay more than the fair market value, as Robert Kiyosaki says in the book ‘Rich Dad Poor Dad’ - you make your profit when you buy not when you sell.  There are also the risks of tenants defaulting, vacancies and if the interest rates go up as many predict they will in the near future, monthly bond repayments will also increase.  These risks do however apply to all properties in all areas.”

According to Brickles, many of these risks can be largely negated by taking out landlord protection insurance such as a Tenrisk Landlord Protection Policy, which guarantees rental income and manages the legal process around tenant eviction. The cost of this is relatively low at approximately R50 plus 1% of the total rental income.  “When placing a tenant, do reference checks and a complete credit check to ensure you are placing good quality tenants in the property.  This will minimize the risk of the tenants defaulting.  There is the option of fixing your interest rate at the bank to minimize the risk of the bond repayments increasing,” Brickles concludes.

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