select
|

Consider all costs when buying property to let

Many investors in buy to let properties often miscalculate what their returns would be by omitting some of the expenses they incur in running property that is rented out, says Michael Bauer, managing director of IHPC.

The obvious is to compare income versus capital, but one has to count up what it actually costs to run the property and what the risks are, said Bauer.

'Many people don't total up what their running expenses are in acquiring and keeping a property. Buy to let property investment is also not easy to exit, as opposed to shares where if you have a bad run, you can cut your losses and sell the shares. If you have a bad tenant who refuses to pay rent, it could take months before you get the eviction order passed,' he said.

The criteria of buy to let mortgages also have to be taken into account, which currently are around 85% loan to value, he said. The banks are requiring property investors to put in more equity than they did in the past.

'It is interesting to see, however, that although the investor market has dropped off in the more conservative economic climate,' he said, 'these investors still amount to ±10% of the overall property market.'
 
All investors should check their income versus the expenses and what the capital returns and risks are before they buy a unit, he said. More research needs to be done on the rent achievable, as there are often costs which have either been unanticipated or have been carried by the landlord when they should be charged to the tenant by factoring these into the rent charged for the unit.

Some of the main costs that the landlord will have to factor in are:
 
- bond repayments;
- rates and taxes;
- levies (if in a sectional title or HOA scheme);
- building insurance;
- maintenance and upkeep of the property (including fair wear and tear);
- a managing agent's fee;
- an amount set aside in the event of vacancy of the unit;
- an amount to cover rental loss and legal fees; and
- a provision for tax (income tax) on profits from rental activities.

The risk is lower if the investor buys a property with cash and does not have to pay a bond each month - even though he will have to cover the other operating expenses if the unit stands empty for a month or two while trying to find another tenant, it is not as financially devastating as having to pay a bond amount as well as expenses, said Bauer.

'The advice I give to all investors is that they must remember to run this as a business. You would not just start a business without doing some market research and checking all the financial options before entering into it. The benefits are there but it needs to be managed properly,' he said.

'If investing in property, you would also generally, as in investing in shares, not only invest in one development or area. You would split your investments between a few areas and developments and diversify,' said Bauer.


  Comment on this Article

  Please login to post comments

Post to my facebook wall
  
2000
Characters remaining


    Latest Property News
    • 24 Nov 2017
      Demand for secure estate living in Hout Bay has risen sharply in recent years, precipitating a spike in development with estate homes now accounting for 20.24% of the property landscape with the launch of an exclusive new gated development on 26 November adding 20 more units to the existing 1250 estate homes.
    • 24 Nov 2017
      There are some things that money can’t buy – spectacular views from Mouille Point to the V&A Waterfront and a trendy and lively neighbourhood that encapsulates the very best of the Cape Town lifestyle.
    • 24 Nov 2017
      Tshwane’s four-bedroom Mayoral mansion, nestled among ambassadorial residences in the upmarket suburb of Muckleneuk, fetched R5.1 million after spirited bidding at High Street Auctions’ final sale of the year.
    • 23 Nov 2017
      Reserve Bank Governor, Lesetja Kganyago, said that the Monetary Policy Committee had once again decided to let the interest rates remain unchanged with the repo rate at 6.75%, and the prime lending rate at 10.25%.
    • 23 Nov 2017
      As the holiday season approaches, most of us are counting the days until that year-end bonus hits our account. There’s nothing quite like a little bank balance booster to get us in the holiday spirit.
    • 23 Nov 2017
      The Adelphi Centre (now entitled “ARTEM") in Sea Point, Cape Town, is being extensively renovated, and once complete will offer an ultra-luxurious galleria style shopping centre unlike any other seen on the Atlantic Seaboard or in Cape Town.
    • 23 Nov 2017
      If you are looking to sell your home in today’s real estate market, there are certain things that you need to include both inside and outside your house. Today’s generation of home buyers is looking toward a more eco-friendly, energy and water conscious home, and if your house stands out then you are more likely to be able to sell it.
    • 22 Nov 2017
      Most people know of the Community Schemes Ombud Service (CSOS) and that levies must to paid to fund its operations. In this article the experts at Paddocks will address some of the issues that are causing confusion.
        
    X
    Subscribe to the MyProperty Newsletter

    Name  
    Last Name  
    Email Address  
    Email Frequency
    select
    X
    Share this Page

       
    For Sale Property
    Rental Property
    More Options
    About
    Connect with us
    FEEDBACK