First-time property investor

Becoming a property investor

Property investing is straightforward. Buy a property and get a bond. Rent the property out so your tenant can pay off your bond. That’s the basics. Let me show you the ropes of making money from property. Let’s discuss property profitability, negotiating interest rates, tax and legal structuring managing tenants.

Let’s go!

Before we start, consider getting pre-qualified/pre-approved if you need a home loan. This calculation confirms you qualify for a home loan. In short, you can spend 30% of your gross income on home loan repayments. About 75% of existing bonded rental properties will be taken into account.

Find a suitable property that fits your strategy

From a financial perspective, you have three types of property investments. Cash flow properties have a higher rent yield, normally 1%+ after rates taxes and levies. With capital gain (also called Krugerrand) properties, you expect the property value to increase. If you have both – you have a unicorn property.

Location is critical for both short and long-term rentals. Short-term requires you to be hands-on and available. Alternatively, you can find a good agency. In contrast, long-term rentals are a lot more forgiving. Long-term rental options include communes (e.g. NSFAS Communes) or renting out flats, rooms and homes. You can also decide to flip property (buy to sell).

Choosing the type of property early makes your life so much easier. For example, I invest in 2 bedroom flats in semi/light industrial areas. I target the young working-class singles, which means filters out many troublemakers.

South Africa has similar tax breaks to American property depreciation. Section 13sex allows you to deduct up to 100% of the property value from tax in a 20-year time. Section 13quat gives tax breaks for urban development zones (UDZ).

Calculate property profitability

There are many calculations you can use. I like the 1 % rental factor rule. It reveals enough for me to decide if the property is worthy of my investment. You can also use cap rate, ROI or gross/net yield. However, if you’re using other people’s money, it can become a lot more complicated.

Find a Investment property

Your strategy will determine where you find your properties. You can find good properties:

1. At the sheriff.
2. Through connections – Distressed sales or friends selling property can be profitable!
3. Through serving on sectional title board of trustees
4. Estate agents – but be careful! Most deals here are horrible
5. Social media
6. By partnering with someone in construction

Company, trust or own name?

The purchaser in the OTP should the the legal entity that will buy the property. But, should you buy your property in a trust, company or own name? A trust would make sense if you’re planning on generational wealth. A company makes sense if you’re planning to grow your portfolio into a business with limited liability. But most people starting out do one of two properties in their own name to test the waters.

I prefer a company-trust structure where the trust owns 99.99% of the trust. To transfer the trust to another person (or family) is easy, and is tax efficient. This does obviously come at a cost.

Make an offer

When you think you’re ready to make an offer, first consider negotiating tactics to get the best deal. Add all maintenance or extra work to your purchase price. You should also pull a Lightstone or Property24 report to confirm if the property is overpriced.

Always offer 20%+ lower than the asking price. If they decline, then negotiate up from there.

You can make a verbal offer on the property, to be approved in principle. Many estate agents want you to sign a legally binding contract. This is an offer to purchase (OTP). It becomes binding once the OTP is signed.

Once signed, you will have the allocated time to supply the funds. most people opt for a home loan, as to leverage other people’s money to pay your bond (ie tenants).

How do I get a home loan?

To get a home loan, you need an offer to purchase. A credit check will be done to determine your home loan affordability. The more information you supply to the bank, the lower your interest rate. For example, your interest rate is affected by having a degree. It is also influenced by the length of time at your job. Ultimately, your affordability and cash flow play a role.

You can use a mortgage originator like Ooba.

Always negotiate with the bank. Use a deposit as your final negotiation tool.

Here’s a simplified overview of the process:

1. Pre-approval: Get pre-approved for a home loan to determine how much you can afford.
2. Bond application: Submit your bond application, providing necessary documentation, such as proof of income and credit history.
3. Bond approval: Receive bond approval, and your lender will issue a loan agreement.
4. Attorneys: Sign paperwork at the bond and transfer attorneys and pay their fee.
5. Registration: Register your bond with the Deeds Office, and transfer ownership of the property.

Alternative financing to fund property investment

You don’t need to get a home loan. You can borrow money from private lenders, such as individuals or companies. Joint ventures spreads the risks by sharing the costs and profits.

You can also consider buying property with family or friends. You don’t need to go it alone!

Another option is using your assets as collateral such as shares and crypto.

How does rental property work?

Investing in rental property can provide a steady income stream. Here’s what you need to know:

1. Rental income: Earn rental income from tenants, which can help offset bond repayments and expenses.
2. Rental management: Manage your rental property yourself or hire a property management company.
3. Tenant screening: Screen potential tenants to ensure reliable rent payments.

Always manage your risk. Something like landlord insurance can mitigate issues with tenants.

How does tax work on rental property?

As a property investor, you’re can deduct property expenses from tax. Bond interest, rates and maintenance can be deducted from your PAYE or company tax. Certain tax breaks could also apply such as Section 13sex and 13quat and 13quin.

When you sell your property, you will be liable for Capital Gains Tax (CGT). Be sure to deduct any money spent betterment of the property (such as redoing the kitchen).