So you want to invest in property, right?
It is a lot simpler than you think. Look you need some things like you know you need some form of income because nobody will lend you any money if you don’t have any income.
But there are some cool strategies that I would like to share with you that you could consider on your journey.
One of the most well-known ones people use in South Africa is called buy to rent. They buy the property and then rent it out.
What type of investor are you?
Some people find property investing a bit intense and a bit too involved for their liking. It’s quite a bit of work to be honest, you know – and most people don’t like that!
In this you have a choice: are you the involved investor or are you the silent investor?
If you are the silent investor, you would prefer to have your property managed by a rental agent – at a cost of course!
If you are the involved investor (a control freak like me), you would want more involvement like being on the board of trustees, self-managing and fixing up the property yourself.
Do you have an emergency fund?
What would happen if your place needs a new coat of paint?
What would happen if your tenant doesn’t pay for two or three months?
Your life will be over soon.
Or you could get an emergency fund in place?
I suggest having 5 months of property expenses saved in your bond. If you don’t know about emergency funds, check out my article here.
Another thing that you would need to consider is that you would need life insurance in case something happens to you.
It’s also one of those things that oftentimes the bank would require from you if you’ve got a mortgage on your home that you’re renting out. There’s a lot that you can deduct from tax and all of these things make it quite worth it to have property.
The crux strategy for buying to rent in South Africa
When you buyin to rent, you want the tenant to pay for the property. This means that your rent should go to cover your bond and other property expenses.
To make it profitable, I work in a 1 % rental factor. For example, if I paid R 400 000 for the property I want R 4 000 a month. Ideally, I would like R 4 000 a month in my pocket every month after the levies, rates and taxes have been deducted. But you don’t get those every day.
In the beginning, you might find that your expenses are not covered completely by the rental income. You will thus have a shortfall. This is the amount that you need to pay in from your pocket.
The idea with the strategy would be that you need to stay tax neutral for as long as you can that you don’t need to pay tax and the person that actually rents the property from you pays off your property if there’s a difference between the rent that you’re getting and your expenses.
Remember your rent is seen as income which means that all income you need to declare to SARS – but you need to declare all expenses as well. Remember that the following are deductible:
- interest that you’ve paid to your bank for the tax year. Your bank will give you a letter with all the calculations, figures and numbers.
- Your levies, rates and taxes
- Any trips to the rental property and costs like painting, plumbers and fixing up are tax-deductible.
Many people decide not to actually do the right thing and actually declare everything. But I do suggest do the right thing and declare what you need to declare.
Do the calculations yourself
My suggestion is to open Excel and calculate, calculate, calculate! Make sure that you’re getting a good deal – you make your profit when you buy, not when you sell. Here are some considerations in your calculations:
- Remember that when you sell the property you are going to have to pay capital gains tax. Find more calculations here.
- Be sure to include your transfer costs your bond costs and all the other fees which you will find in this post here. Please make sure that you calculate accurately as much as you can and play devil’s advocate. What would happen if the tenant doesn’t pay for six months?
Residential property is awesome and there’s a lot of opportunities there. If you’re into investing in residential rental property or even if you’re not – it’s not that difficult to get into.
In simple terms – you need to attempt to stay tax neutral by letting the tenant pay off your bond.
Deduct everything that you legally can deduct from tax.
Do calculations. Make sure that your investment is worth it before you buy!
Make sure that it’s a good tenant that you place in your property (check my post here on good tenants) – good tenants are worth giving a bit of discount!
Now, go and make some good investments.
Frugal Local runs his own company (Effectify). He does software development and helps small businesses and startups with digital solutions. He enjoys writing articles and simplifying complex things – such as the article you’re reading!