Correctly managed, buy-to-let properties can be one of the most attractive investment opportunities available.
For a relatively low up-front cost, they can generate good long and short-term returns in the form of capital growth and rental income, and their gearing potential can be leveraged for continued expansion in the market.
It sounds like the ideal starter investment – and it can be – but if managed poorly, buy-to-let can also be a huge financial drain. So how do you go about positioning yourself for success as a first-time buy-to-let investor? According to Tony Clarke, Managing Director of the Rawson Property Group, it’s not difficult as long as you’re willing to do your research, crunch the numbers, and keep your expectations realistic.
“The first step,” Clarke says, “is to take a good look at your own finances. Visit a bond originator and find out what kind of mortgage you qualify for, and then consider how comfortable you’d be with those repayments if the interest rates rise or your personal monthly expenses climb. Don’t forget about bond, transfer and conveyancing fees either – they can add a significant amount to the bottom line.”
Clarke advises being conservative when considering affordability, especially as a first-time investment buyer.
“Being forced into an early sale because of financial distress is a sure way to lose money on a buy-to-let investment,” he says, “so it’s better to start small and be absolutely sure that you can weather any surprises that come your way.”
Once you’ve worked out how much you can afford to spend, you’ll need to start looking for a property that fits the bill – quite literally. “It’s not just about purchase price,” says Clarke. “It’s about finding a balance between all the associated costs, the potential rental income and any future growth.”
According to Clarke, finding this balance can be complicated, and is best approached with the help of a property professional who is active in the area you are considering.
“You’ll need to be able to estimate your monthly bond repayments as well as rates or levies, insurance, and the cost of maintaining your property in good condition. You must also be able to accurately predict the rental potential of the property, and understand the local area trends, to assess the likelihood of future growth. It’s a process that requires a lot of in-depth knowledge, and experienced agents will generally be able to give you a far better idea of the situation than you could determine for yourself.”
Clarke warns buyers not to expect to be able to cover 100 percent of their bond repayments with rent to begin with – let alone 100 percent of their overall costs.
“Depending on which area you’re investing in, your rental yield is likely to cover between 50 percent to 80 percent of your monthly costs at the beginning,” he says. “This percentage increases over time as rent goes up, but it does mean your investment might take a few years to start paying off. It’s a good idea to keep this in mind when you begin investigating potential neighbourhoods, as some suburbs will offer more immediate returns than others.”
High rental yields don’t always signify better investments, however, and Clarke says buyers shouldn’t discount the value of capital growth.
“Over the long term, a property with a lower rental yield but high capital growth may well outperform a property with higher rental yield and low capital growth,” he says. “You have to look at the long and short-term benefits of an investment property, and choose one that will suit your specific priorities and cash flow.”
This article “What You Need To Know Before Buying Buy-To-Let Property” was issued by Rawson Property Group – http://www.rawson.co.za/