Everything you need to know.
We’re reaching the age where we need to start looking at buying our first investment property. An exciting yet scary era to enter in our lives. We’ve been so excited about this, looking at 100’s of places online and going to viewings as frequently as possible in search of the perfect investment property.
What is an investment property? For us it’s a property we can rent out to generate rent income from.
The worst part out of all of this? We had no idea where to start, what to look out for or what a ‘good deal’ looked like. My parents are avid investors, yet it was difficult for them to give me exact step by steps as they wanted us to learn about this process on our own. And I’m glad they did, I’ve learnt so much!
I, however, will give you all the needed information for buying an investment property. I’ll be breaking this into 3 parts: Part 1: Finding the perfect property and making an offer. 2. My bond was approved, now what? and Part 3: Renovating and renting out. Most of what I will be sharing will be based of personal experiences as well as these 2 amazing books that both my husband and I read before investing:
- Retire Rich Through Property – Jason Lee (Bought mine at Exclusive Books)
- Making Money through Buy To Let in SA – Francois Janse van Rensburg (Also Exclusive Books)
Both books are amazing guides and relevant to the current property market in South Africa – I strongly suggest buying at least one of the two.
So first things first: Where to begin?
Save up for the transfer fees.
If you are buying a property under R950 000 your transfer fees will be significantly lower (like half) due to the elimination of transfer duties. Transfer fees are not covered by your bond and will need to be paid up front. So if you are looking at an investment property that won’t break the bank from the get-go, aim for a property below R950 000. You can check the transfer fees of properties here:
http://www.jouberts.co.za/services/conveyancing/transfer-bond-costs.php (These are of 2017 numbers, but it should give you an idea)
Once you have saved up for transfer fees, you can move on to the next step.
Banks rarely give pre-approved loans before you have a property you wish to buy. Hence your second step will be:
Find a property
- To guess the price range you qualify for, you will need to have about a third of you salary (or combined salary) left at the end of the month. SO to make it simple:
- If you and your husband/wife/partner have a combined salary of R60 000, you will need to have R20 000 left at the end of the month and it is more or less safe to assume (just an informed guess) that you will be making 10% interest repayments.
- Hence if you R20 000 left at the end of the month that you are pushing into saving (more or less) then you can possibly qualify for a loan of around R2m. (very rough estimate)
- So look for a property of half that if possible, to make sure that you will likely get the loan, have cash left after bond repayments, can push extra capital into the property and can still save for your next property.
- Things to look out for when buying an investment property:
- Rather look at 2-3 bedroom apartments/houses/duplexes as apposed to 1 bedroom places, as the market/demand for 2-3 bedroom places are more.
- Look for low maintenance gardens
- always look at the view. Stay away from places close to railways, dumps, informal settlements, busy roads and even open fields.
- Security availability: electric fencing, alarm systems, spikes on walls, walls, gates, burglar bars etc. Not all of these are requirements, but there should at least be burglar bars to begin with depending on the area.
- Parking availability: garage, allocated parking bay, visitors parking etc.
- Levies. Careful about this one. You will often see a place that seems really affordable, and you would guess you can make a decent profit from the rent, but then the levies knocks an average of R1000 – R2000 off your rent. So if you can find a place with no levies (Such as crescent that has homeowners – so much better!) Levies aren’t bad, just make sure you are aware of them.
- Ask the agent about the rent potential of the area and apartment, they should be able to give you a good estimate.
- Let’s say you buy a place of R900 000 and the rent potential is R 9000, you are winning big time, if the rent potential is R 6000, it will take you a long time to make the place cash positive, and you might need to reconsider. Especially if you have to deduct levies, rates & taxes etc from the rent.
- A nice to have is if the place already has an electricity meter installed.
- Ask the owner about the area, safety, if they’ve had any break-ins, is the plumbing in place as well the electricity. Ask about the structure, how long they have lived there, how noisy the area is. You want to know as much about the area and the house as possible. Keep in mind that they want to sell the place so they might not disclose all the information such as dogs barking at night etc.
- Remember you’d rather buy a small or fixer-upper place in a good area, than a perfect place in a dodgy area.
You’ve found your perfect place, now what?
Making an offer
Decide on the maximum price you are willing to pay for the place. If the asking price is R 900 000 and your maximum is R 850 000, offer below your max. How low you want to go is up to you. But the odds are that they will come back with a counter offer, and you need to leave space for negotiating. If you had to offer R 850 000 from the start, they could make a counter offer of R 870 000 leaving you without your dream property.
Contact your estate agent and tell him/her you would like to make an offer on the place. They will send you an Offer contract, that is binding, so be sure that this is what you want. If you feel the need, you can always go for another viewing. Once you have filled out and signed the contract, she will present it to the Sellers. If the seller makes a counter offer they will amend the contract, and so it will continue until you have come to an agreement. Both parties will sign.
The agent usually has a bond originator you can make use of. The bond originator gets commission from the banks, so you will not pay for this service. Hence, if she offers this, take it. The bond originator will mail you for paperwork she needs, such as bank statements, ID’s, payslips etc. She will then search for a loan for you at all the banks and cut the best deal for you. I suggest asking the bond originator that you want an access bond. An access bond allows you to push extra capital into the bond that you can withdraw again when needed. Obviously there are terms and conditions to this, but most definitely a better option.
At this point I would suggest asking your estate agent if you can have a second viewing despite signing the offer. You can look at it with a fresh set of eyes so you can spot things you’ll need to fix and renovate once the property is on your name. You can also ask the same questions about the house and area, especially if the seller is present, as the contract is signed and they will be more open to discuss these topics. Make a list of things you’ll need to do to make it rent-ready and start saving up!
Keep an eye out for Part 2 of my blog post on buying your first property. It’s so exciting and so much fun, Enjoy the journey for what it is. And keep in mind that it is so much easier than you thought, or at least for me it was.