Purchasing Property 101

[feo]

So, I've been pondering over this for quite a while and I think it's time for me to venture into the world of property!

Basically, I've been hearing so much from friends and colleagues at work about them buying properties and for some or other reason, they end up renting it out and getting anything from R6000-9000 per month in rental. Now I'd love to do that...problem is, I don't know much about property and the pros and cons associated with buying property as an investment.

So, does it work like this? I see a nice property for a decent price...say a 2 bed unfurnished place for R700k which I wanna buy with the intention of renting out. I will try to put down as much money as I can afford as a deposit and bond the rest. Let's use some numbers here: say I can put down R100k as deposit so I'll finance R600k which works out to R6000 per month roughly to pay it back.

Now, I'll spend some time painting the place and furnishing it so that I can get R7k+ per month in rental income which will effectly pay for the bond and maybe net me some extra cash in my back pocket.

That's the plus side...what are the cons involved in doing this? I've heard that some tenants give you a VERY hard time when it comes to paying up their rent and that it can be a MAJOR headache trying to get them to pay...is this true?

I'm not really sure what other questions I should be asking here so please post anything you think may be helpful to a first time property investor.

Thanks guys..

 

[Syndyre]

So, does it work like this? I see a nice property for a decent price...say a 2 bed unfurnished place for R700k which I wanna buy with the intention of renting out. I will try to put down as much money as I can afford as a deposit and bond the rest. Let's use some numbers here: say I can put down R100k as deposit so I'll finance R600k which works out to R6000 per month roughly to pay it back.

Now, I'll spend some time painting the place and furnishing it so that I can get R7k+ per month in rental income which will effectly pay for the bond and maybe net me some extra cash in my back pocket.

That's obviously ideal but its unlikely you'll be able to rent it out at a rate that'll fully cover your expenses, at least initially. Aside from the monthly repayment you obviously also need to take into account maintenance, levies etc. Ultimately the downside is the risk that your tenants won't pay, you won't be able to find tenants, interest rates will rise, the value of your property will drop etc.

 

[diabolus]

so that I can get R7k+ per month in rental income which will effectly pay for the bond and maybe net me some extra cash in my back pocket.

Not a chance. You're not going to get R7k rent on a R700k 2 bedroom flat/townhouse. More like R4.5k if you're lucky. This is where alot of people are getting a big surprise. The whole point of buy-to-rent is the long term benefit, your property increase in value, while your payments remain static. You're going to have expenses, just like paying for a pension fund, if your calculations worked like that in reality , you'd be getting property for FREE [as in no expenses at all!] . If it worked like that, no one would be renting !

I mean think about it, if i pay R7k RENT on a R700k place? Why on earth would i rent? I'll buy the place....in fact this is exactly what people will do. The reason people rent [instead of buying] is not always because they can't get a bond, it's because it is cheaper on the short term but you lose out on a growing investment (thus no asset). There would be no incentive to rent if it costs the same as buying..

Also right now, the market is quite a bit wobbly, the whole "buy to rent" boom is hitting alot of people, as renters can not AFFORD to pay off your interest-hiked bond for you because you can't pay it anymore....

 

[Syndyre]

Not a chance. You're not going get R7k rent on a R700k 2 bedroom flat/townhouse. More like R4.5k if you're lucky. This is where alot of people are getting a big surprise.

Exactly, don't trust what the agent tells you either.

 

[Frankie]

That's obviously ideal but its unlikely you'll be able to rent it out at a rate that'll fully cover your expenses, at least initially. Aside from the monthly repayment you obviously also need to take into account maintenance, levies etc. Ultimately the downside is the risk that your tenants won't pay, you won't be able to find tenants, interest rates will rise, the value of your property will drop etc.

Correct, generally even though the OP intends using a fair size deposit and considering a property that he can add value to, he would still be hard pressed to cover his bond payments with the rent, let alone the levies if the property is sectional title etc., and the municipal levies, and if he plays safe like I do, then it will also be letting agents fees.
Another often overlooked cost is the bond registration and deeds transfer and registration.

You may get higher rent for a furnished place, but the costs of furnishing it tastefully are really high and the risk of damage or destruction is very high - the fly by night tenant could even make a duck with your furniture.

You can make good money if property prices soar, but that's very hard to predict and typically not that rapid, so by the time you decide to sell you could be facing a loss.

As can be seen, property investment income is not as simple and rosy as some of the office or party chatter you hear.

 

[feo]

Not a chance. You're not going get R7k rent on a R700k 2 bedroom flat/townhouse. More like R4.5k if you're lucky. This is where alot of people are getting a big surprise.

I mean think about it, if i pay R7k RENT on a R700k place? Why on earth would i rent? I'll buy the place....in fact this is exactly what people will do. The reason people rent is not always because they can't get a bond, it's actually because it is cheaper on the short term because you don't have a growing investment. Now if you go and ask the same as buying the place...why is anyone going to rent? There would be no incentive at all.

Also right now, the market is quite a bit wobbly, the whole "buy to rent" boom is hitting alot of people, as renters can not AFFORD to pay off your interest-hiked bond for you because you can't pay it anymore....

I know someone at work who is getting R9k for a furnished place...not exactly sure of the details of the apartment but it's in the Sandton area so I guess there's a premium paid for location then?

What types of places are good investments then? I always thought that dirt cheap rundown places that could be revived/renovated nicely with minimal cost were the best types of places one should aim to invest in.

 

[feo]

Correct, generally even though the OP intends using a fair size deposit and considering a property that he can add value to, he would still be hard pressed to cover his bond payments with the rent, let alone the levies if the property is sectional title etc., and the municipal levies, and if he plays safe like I do, then it will also be letting agents fees.
Another often overlooked cost is the bond registration and deeds transfer and registration.

You may get higher rent for a furnished place, but the costs of furnishing it tastefully are really and the risk of damage or destruction is very high - the fly by night tenant could even make a duck with your furnisher.

You can make good money if property prices soar, but that's very hard to predict and typically not that rapid, so by the time you decide to sell you could be facing a loss.

As can be seen, property investment income is not as simple and rosy as some of the office or party chatter you hear.

That deposit was just a hypothetical number although I could rustle up a bit of cash IF needed.

Mind just giving me a crash course in the fees involved? I know I could just google it but I prefer having it come from a real human being with real experience. Levies and stuff are monthly fees, right? I know when I bought my current house, the fees (legal and transfer) were quite substantial. (those were once off fees though)

You're right about furnishing it....if I were to furnish it the way I have my own place furnished, I'd easily spend R15k on a lounge suite.

Another question, why don't people make the monthly rental amount go off on the tenant's current account as a debit order? Or can that only be done through a leasing agent at a fee? (might be a dumb question)

 

[Frankie]

Not a chance. You're not going to get R7k rent on a R700k 2 bedroom flat/townhouse. More like R4.5k if you're lucky. .

True.
I have a property in a good area near the PE rugby stadium that was purchased for 950k two years ago and the rent is R4,300 pm
Bond payment on that figure was R10,000 at one point and is now down to R7,500
Now subtract R630 levies, R500 rates, and R350 letting agency fees.

If I tried selling it today I'd be lucky to get R900k

 

[Syndyre]

I know someone at work who is getting R9k for a furnished place...not exactly sure of the details of the apartment but it's in the Sandton area so I guess there's a premium paid for location then?

What types of places are good investments then? I always thought that dirt cheap rundown places that could be revived/renovated nicely with minimal cost were the best types of places one should aim to invest in.

There's a massive premium for location, more than anything else. Its hard to say really, you can't expect to cover your bond and expenses from rental initially with any property, you're essentially hoping that property prices will rise as rents would generally rise in tandem and then cover your monthly fixed costs and leave you with a capital gain as your property value rises. Obviously the ideal is to buy property in a less expensive area that's gentrifying and will be more expensive in future but its easier said than done.

 

[Frankie]

That deposit was just a hypothetical number although I could rustle up a bit of cash IF needed.

Mind just giving me a crash course in the fees involved? I know I could just google it but I prefer having it come from a real human being with real experience. Levies and stuff are monthly fees, right? I know when I bought my current house, the fees (legal and transfer) were quite substantial. (those were once off fees though)

You're right about furnishing it....if I were to furnish it the way I have my own place furnished, I'd easily spend R15k on a lounge suite.

Another question, why don't people make the monthly rental amount go off on the tenant's current account as a debit order? Or can that only be done through a leasing agent at a fee? (might be a dumb question)

Certainly not a dumb question.
You can get a debit order for the rent payments just like the agents do, but you'll find some potential tenants reject this, and I consider that a sure sign that these are not tenants I want.
My rental agent insists on debit order, and I wouldn't have it any other way.

I bought two properties in the past 3 years - give me some time and I'll find the records in the archives.

I would advise that you drive a hard bargain with the price offered, and make any offer to purchase subject to you as the buyer selecting the bond transferring lawyer and if you use the same lawyer for the bond registration then you should get about 25% discount on his fees.

 

[diabolus]

I know someone at work who is getting R9k for a furnished place...not exactly sure of the details of the apartment but it's in the Sandton area so I guess there's a premium paid for location then?

What types of places are good investments then? I always thought that dirt cheap rundown places that could be revived/renovated nicely with minimal cost were the best types of places one should aim to invest in.

Well of course location makes a massive difference. I'd say you can get away with murder in Sandton based on how desperate people wants to miss traffic.

Anyhow, you must remember, while you can't expect the rent to cover your expenses...after 20 years it is paid off and it is the equivalent of a pension payout when you sell. THAT is how one must look at it, not whether you can cover your monthly expenses or even making a -monthly- profit. I'd say even thinking of profiting per month from rent is a little bit far fetched, your profit in property is when you sell it...

I'd say only people that profits from rent , either paid off the place already or have been paying for say plenty of years [where inflation allowed for the rent to increase but your bond payment did not increase]

 

[bwana]

True.
I have a property in a good area near the PE rugby stadium that was purchased for 950k two years ago and the rent is R4,300 pm
Bond payment on that figure was R10,000 at one point and is now down to R7,500
Now subtract R630 levies, R500 rates, and R350 letting agency fees.

If I tried selling it today I'd be lucky to get R900k

Never heard of that.

 

[Frankie]

Never heard of that.

It's the stadium where they host a few shows like Celione Dion etc. - on the hill behind McDonald's on the beach front road.
Search for Cathcart road, Humewood.

Edit: Or were you questioning whether is a good area - I guess that's subjective - it's middle class, and very conveniently located.

 

[rwenzori]

Things to watch for/remember:

- You have to pay rates.
- Ensure you get a copy of the water/lights bill, as you are liable if they don't pay, and a favourite trick of tenants is to run up huge bills in this regard.
- You have to allocate money for maintenance of the property - tenants habitually take little care, and have been known to steal things like light fittings/bathroom fittings when leaving.
- Ensure pool and garden are properly taken care of. Resurfacing pool is expensive.
- Tenants typically do NOT pay the last month's rent ( their way of getting their deposit ) and will give you big BS stories about cheque-in-mail or suchlike.
- Ensure lease has provision that they notify you of leaking toilets/taps or they have responsibility for fixing them - you can end up with a R5k extra water bill if not careful.
- Don't be too quick to take on tenants - DO A CREDIT CHECK on them. If they like the place but want you to alter 100 things before they'll take it, tell them to f-off.

 

[Frankie]

Things to watch for/remember:

- You have to pay rates.

In Dec 08, I had to pay 6 months rates in advance - I guess this is a new thing
- Ensure you get a copy of the water/lights bill, as you are liable if they don't pay, and a favourite trick of tenants is to run up huge bills in this regard.
I would strongly recommend getting a pre-paid electricity meter installed.
In sectional title the water is included in the levies which makes it easier.
Also bear in mind that some sectional title body corporates insist on the first years levies are paid in advance

- You have to allocate money for maintenance of the property - tenants habitually take little care, and have been known to steal things like light fittings/bathroom fittings when leaving.
- Ensure pool and garden are properly taken care of. Resurfacing pool is expensive.
When buying investment property I avoid a swimming pool like the plague
- Tenants typically do NOT pay the last month's rent ( their way of getting their deposit ) and will give you big BS stories about cheque-in-mail or suchlike.
This is true, and if it's with a letting agent they will get black listed for breach of contract.
My letting agent insists on 1.5 X the monthly rent for the deposit, and this is maintained at 1.5X at each rent increase
- Ensure lease has provision that they notify you of leaking toilets/taps or they have responsibility for fixing them - you can end up with a R5k extra water bill if not careful.
- Don't be too quick to take on tenants - DO A CREDIT CHECK on them. If they like the place but want you to alter 100 things before they'll take it, tell them to f-off.
The letting agent will do the credit check - I'm not sure how a private person goes about this

........

 

[CyraxHB]

My parents own a town house in Summerstrand in PE which they are renting out to students, bringing in about R8k a month.

They bought the place in 2003 for R300k, other units in that complex are selling for around R1 mil now. They put the place on the market earlier this year but 3 prospective buyers have already been turned down by the banks for a loan.

At least its easy to get tenants there.

 

[Hosehead]

Location. Location. Location. Buy the cheapest dwelling you can afford in the best area, and wait for the capital appreciation over the medium term.